Diana Clement: At last, financial protection we all need

I have to admit my eyes begin to glaze over when the word regulation is bandied about. Financial markets regulation, financial advisers regulation, non-bank deposit takers regulation ... the list goes on.

So I decided to make a list of all the relevant acts of Parliament and regulation that go up to make the layer-cake of changes in the works that together are designed to improve consumers' safety in the financial markets.

By pure coincidence, I did this research on the annual Consumer Rights Day this week. How fitting.

The vast array of regulatory changes percolating their way through Parliament are designed to make investing safer.

And boy does the public need it. I cringe at all the sorry tales I've heard in the past five years of ordinary people losing their life-savings to one shyster or another.

As one commentator put it, the authorities simply "looked at each other as investors' money hit the floor" as the finance companies collapsed. Should the changes listed in this column meet expectations, we shouldn't see this happening again.

But on my more cynical days I wonder if the regulation of financial advisers, in particular, will have the desired effect. Andrea Bather, senior tutor in commercial law at Waikato Management School, reinforced my view. She worries that the regulation of financial advisers isn't going to make one iota of difference.

That, she says, is because most people don't even know what a financial adviser is and does, and the heap of information they'll get with disclosure statements is too much for them to digest. One or two pages of bullet points might be better.

In part, the success of all this regulation will be to do with how well it's policed. That in turn depends on the independence of the regulatory authorities and how well funded they are.

Nonetheless, here's a snapshot of what's new and what's on the drawing board when it comes to protecting consumers' money:

Financial Markets Authority (FMA)

Like the Australian Securities and Investments Commission (ASIC) and the Financial Services Authority (FSA) in the UK, New Zealand is finally getting one super-regulator.

The new regulator, which will take over functions performed by the Securities Commission, Government Actuary, Companies Office and NZX, opens for business on April 1, 2011.

The FMA's functions are wide. But among other things it will have a disciplinary committee and the power to take a civil action against a financial market participant such as a funds management company or financial adviser, where the FMA considers this to be in the public interest.

Financial Advisers Act (FAA)

This one introduces minimum standards of professionalism for financial advisers and regulates them.

Under the FAA, which comes into effect on July 1 next year, financial advisers must act with care, diligence and skill and adhere to a code of professional conduct, available at www.financialadviser code.govt.nz.

A simple, but effective step will be establishment of a register of financial advisers that the public can access. It's still to be decided if people touting the investment benefits of real estate will be authorised and regulated. Banks must take responsibility for their staff who give financial advice.

More information is at at www.sec-com.govt.nz/far/

I have to say that making a financial adviser produce a lengthy disclosure document isn't going to protect most consumers. Many members of the public aren't literate enough to read or understand such documents and, even if they are, many will not know how to compare apples with apples. Such statements sound impressive even if the adviser was an HRV or used-car salesman a year or two ago.

Dr Claire Matthews, director of financial planning at Massey University, says many of the changes are designed to bring us up to the standards of consumer protection in countries such as Australia and Britain.

She adds: "Consumers shouldn't notice a difference. They should be in a safer environment, but we will have to see how it works in practice."

Financial Service Providers (Registration and Dispute Resolution) Act (FSP Act)

Until now financial advisers' clients haven't had access to independent dispute resolution. . The FSP Act provides an independent dispute resolution scheme for clients seeking financial redress from their advisers.

The schemes will work in a similar way to current ombudsmen's schemes for banking and insurance - the banking and insurance and savings ombudsmen are two of the four licensed providers.

I do have my doubts because financial advisers can choose between four competing dispute resolution schemes. To me that means they can choose the "service" that gets the reputation for being most lenient. Unlike the Real Estate Agents Authority, which names transgressors, the financial advisers dispute resolution services won't be naming advisers sanctioned.

"Dispute resolution is a consumer protection arrangement, rather than punishment," says the Securities Commission's director of financial adviser regulations, Angus Dale-Jones.

But consumers can complain to the FMA in the hope of having an adviser sanctioned by that body, or perhaps struck off. Or consumers can make a civil claim through the District Court.

The FMA, says Dale-Jones, will also have the power to take action where it sees systemic problems about one institution or adviser.

As well, if an adviser or institution is found wanting by the FMA's disciplinary committee, they may be named, although those rules are still being ironed out.

Dale-Jones adds that all good regulators need intelligence and the primary source for that in this case is the investing public.

The FAA will be fully implemented on April 1 next year

Reserve Bank of New Zealand Amendment Act

This act curtails some of the outrageous rip-offs perpetrated by finance companies and other non-bank deposit takers during the last boom.

The act was passed in 2008 and is being introduced on a staged basis. It will include requirements for credit ratings, restrictions on related party lending, minimum shareholder capital requirements, and others.

In short non-bank deposit takers will be subject to similar requirements to registered banks and insurers. For more, visit www.rbnz.govt.nz/finstab/nbdt/3857991.html

The Insurance (Prudential Supervision) Act

This act, passed in September, makes the Reserve Bank responsible for regulation and supervision of all insurance providers. Disputes are still heard by the insurance and savings ombudsman. For more, see www.rbnz.govt.nz

Securities Trustees and Statutory Supervisors Bill

At times trustees have been found to be lacking when it comes to exercising their duties to protect consumers. This bill lays down new rules and ongoing oversight of trustees and statutory supervisors of issuers of debt securities (bonds), collective investments and retirement villages.

Consumer law reform

Seven laws are being reviewed by the Ministry of Consumer Affairs. They are the Fair Trading Act, the Consumer Guarantees Act, the Weights and Measures Act, the Layby Sales Act, the Unsolicited Goods and Services Act and the Door to Door Sales Act, all of which affect consumers financially.

The reform is intended to keep New Zealand consumer law in line with international best practice and ensure our laws are effective and enforceable.

Credit Contracts and Consumer Finance Act (CCCFA)

The Ministry of Consumer Affairs recently received submissions on a discussion document on the CCCFA.

Proposals for change include improving access to hardship provisions, a requirement for definition of secured property in a credit contract, and requiring credit repossessions to be authorised by an independent agent such as a Justice of the Peace.

Decisions about the CCCFA are not likely until March next year.