Legislation Would Set a Number of the Standards for Financial Intermediaries
33. The Task Force recommended that core minimum standards should be set out in legislation. These legislative standards would prohibit particularly egregious conduct requiring harsher penalties (e.g. misleading and deceptive conduct).11 In addition, industry specific standards developed by APBs would also be given legislative backing/approval. This second class of standards would generally require financial intermediaries to meet certain levels of conduct, skill, care, diligence, qualifications and experience. For those personal financial advisers who are also businesses, APBs may require minimum set standards, processes and policies for dealing with employees.12
Why Is the Lack of Standards a Problem?
34. Existing legal obligations on financial intermediaries have been criticised for being unclear, not easily enforced and sector based.13 Information gathered by the Task Force also suggests that inconsistent (or non-existent) industry standards on skill levels, qualifications (etc) are linked to lower quality advice, lower quality processes / formal records of advice and lower profitability / productivity for intermediaries. Low standards were linked to low consumer confidence, resulting in "an unwillingness to remunerate financial intermediaries for their services at a profitable level."14
35. The current lack of clear standards for financial intermediaries (both in relation to legislative standards and industry specific standards) is a problem as:
- there are no barriers to entry to the general profession (assuming that this leads to unscrupulous / less qualified intermediaries);
- it is harder for consumers to understand and distinguish between quality standards, and it is hard for financial intermediaries to judge themselves, or to be guided in their activities;
- there is less transparency around fees, commissions, and intermediary history, and more potential for conflicts of interest arising (assuming that mandatory standards as suggested by the Task Force would result in changed behaviour by the financial intermediaries, and would require more information to be provided to consumers).
Cabinet Approval Sought for Legislative Standards
36. I ask Cabinet to give in-principle approval that legislation would set standards for financial intermediaries. This would allow the Ministry to undertake design work on the appropriate form of the standards to be implemented by legislation and the appropriate form of the standards to be set by the APBs with legislative backing. A large part of this work would involve:
- consultation with consumers, industry and government to identify those areas which should have the certainty of clear rules set in statute, and which areas would benefit more from allowing variation across sectors of the industry (that is, where APBs could set the standards);
- consideration of the statutory standards recommended by the Task Force (some of which are already in the Securities Legislation Bill, for example, the standards relating to misleading and deceptive behaviour); and
- consideration of the different classes of "financial intermediary" to work out the appropriate skill set for each sector (refer paragraph 30 above).
37. Inserting standards in legislation, and also allowing APBs to set standards, would mean that financial intermediaries and consumers would have clear standards against which to measure the services provided by financial intermediaries. Standard setting will not necessarily guard against dishonesty, but the other functions of the co-regulatory framework (including dispute resolution and disciplinary processes) will help to reduce this risk.
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