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CER – Comparative Emerging Regulations

Posted: 29 November 2016

Since FSRA hit the market in 2004, NZ observers have been watching the progress and developments of the post-regulatory experience in the financial services industry in Australia.

With the introduction of the Financial Advisers Act 2008, New Zealand took the first steps toward the regulation of the behaviour and practices of investment and life insurance advisers. This had been accelerated by the collapse of the Finance Houses and sub-par lending institutions, and the haste with which the legislation was framed and introduced was reflected in the quality of the statute.

While ASIC continued to seek ways to prove its effectiveness as a regulator, enforcing and punishing miscreants based on the rules to be applied, NZ sought to establish a principles based regime overseen by the Financial Markets Authority, the body set up to implement the provisions of the FAA 2008, and to work with the newly established Financial Services Provider Register.
From the outset the two regimes chose different paths and a brief overview of the impact of those paths follows.

The Australian regulator announced its arrival with an aggressive, punitive, and adversarial regime, which made little or no attempt to seek co-operation or collaboration from the industry it was charged with regulating.

Having spent 3 years leading one of the Life Companies in Australia through the early years of the regime, I found ASIC to be unhelpful, reluctant to engage in constructive dialogue, and with little appetite for improving the industry by enlisting support from participants.

Relationships between those regulated and the regulator were, and continue to be frosty at best, antagonistic at worst.

Nothing illustrates this more than the oft-cited example of the Toll/Patrick case in 2007, brought by ASIC against Citigroup alleging insider trading.

Dealing in the companies shares at the Equity Desk, and acting as the intermediary via their Merchant Banking arm in the merger activity smacked of illicit practice, and ASIC proceeded accordingly. Had the action succeeded, the implications for the merchant banking industry worldwide would have been traumatic.

As it turned out, the judge gave ASIC a bloody nose – in effect, telling the regulator not to waste taxpayers money with frivolous actions based on unfounded allegations, and dismissed the case without too much ado.

The audible sigh of relief was only drowned out by the popping of champagne corks in the various Bank boardrooms in Sydney and elsewhere.

Of course, heaven help any FSRA licensed entity that got their punctuation wrong in a public issue document in the immediate aftermath as ASIC sought to recover its position.

However, the nature of the environment and the position of the regulator was well and truly confirmed and the consequences are still with us today.

The passage of time has not softened ASIC’s adversarial stance, and the industry regards the regulator as existing at the other side of a never-to-be-crossed divide.

By contrast, the New Zealand regulatory environment has been characterised by a lighter, more collaborative touch, with less litigation, prosecutions, and penalties recorded.

The recent consultative process embarked upon the Financial Markets Authority (FMA) during the scheduled legislative/regulatory review process is an indication of the regulators intent to achieve a consensus. The regulator’s stated goal is to develop regulation that can be an effective path to establishing efficient capital markets, creating confidence among consumers that advisers and providers are acting ethically, and to build a framework for stimulating appropriate governance practices across the industry.

Initially, NZ chose to require individual advisers to register themselves on the Financial Services Provider Register (FSPR) with only those wishing to recommend investment products required to meet a higher qualification standard to achieve Authorised Financial Adviser (AFA) status.

Separating the advisers into those able to access risk products only (Registered Financial Advisers) and those able to access risk and investment products (Authorised Financial Advisers) was widely regarded in the adviser community at the time to be a structural defect.

However, individual adviser responsibility was regarded as a strength, particularly in view of the experience in Australia.

The initial proposed regulations had everyone who purported to be a financial adviser to qualify via examination, and many smaller adviser entities embarked on this path to compliance before the intervention of the ‘big end’ of town.
In the face of intense lobbying from the banks, and to provide large institutions with an acceptable pathway to compliance, the Government of the day developed the concept of a Qualifying Financial Entity (QFE) that was charged with taking responsibility for those advisers who chose to become a member of a QFE.

Limited product choice was the price to pay for the adviser, but the QFE-owning entity avoided the expense of having their aligned advisers meet the individual compliance obligations.
And so the consumer was faced with confusing and complex categories of advisers, products, and distribution entities.

Miraculously, the incidence of a QFE being held responsible for one its members breaching the regulations are practically non-existent – in 5+ years!! A truly remarkable achievement from an industry that was supposedly in such dire need of regulation.

However, compared with the Australian experience such observations sound trivial and trite. The issuance of an Enforceable Undertaking by ASIC has practically become an expectation in Australia as the combative nature of the regulator persists, ably assisted by statistically flawed reports issued by the body itself, with dubious support from the Trowbridge Report and similar.

NZ had its own version of Trowbridge – the Melville Jessup Weaver Report – which was a ‘lite’ version of its Australian master template.

Indeed, Trowbridge conducted the actuarial peer review, and, not surprisingly, gave the MJW document his stamp of approval.

However, unlike the experience in Australia, the NZ industry and the Government rejected the findings of the MJW report, preferring to let the market decide.

The current regulatory review in NZ proposes to introduce entity licensing, the wisdom of which remains to be seen.

Overall, the NZ industry is moving toward a more consumer-sensitive regime, and the advent of a united adviser body is a direction that Australian advisers should urgently contemplate.

In the face of such an aggressive, adversarial regulator, there is more that unites advisers than divides them and a strong, representative body provides a better opportunity for consumers and the wider community to gain real benefit from the industry.

dwhyte_blogAuthor: David Whyte

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