Money: Licensed to advise

By Philip Macalister

Tougher controls could be placed on investment advisers and financial planners, to give the saving public greater confidence in their services.

There is a growing perception that the current disclosure requirements for advisers and planners, which came into force three years ago, are not tight enough.

Currently there is a mandatory list of information advisers must give their clients. There is a further list of more useful information which they must also disclose, but only if asked to do so.

New Zealand First leader Winston Peters says the current regime is not working and there is a need to strengthen the Investment Advisers (Disclosure) Act 1996.

He favours some form of compulsory adviser registration and wrote to associations within the financial services industry - the Investment Savings and Insurance Association (ISI), the Financial Planners and Investment Advisers Association (FPIA) and the Health Funds Association - asking for their views on the idea of registration.

The responses were muted. Where's the problem? asked the ISI, while the FPIA and the HFA did not respond to Mr Peters' request within the specified deadline.

Other industry participants expressed a wide range of views, some supportive of the concept, and others heavily discounting the idea, largely because it was seen as Mr Peters pursuing something for political capital rather than through a genuine interest.

But despite the generally negative responses, a number of industry protagonists are now seriously considering the issue.

ISI chief executive Vance Arkinstall said that although there may be a lack of enthusiasm for compulsory registration, it was highly likely that something would happen.

In many ways New Zealand is out of step with other countries and other professions. Australia, Britain and the United States all have some form of adviser licensing, and in New Zealand most other professions have some system of registration, such as lawyers, accountants, doctors. There are also registration schemes for master builders and electricians, and moves are afoot to re-establish a teacher registration board.

Mr Arkinstall and some ISI board members recently met Mr Peters to discuss his idea and look at some cases NZ First has catalogued as advisers ripping off clients.

He said a number of agreements had been made with NZ First and that the ISI would form a joint working party with the FPIA to look at options for a scheme.

Mr Arkinstall, who had to deal with adviser fraud when he was head of Norwich Union, said there was no way that registration would stop fraud. From his experience, a crooked adviser who is determined to beat the system will do just that.

However, registration could benefit the industry by stopping crooked advisers moving from one agency to another, he said.

Under the current industry practices, an adviser who loses an agency or distribution arrangement with a financial services company can easily sign a new agreement with another company.

Mr Arkinstall said the industry had to stop these sorts of people moving from one company to another. However, he said the current employment laws made it difficult to achieve.

On the same theme, FPIA co-president David Milner expressed a personal preference for financial services companies to take a stricter line on who they allowed to offer their products. His idea was for a form of self-regulation where life insurance companies and fund managers could only use advisers who were members of a professional organisation (such as the FPIA) to sell their products.

Under this scenario the associations would then police their own ranks.

Mr Milner said the financial services industry was a place where people "use their imagination and creativity to make a quick buck," tarnishing the whole advisory industry.

But while these options have merit, they are not a great step forward from the present situation. At the moment, the public can feel reasonably assured when they are dealing with an adviser who is a member of, say, the FPIA that the adviser is bound by a code of ethics and a set of disciplinary procedures.

The question remains: how do you police advisers who are not members of a professional association?

Securities Commission chief executive John Farrell says the Institute of Chartered Accountants (ICANZ) has a useful model. In fact it is the model the commission recommended - unsuccessfully - to the Government when the Investment Advisers (Disclosure) Act was being developed.

Under this arrangement, legal protection is given to the title Chartered Accountant, and the only people who can use it are accountants who are members of ICANZ.

Another option was the idea of making advisers pay a bond. Phil Briggs, managing director of Equity Investment Advisers & Sharebrokers, said registration was long overdue. He favoured a scheme similar in concept to the system applying to motor vehicle dealers. Under this scenario, an adviser would have to pay a bond of $100,000, for example, to the appropriate body.

"Isn't the loss of one's own money a deterrent for those who dishonestly lose others' money?" Mr Briggs asked.

That bond would be like a personal fidelity fund, and used to repay clients if fraud was discovered.

While there are many views on how to tackle the issue of adviser registration, there are some common goals.

NZ First spokesman Roly Metge, a former chief executive of the Insurance and Investment Advisers Association, said the proposals were designed to give the public greater confidence in financial advisers. He wanted the idea developed in conjunction with the industry, rather than being forced on it by politicians and bureaucrats.

Mr Briggs said that the chosen registration scheme "should be designed simply to stop those advisers who are dishonest, not to stifle competition for the established or stop the new vibrant advisers".

Likewise, Mr Arkinstall said advisers should not be concerned about proposals for compulsory registration.

"The only ones who need to fear it are those who embark on questionable practices."

He said advisers, fund managers and life insurers should not hesitate to move to registration if it would improve public confidence.

* Philip Macalister is a freelance writer who publishes an online magazine covering the investment industry . He can be contacted by e-mail at: philip@goodreturns.co.nz.