Diana Clement: New rules won't remove all pitfalls

Investors have lost their shirts left, right and centre over the past few years. Sure some were naive. But thanks to a paucity of regulation many were taken for a ride by the very professionals they sought advice from.

Financial advisers and other investment professionals have the ability to leave clients destitute or with severely reduced means if they don't do their job well.

Ask investors whose financial advisers recommended they put money in finance companies or the so-called "investment advisers" (read commission salespeople) from property investment companies Blue Chip and Merlot.

While you can't legislate against every conceivable rip-off , new rules set out to tame the cowboys, give regulators more bite, and allow consumers low-cost dispute resolution.

They include:

* The Financial Advisers Act 2008 sets minimum standards for those giving financial advice and brings financial advisers and many mortgage brokers and insurance advisers under the Securities Commission. They will also need to adhere to a code of professional conduct or face discipline and compensation claims.

* The Financial Service Provider (Registration and Dispute Resolution) Act 2008 requires financial advisers to register and join an approved dispute resolution scheme. In short, says Retirement Commissioner Diana Crossan, these two laws are designed to promote sound and efficient delivery of financial advice by requiring disclosure by advisers, improved competency and accountability.

* The Reserve Bank of New Zealand Amendment Act 2008 imposes minimum standards on non-bank deposit takers, including finance companies, building societies and credit unions. Among other things non-bank lenders will need to have a mandatory credit rating by March 2010 - which will give investors in finance companies a better understanding of these companies' financial strength.

* The Real Estate Agents Act 2008 clamps down on rogue practices. The old system was often argued to be toothless with some agents accused of mishandling funds, giving poor contractual advice and more.

* The Securities (Disclosure) Amendment Act 2009 and Securities Regulations 2009, which came into effect on October 1, affect prospectuses prepared by companies seeking to raise capital.

* The proposed Insurance Contracts Bill, which will cover issues such as the status of third-party advisers who sell insurance and the avoidance of policies for non-disclosure. This long-awaited bill is currently on the Government's back burner.

* The Securities Act 1978 and Credit Contracts and Consumer Finance Act are both under review.

Consumers can be forgiven for being confused about or blissfully unaware of the changes. No single government agency I contacted could give me a simple list of regulatory changes - let alone an overview.

That's in part because of the artificial split between "securities" and other investments. They're all investments as far as the consumer is concerned. Insurance, as well, is part of the spectrum of maintaining and enhancing an individual's finances.

One of the more important laws for consumers, the Financial Advisers Act, is still in the process of being implemented and won't be fully enforced until late next year.

There is also confusion over exactly who is covered by it.

Under the Financial Advisers Act clause 12(g), a real estate agent is not providing financial advice "if the advice or transaction is a necessary incident of working as a real estate agent". Some people argue that companies that sell "financial security" through investment property, but aren't real estate agents, such as NZ Invest, still aren't selling securities and therefore shouldn't be covered.

These companies often offer services such as "investment consultancy" and in some cases "financial plans".

They may think they fall through cracks in the law, says Russell Hutchinson, director of Chatswood Consulting.

He believes, however, they will find that their services do fall under the act, meaning they will need to be registered and authorised.

Even if you argue that regulators have bite here in New Zealand - which isn't universally agreed - it's not the end of the story for consumers.

Regulation and disclosure statements don't guarantee that advice will be good, ethical and in the client's interest. Nor do they wipe out rogues and criminals.

"It's not automatic that honesty improves with education," adds Hutchinson.

Nor does regulation ensure that the Securities Commission, Commerce Commission and other government agencies have the money or the balls to tackle problems in time.

One thing that the general public often doesn't understand is that the Securities Commission, Commerce Commission and other bodies don't take cases on behalf of individuals. They prosecute companies for breaking relevant laws.

In Australia, says independent analyst Steven Anderson, Asic, the equivalent of our Securities Commission, can take class actions against financial services providers. That means one test case that affects the entire class of product or advice.

Even with the new regulation it's essential, says Crossan after the release this week of a Consumer article about shoddy financial advice, that investors still do their homework.

The Retirement Commission is about to launch a campaign telling people to investigate before they invest.

That means more than just reading the disclosure statement. You need to know how they repay you if something goes wrong. The professional indemnity insurance that most advisers hold is designed to cover their legal bills if a client sues them - not to repay client losses.

One would expect that financial advisers have their own personal assets carefully tucked away in trusts - meaning there won't be much to go for even if you sue them successfully.

Interestingly there is no requirement in the law for capital adequacy. That means an adviser can be in business with no hope of ever compensating you if things go wrong.

With this in mind you may be better off, suggests Hutchinson, using an authorised adviser from a large firm with deep pockets. He cites the case of an ASB adviser who allegedly made fictitious investments on behalf of 22 wealthy customers.

The ASB didn't hang around for it all to come out in the wash. It immediately refunded the clients - which an independent adviser mightn't be inclined or able to do.

When it comes to the large number of financial regulation changes under way, investors are probably mostly interested in how they affect dispute resolution - when investing goes wrong. In particular, they'll want to know how to get recompense - because it's not always easy to recover your money.

The big changes include a dispute resolution service for financial advisers' clients, which will come into effect next year. It will give consumers a low-cost complaints service similar to the service offered by the Banking or Insurance & Savings ombudsmen - although the details haven't been made public yet.

The newly formed Real Estate Agents Authority is another new disputes resolution service. It fields complaints from real estate agency clients, having taken over this role from the agents' own trade body, the Real Estate Institute.

The Real Estate Agents Act 2008, which gave birth to the authority, increases the amount of compensation available to the public to $100,000.

Such government agencies aren't always swift at handing down justice. For example, back in March 2008 complaints were laid with the Valuers Registration Board against valuer Tony Kidd, whose company Axiom Rolle PRP valued hundreds of Blue Chip apartments.

The investigation is still going on with no end in sight.

Whether it's insurance, financial advice, real estate, or other aspects of investing, consumers have access to the courts.

But many cases are never heard because the individuals involved can't afford the costs of going to court. Just look at the case of Michael Fallows, who lodged a $697 claim against Hanover Finance but was forced to drop it after the company took him to the High Court.