Co-Regulatory Model
17. The Task Force recommended an industry and government co-regulatory model which would allow different sectors of the financial intermediary industry to develop their own standards, dispute resolution and disciplinary procedures by forming approved professional bodies (APBs), to which certain classes of financial intermediaries ("personal financial advisers") would have to belong. The Task Force proposed that APBs would be overseen by a government regulator (see paragraph 23 below). An example of a current co-regulatory system in New Zealand is the regulation of engineers managed by an industry body (the Institute of Professional Engineers of New Zealand Incorporated) and a Crown entity (the Chartered Professional Engineers Council).
18. Each APB would represent a number of individuals and businesses undertaking a "personal financial adviser" role. While the exact definition of a "personal financial adviser" is one of the upcoming design tasks for the Ministry (see paragraph 44 below), the Task Force suggested that this role would include those intermediaries who give financial advice or advice on products to members of the public, while taking into account the suitability of the advice/product in light of the consumer's personal circumstances. The Task Force also suggested that lower level financial intermediaries (e.g. those intermediaries who market or promote financial products, or who only provide factual information to the public) would not have to belong to APBs, but would still be subject to dispute resolution and disciplinary functions as well as some disclosure requirements (see paragraphs 28, 40 and 43 below).
Why Did the Task Force Recommend a Co-Regulatory Model?
19. The Task Force noted that there was strong support from industry stakeholders for enhanced self and/or co-regulation on the basis that the knowledge and practices of existing industry bodies could be leveraged to help address the current limitations of the existing self regulatory organisations. Currently, industry relies on voluntary compliance with codes of ethics and disciplinary procedures, but it is difficult for industry bodies to effectively sanction poor behaviour (e.g. members can simply leave the industry body but still continue to practise) and existing industry bodies are not well set up to deal with all disciplinary matters. In addition, there was a high level of consensus across industry participants, consumer and regulatory bodies (including self regulatory bodies) that change was required and that it was unlikely to occur in the existing environment.
20. The co-regulatory model depends on sufficient willingness from the financial intermediary industry to form APBs. As part of the upcoming design work, the Ministry plans to consult with a number of stakeholders (who may potentially form APBs) on the exact roles of APBs, which may extend to:
- making rules for financial intermediary members (in addition to any statutory standards placed on financial intermediaries) on matters such as ongoing competency, training, professional indemnity insurance and fidelity fund contributions (etc);
- monitoring compliance by financial intermediary members with both statutory standards and APB rules;
- resolving low level disciplinary and consumer dispute matters;
- providing funds for higher level dispute resolution and disciplinary functions;
- reporting material breaches of standards and bringing disciplinary proceedings against members when there has been a material breach; and
- promoting to consumers their rights and also providing education on the role of the APB (which should not extend to a lobbying role according to the Task Force).
21. The Ministry would also consider whether APBs could include individual firms, such as banks or insurance companies.
Cabinet Approval Sought for Co-Regulatory Framework
22. I ask Cabinet to approve a co-regulatory framework, broadly as recommended by the Task Force. This decision would allow the Ministry to carry out detailed design work with key stakeholders on the following matters (raised by the Task Force, Ministry officials and agencies consulted in the preparation of this paper):
- the role of APBs: how to deal with the extent of the roles of an APB (refer paragraph 20 above) to ensure that financial intermediaries and consumers are not disadvantaged by the potential increase in costs and complexities in the operation of the regulatory regime.
- the number of APBs: there are potential costs and interface complexities for consumers, industry participants and government if there are a significant number of industry bodies involved in a regulatory role.
- industry capture risks: there is a risk of industry regulatory bodies (especially in those sectors where there is already a strong industry representative) acting as "closed shops" deterring innovation and competition, preventing entry into the industry by creating excessive barriers or not taking into account the interests of all relevant stakeholders (for example consumers) when APBs carry out their regulatory functions.
- lack of APBs in a certain industry: officials need to consider back-up options under the co-regulatory model as it is not clear how the co-regulatory model would work in less developed segments of the market, where either there is no established industry body coverage or else the industry body has little expertise and or experience in carrying out the functions of a regulator (for example, in a reasonably new market segment).
- the role of the regulator and the Minister in relation to rules approval or disapproval, powers of intervention in relation to intermediaries or APBs (regarding conduct, disclosure, or rules), and any need for regulatory backstop provisions in the event of absence or failure of an APB.
- tension in the co-regulatory model: there is a need for clear distinction between the role of the industry bodies and government oversight (through the regulator and the Minister) to balance the risks of government "second guessing" industry body administrative decisions, or placing overly high standards on APBs, against the risk that government oversight may be limited to "rubber stamping", with the structure implying a higher level of government assurance than is actually delivered. This would also include consideration of whether an APB should have prime responsibility for its rules, or whether the regulator and the Minister should have power to propose changes.
- legislation: how legislation would define the required functions of APBs and deal with the potential conflict of existing legislation on financial intermediaries.9
- clear consumer information and representation: how to balance the shared responsibilities of APBs and the regulator to ensure effective and consistent delivery of information to consumers (including through the possible use of a register of financial intermediaries), and whether or not there should be consumer representation on boards of APBs.
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