Brian Gaynor 's Opinion

Brian Gaynor is a Weekend Herald columnist.

Brian Gaynor: Spread net to cover lawyers, accountants

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Professions exempt from rules aimed at preventing repeat of finance company debacles

Eight of the 20 ministers in John Key's cabinet have legal or accounting backgrounds. Photo / Mark Mitchell
Eight of the 20 ministers in John Key's cabinet have legal or accounting backgrounds. Photo / Mark Mitchell

One of the unique features of New Zealand business is the way lawyers and accountants are exempt from regulations that apply to most other parties.

This blatant elitism is disturbing because many of the convicted finance company directors and executives were lawyers or accountants.

Yet their professions have been exempted from regulations that are supposed to avoid a repeat of the finance company debacles.

Lawyers and accountants have been able to convince government ministers that they are above the law, that they shouldn't be subjected to external regulation because they have their own effective self-regulatory structures.

They have received a sympathetic hearing from ministers, partly because lawyers and accountants play an increasingly dominant role in the Cabinet.

For example eight of the 20 current Cabinet ministers have legal or accounting backgrounds. Gone are the days when farmers and school teachers dominated the Cabinet table.

But the good news is that while governments continue to support the elite status of the legal and accounting professions the Shareholders Association and several prominent businessmen are trying to make our boardrooms more inclusive.

They are doing this through two programmes, "Future Directors" and the "25 per cent Group", which deserve widespread support.

Hopefully, attempts by the business community to make our boardrooms more inclusive will convince governments to remove the elitist status they bestow on lawyers and accountants.

The two most recent acts of Parliament with lawyer and accountant exemptions are the Financial Advisers Act 2008 and the Anti-Money Laundering and Countering Financing Terrorism Act 2009, which was covered in last week's column.

The Financial Advisers Act regulates financial advice and broking services.

Under it, anyone who provides financial advice in the course of their business is required to:

Take an appropriate degree of care.

Refrain from misleading or deceptive conduct.

Be a member of a dispute resolution scheme if services are provided to retail clients.

Depending on the nature of the services, the financial adviser or broker may also have to:

Provide information to clients about themselves, the service they provide, fees, and other matters the client needs to consider before deciding whether to use the service.

Be an authorised financial adviser and comply with additional conduct obligations in the Code of Professional Conduct for Authorised Financial Advisers.

Some parties are excluded from the act. They include lawyers, incorporated law firms, registered legal executives, chartered accountants, tax agents, real estate agents and registered valuers.

The original bill included anyone who gave investment advice, but this was later changed to limit cover to persons whose primary occupation is to provide investment advice or who regularly provide such advice in the course of their business.

This exempted lawyers and accountants from the act, but they are often the primary source of investment advice for individuals who sell their farm or business.

Lawyers have also initiated investment products, particularly if they have positive tax outcomes for investors.

Two prominent Auckland lawyers established the Trinity forestry scheme which the IRD successfully claimed would cost the taxpayer $3.7 billion over its 50-year life span.

Allan Hubbard, who was in charge of the biggest of the failed finance companies, and David Ross, who ran New Zealand's biggest alleged Ponzi scheme, were also chartered accountants.

They would both be exempt from the requirement of the Financial Advisers Act as long as they restricted themselves to chartered accounting activities and gave investment advice in this capacity only.

Another bizarre feature of the act is that overseas financial adviser qualifications are not recognised in the authorised financial adviser regime but New Zealand accountancy qualifications are, even though the overseas qualifications are far more relevant to authorised financial advisers.

Lawyers and accountants are also exempt from the anti-money laundering legislation which came into force this week.

This exemption is equally bizarre because lawyers and accountants can - inadvertently - be the first port of entry for fraudulent funds being introduced into the financial system.

People in these professions often handle large sums of money through their trust accounts, and these sums should be subject to the same scrutiny as money that is lodged with other organisations that are subject to the anti-money laundering law.

The activities of Geoffrey Taylor, covered in last week's column, were one of the reasons for the introduction of the law.

Queensland-based Taylor had more than 1000 companies registered in New Zealand, one of which leased a plane that was caught transporting arms and explosives from North Korea to Iran.

Taylor was also chairman of the NZX-listed Sunseeker Energy (Australasia).

A former NZX director tried to stop the listing but a major law firm, which sponsored the listing, successfully opposed this move.

Sunseeker's only New Zealand director was a former senior partner of another large law firm.

The company had a master licence, from an overseas-related party, to manufacture solar energy panels for Australasia. Sunseeker quickly crashed and burned and there is no evidence of it ever having established a manufacturing facility for these panels.

The point here is that lawyers and accountants are no different from anyone else, they can give good or bad advice and their judgment of individuals can be astute or naive.

They should not be exempt from the Financial Advisers Act, if they give investment advice, or from the anti-money laundering legislation because they may not be astute enough to identify possible money-laundering activities unless they follow procedures outlined in the act.

Ironically, these two new acts are a big money spinner for law firms, because they do not have to incur the huge expenses associated with meeting the requirements of the legislation while they charge clients for advising them how to adhere to these regulations.

Offering a more positive note is the Future Directors programme, which was founded by Sir Stephen Tindall, Michael Stiassny and Des Hunt of the Shareholders Association.

The programme's objective is "to give young talented people the opportunity to observe and participate on a company board for a year while giving the company exposure to this talent and the benefits a young mind can bring to the boardroom".

Future directors are not directors in a legal sense, as they are not appointed by way of a shareholder resolution or board appointment to fill a casual vacancy.

But they participate in all board meetings and the guideline remuneration is $20,000 a year.

The first Future Directors appointment was Sheridan Broadbent, general manager of strategy and business technology for Genesis Energy, to the Auckland International Airport board.

The Future Directors programme is an attempt to give young people board experience and expose boards to individuals from different backgrounds while reducing the influence of the legal and accounting professions on our board of directors.

Women are often more forward thinking than men and it is no coincidence that the first future director is a female and the appointment was made by a company chaired by Joan Withers.

Stiassny is also involved in the "25 per cent Group" which is hoping to lift the number of women on listed company boards from around 16 per cent at present to 25 per cent.

This is another laudable objective although Hanna Rosin suggests in her recently released book The End of Men and the Rise of Women that the demise of manual jobs, and the rise of the service economy will place women in more powerful positions.

For example, 13 of the 15 job categories with the greatest growth potential over the next decade are dominated by women.

In 20 or 30 years, our main concern might be that our corporate boards are female-dominated and don't have enough male, lawyer and accounting representatives.

Brian Gaynor is an executive director of Milford Asset Management.

- NZ Herald

Brian Gaynor

Brian Gaynor is a Weekend Herald columnist.

Brian Gaynor has written a weekly investment column for the Weekend Herald since April 1997. He has a particular particular passion for the NZX and its regulation. He has experienced - and suffered through - the non-regulated period prior to the establishment of the Securities Commission in 1978 and the Commission’s weak stewardship until it was replaced by the Financial Markets Authority (FMA) in 2011. He is also a Portfolio Manager at Milford Asset Management.

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