A Lack of Confidence in the Regulator

The results of a survey carried out by CoreData amongst investment advisers in Australia makes some interesting observations.  The Australian finance industry is currently much heavier regulated than it is in New Zealand.  The Australian regulator is the Australian Securities and Investments Commission (ASIC), whereas the NZ one is the Securities Commission.  New Zealand is moving more towards the Australian model.  It is not surprising, given that a number of the senior figures at the NZ Securities Commission are former employees of ASIC.

The survey showed that almost half of financial advisers have no confidence at all in ASIC’s ability to monitor and prevent malpractice and financial product collapses.  If a similar survey was done in New Zealand, the response could well be over 75% have no confidence in the New Zealand Securities Commission.  The public’s perception, especially amongst those who were invested in a number of finance companies, is possibly even higher.

Four out of five respondents felt that advisers are being unfairly targeted.  The NZ situation again is probably very similar.  Sure there are some rat bag advisers out there.  And some of the worst advisers by a long shot would have to have been many of the ANZ Bank’s investment advisers who may well no longer work there.  What is even worse is that these advisers were presumably only working to the guidelines provided by their employer, a heavily regulated Bank. 

The widely publicized Consumer Magazine article has been rubbished by virtually anyone who has sufficient knowledge of what happened.  This week, information released under the Official Information Act, stated that the Securities Commission did not assist in funding the survey, whereas the Consumer report stated that the Securities Commission did fund it.  Assuming that the information provided by the Securities Commission, is in fact correct, the credibility of both the Consumers Institute and its article must be seriously eroded.

While 89.3% of respondents agreed that financial advisers should have a fiduciary duty to place clients’ interests ahead of their own, opinion was divided over the impact this would have on the advice industry.  This could be interpreted a couple of ways.  If these same respondents were already placing their client’s interests ahead of their own, then it would only be 10% or so who did not.  If this is the case, then it would be difficult to achieve a significant improvement in fiduciary duty.  On the other hand, if it was only the adviser’s perception that they were already acting in their clients best interests, and in fact they were not, then a significant improvement should be attainable, albeit a massive mindset change would need to occur amongst the advisers.

When asked which recommendation would have the biggest impact on the advice industry, ceasing commissions received the highest number of votes (44.6%) followed by legislating to ensure a fiduciary duty of care (20.2%) was followed.

Despite in some ways being ahead of New Zealand, in Australia there is a lot of what could be regarded as underhand or anticompetitive practices within their investment industry.  Large financial incentives are provided to some groups to utilise various wrap account platforms.  Fees are also paid by product providers to ensure that there products are on a group’s recommended product list.  The costs of the Australian regulatory system are so high and complex, that very few independently owned advisory practises actually exist.  Instead they operate using effectively a third parties license. This situation does not appear to be prevalent in the investment industry in New Zealand.

New Zealand has a chance to get regulation right, and to improve investment outcomes.  Unfortunately if the regulators get carried away, investors may actually be worse off than what they already are.