The long-awaited Commerce Committee report into the finance company failures has found that most of the holes in the regulatory net have already been filled, or should be addressed through the Financial Markets Conduct Bill (FMC Bill).
This was a risk we identified in our earlier Brief Counsel, given the busy legislative programme in the capital markets area, and was not helped by the fact that the Committee laboured over its task for more than two years and had to call extra time when Committee Chair Lianne Dalziel was called away by the Canterbury earthquakes.
This Brief Counsel comments briefly on the Committee’s recommendations.
Since the Committee initiated its inquiry on 20 August 2009 and received submissions in November that year, much has changed. The new financial advisers’ regime is now in place, as is the Financial Markets Authority (FMA), a Bill is before the House to impose prudential requirements on non-bank deposit takers, and the FMC Bill has been introduced as one of the last acts of outgoing Commerce Minister Simon Power.
As the Committee acknowledges in its report, these measures have largely addressed gaps in regulation raised by the finance company collapses. As a result, many of the Committee’s recommendations are rather slight, even symbolic.
Although the inquiry Terms of Reference did not set out to examine the broader causes of the failures, the Committee concludes that a Royal Commission requested by some petitioners would not add significant value. The Committee received wide ranging advice on the inquiry from Tony Molloy QC.
That the distinction between “independent” advisers and those who receive their remuneration from the providers of investment products be publicised to encourage investors to opt for independent advice.
That the Government investigate the possibility of banning conflicted remuneration structures in the provision of financial advice, including consultation with the Australian authorities on the model proposed in that country.
The first recommendation was implemented in 2010 in the Code of Professional Conduct for Authorised Financial Advisers (AFAs). Code Standard 3 prevents AFAs claiming they are independent when they receive commissions from issuers. And the general restrictions in the Fair Trading Act would restrict claims of independence by other advisers when they are receiving commissions for sales of investment products.
As a more general comment, the Financial Advisers Act failed in our view to adequately distinguish between those intermediaries who are fundamentally selling agents and those who are truly financial advisers. Both are now classified as financial advisers. We do not disagree with the broader sentiment of ensuring members of the public understand the role of a commission-based advisory service, but this does not necessarily lead to banning commissions.
That the FMA be asked to investigate means of standardising the way information is publicly presented so the general public can readily understand financial information such as profitability.
The FMC Bill and associated Regulations should go a long way to meeting the Committee’s concerns. In particular, the simplified product disclosure statement and the power the FMA will have to issue frameworks governing the way in which information is presented (both at point of sale and ongoing), should address the desire for consistency. We support the Committee’s suggestion that the FMA provide some direction around how funds and companies present their profitability results.
That the Government give priority to a coordinated effort to improve New Zealanders’ understanding of financial matters, focused particularly on those at or nearing retirement age, on young people to build financial capability, and on those most at risk from scams and irresponsible lending practices.
That the Government review the adequacy of current funding of the Retirement Commissioner and of schools for financial education, and increase it as necessary.
The Government sets the school curriculum and could do a lot to improve it in relation to training for financial literacy. The FMA has also been given a function of providing, or facilitating, public information and education about any matter relating to financial markets. This supplements the role of the Commission for Financial Literacy and Retirement Income (formerly the Retirement Commission), which merits more support for its excellent initiatives, such as its New Zealand Network for Financial Literacy (www.financialliteracy.org.nz).
That moratorium situations be referred to as “creditor compromise situations”, as a small but important indication of the unlikelihood of a satisfactory outcome for investors.
As we predicted, the Committee’s terms of reference on moratoria disclosure were soon overtaken by the introduction of additional disclosure regulations prescribing an investment statement and legislating for the existing practice of independent expert reports. The Committee’s recommendation is accordingly modest, but may provide some further clarity if adopted.
That the duties imposed on directors be stated clearly and forcefully in legislation, according to the principles set out in the February 2011 Cabinet paper which set out the policy intent of the draft FMC Bill.
Additional criminalisation of directors’ duties is now proposed in the Companies Amendment Bill, rather than the FMC Bill, with some changes to those proposed in the February Cabinet paper. We think it would be timely to reconsider the drafting of some of the core directors’ duties in the Companies Act 1993 to reflect case law since enactment and more law reforms undertaken in other jurisdictions. Neither Bill, however, does that.
That the term “supervisor” be used instead of the term “trustee”, to describe those trustees who supervise people’s investments.
The use of the word "supervisor" is more accurate as it more correctly reflects the role. The FMC Bill calls them supervisors and will rename their governing statute the Financial Markets Supervisors Act 2011.
That the Government ensure the FMA is adequately resourced to fulfil its statutory functions.
That the wording of the Protected Disclosures Act 2000 be broadened to cover wrongdoing by board members and other senior officers besides the “head” of the company.
The FMA has been given more government funding than the Securities Commission, although not as much as some have advocated. A significant part of its funding is recoverable by levies from financial participants (although Government has not yet published decisions from its consultation on precisely where the levies will fall).
That priority be given to progressing legislation on class actions during the term of the 50th Parliament.
That such legislation include guidelines for the operation of commercial third-party funders of litigation.
That the Government consider accelerating work on legislation to provide means for investors to gain redress from funds in trusts, including an examination of sham trusts and means of penetrating trusts to recover assets for creditors.
The Law Commission has embarked on a comprehensive, and considered, review of the law applying to trusts. We think it would be a mistake to rush this work or to tackle the topic in a piecemeal fashion.
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