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Brief Counsel

Financial Adviser Bill still in need of repair

07 April 2010

Last ditch attempts to correct the flaws in the new financial advisers framework have failed to address many of the potentially damaging consequences for the financial services sector - and the much wider economy.  The last hope is that the Commerce Select Committee or the Minister of Commerce will call for new changes to be drafted.  The Financial Service Providers (Pre-Implementation Adjustments) Bill and the subsequent Supplementary Order Paper (SOP) do not resolve many of the problems identified in the Financial Advisers Act (FAA) and the Financial Service Providers (Registration and Dispute Resolution) Act (FSPA).  We have prepared submissions to the Select Committee in a final bid to get a regime which reflects the realities of the New Zealand market and which is capable of working sensibly.

For a copy of our submission click here.

One of the main problems with the proposed amendments is that they provide that only individual persons can give financial advice and (with one limited exception) make investment management decisions, whereas in reality the financial services industry in New Zealand - and in every other functioning modern economy – is dominated by corporates.  By largely ignoring this fairly obvious fact, the legislation is denying these companies the ability to perform functions which sit at the core of their business.

It is not feasible for a corporate to address the restrictions by providing financial advice or investment management decisions through their employees, as staff would not want to take on a large corporate potential liability for their firm’s decisions and – anyway – any service performed by an employee is deemed to be provided by the employer, so the employer would still be in breach of the FAA under current proposals.  We have suggested a solution which we would urge is adopted.

Another problem is the proposed scope of the legislation.  Many businesses which are not financial advisers nevertheless provide advice relevant to investment decisions, even if it is not a core part of their business.  They will all be prevented from offering this advice as a company and, if providing it as individuals, will need to be qualified and otherwise comply as authorised financial advisers.  Examples of prohibited business activity for companies and non-compliant individuals include: 

  • farm advisers, architects, engineers, Regional or City Councils, property inspectors or builders providing opinions, recommendations or guidance to vendors or purchasers in relation to a potential property sale or purchase (only real estate agents and valuers are exempt)

  • shareholders when wanting to sell existing shares in their business commenting on that  business to potential purchasers

  • advising someone who wants to buy shares in an existing business (e.g. a McDonalds franchise, the local dairy, through to anyone who contributes to a due diligence process on a larger business)

  • as an industry consultant in the field of a business being sold, advising a buyer or seller of shares in a business on the industry’s benchmarks or prospects or the feasibility of the business being sold

  • recommending taking foreign exchange cover – e.g. as an export adviser, industry-body representative or farm adviser

  • as an investment manager, advising its clients of its opinions on its intended trades

  • as an international fund investment adviser, advising on investments rather than making the investment decisions themselves

  • being a unit trust manager (even though unit trust managers are required to be companies under the Unit Trusts Act)

  • being a corporate trustee which undertakes its own investment management decisions 

  • being a sub-delegate of any permitted delegated investment manager, and

  • being an investment manager for anyone other than an offeror of securities or an insurer, which includes an investment manager for any form of international trust established in New Zealand.

It is surprising that this legislation has proceeded this far without these fundamental flaws being properly addressed.  It is hoped the Select Committee will rewrite the legislation so it allows corporates to function as financial advisers and investment managers.  But the “last minute” repair work is unlikely to provide sufficient opportunity for full consultation on the needed changes.

There are numerous other problems with the legislation, noted in our submissions.  We are concerned that the deadline for the law’s commencement is looming without the legislation being settled.  Many of our clients are considering how to respond to the legislation and particularly whether to become QFEs, but it is difficult to do so with the current level of uncertainty.

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