5. Outcomes of the Review of Financial Intermediaries
Desired Outcomes in the Financial Sector
6. The outcomes the government is seeking to achieve from the financial sector are a sound and efficient financial system, investment which encourages growth and innovation, an environment which facilitates wealth accumulation and confidence in the sector which encourages participation by consumers and market participants. To do this, the Government is working on an effective and consistent framework for the regulation of non-bank financial institutions, financial products and financial intermediaries.
7. This work encompasses a number of reviews including the Review of Financial Intermediaries (dealt with in this discussion paper) the Review of Products and Providers and the Review of Domestic Institutional Arrangements (led by Treasury).1
Role of Financial Intermediaries in the Financial Sector
8. Trusted financial intermediaries play a key role in addressing information asymmetry in the financial sector, as the market will only operate efficiently if investors can make informed choices about which products or providers best suit their needs and risk levels.
9. Retail investors often do not have sufficient expertise, time or information to make these choices unaided. Information on financial matters can be costly to gather and share, and once it is released, the value of the information dissipates.
10. Intermediaries can help investors understand and choose investments and give investors reasonable assurance that an investment is suitable for their needs. Intermediaries should have the expertise, time and information to break down the knowledge gap between the provider and the consumer to assist in the efficient allocation of resources by matching consumers with products that best meet their needs and risk appetite.
Why the Government Intervenes
11. While there are currently many trusted financial intermediaries in New Zealand, the Government is carrying out this work because most intermediaries only have informal incentives placed on them to credibly vouch for the quality of information. These incentives arise because their business is based on giving accurate information and they will suffer reputational and therefore economic loss if they provide misleading information or allow a provider to falsify or exaggerate information.
12. Consumers have limited information and a limited ability to evaluate their financial intermediaries. In addition, consumers may not verify the information provided by financial intermediaries so there may only be incentives on some intermediaries to do the minimum necessary to keep their client satisfied. Low entry requirements may also allow intermediaries to operate off the reputations of other intermediaries. There may not be sufficient incentives for intermediaries to act ethically or to manage conflicts of interests appropriately. As well, most consumers do not have experience and expertise in investing in the financial sector.2
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