Posse aims to corral unruly financial advisers

Mention commission-crazed salesmen and the financial services industry utters a collective "not me".

"It's the Wild West out there," a British-trained financial adviser, now working in New Zealand, said recently. But a new set of rules are on their way and it's going to give the cowboys in the industry a rockier ride.

Until now, New Zealand has had one of the least-regulated financial services industries in the Western world.

But the lack of controls has meant that small investors don't always get a fair deal.

At the moment, anyone can hang out his or her shingle, say "I'm a financial planner" and advise you what to do with your retirement savings. There's nothing stopping them recommending the products that pay them the highest commission.

Consumers often don't notice what they're being charged. They may think the advice they're receiving is free. Whereas commissions are deducted from the money they invest - eating into investment growth.

Here in New Zealand there is no requirement for those planners and advisers to automatically disclose their commissions nor the fees built into many of the products they sell.

When the Consumer Institute investigated managed funds last year, it found that despite the promises, the "fee fiasco" meant returns were often those available on term-deposits.

Don't get me wrong, Most financial planners and insurance advisers I meet as a journalist are professionals who aim to provide their clients with top-notch service and advice.

But David Russell, chief executive of the Consumers Institute who sees complaints from those who meet the less-than-professional end of the business, isn't so sure.

"The industry is diverse, ranging from commission salespeople masquerading as advisers, through to true professionals - and my impression is that there are not too many of the latter," he said.

Commissions and the temptation to squeeze an extra dollar from every client will attract a certain rogue element to any profession.

What's wrong in New Zealand?

From a consumer point of view, some of the standards that British and Australian consumers take for granted just didn't exist here. Up until now, we've not had:

* Rules over how the titles "independent", "financial adviser" and "insurance broker" could be used. In Australia, you need a diploma before you can call yourself a financial planner and a degree to call yourself a chartered financial planner.

* Compulsory indemnity insurance for advisers.

* A requirement for planners and advisers to recommend products in the best interest of consumers. In the United Kingdom, this is mandatory.

New Zealand had been on the regulation path ever since this Government came to power, said Kirstie Hewlett, manager business law team at the Ministry of Economic Development.

"The Labour Government wanted to bring investors back into the markets. At the same time, we realised globalisation meant we couldn't [be different] from the rest of the world and consumers didn't have the same kinds of protections that other markets had and they wondered why."

Many of the problem areas have already been tightened up, including rules surrounding takeovers, insider trading and directors' disclosures.

What's more, the new Credit Contracts and Consumer Finance Act, which gives the Commerce Commission some teeth, came into force this month.

It sets minimum standards for consumer credit contracts, particularly in relation to disclosure and contract terms; gives consumers the right to repay contracts early; prohibits unreasonable fees; and allows for the variation of contracts where consumers are struggling to meet obligations due to unforeseen hardship.

More help for beleaguered financial consumers is on the cards: a new Securities Legislation Bill, tightening disclosure rules. Salesmen will have to tell you if they receive any "soft dollar" kickbacks for recommending certain products.

Financial reporting, insolvency and life insurance regulation all come under the ministry. It is also looking at the Unlisted stock market, which enables consumers to trade in small companies not listed on the main NZX exchange, and operates outside regulation.

A regulation of financial intermediaries taskforce is due to report back in the middle of this year.

Its aim is to deal with problems in the advising and marketing of financial products and investment advice from investment and budget advisers, banks, managed funds, insurance companies, stockbrokers, insurance brokers, mortgage brokers, lawyers, and accountants.

Too much regulation and the amount paid for financial services could go up, said Phillip Matthews, chief executive officer of the Financial Planners and Insurance Advisers Association. Too little and consumers' opinion of the profession might not improve.

Matthews believes an organisation such as his is best placed to be the regulator - rather than a Government-based bureaucracy.

But Russell isn't so sure it will work.

"The industry has been given plenty of time to self-regulate and, in fairness, it has tried," he said. "However, there are too many so-called advisers operating outside the industry bodies.

"The Government has signalled it will be going ahead with a workplace saving proposal. The detail is not known but, no matter what the final form, the inexperienced and naive will be carrion to industry vultures unless effective controls are introduced."

Where are we heading? Legislation expected in the wake of the taskforce's findings is expected to ensure that professionals will almost certainly need to be registered, have qualifications, provide a complaints procedure and disclose hidden commissions. Regulation should also mean that if a financial planner or adviser misbehaves, he or she can be thrown out of the industry.

In Australia, the Australian Securities and Investment Commission is trying to steer the industry away from commissions and use the fee-based remuneration method. That means paying up front for their services.

In New Zealand, only a handful of financial planners use this method - charging a fixed fee for a financial plan with recommendations. Some offer a mixture of both methods, charging an upfront fee for a plan, which is refunded if products are bought through the financial planner.

What advantages are there for consumers?

Regulation doesn't ensure that financial scandals won't happen. The UK, where the financial services industry is heavily regulated, has been racked by scandals for the past 15 years. Millions of consumers were "mis-sold" pensions and endowments and a sector of the investment trust market - called split capital investment trusts - imploded after it was disclosed funds were buying each other's shares to keep the market buoyant.

Some in the financial services industry see regulation as delivering the credibility that will redeem them in the public eye.

Others see it as the death knell.

www.med.govt.nz/buslt/bus - pol/task-force/

www.comcom.govt.nz