9. Conduct
129. The proposed legislation will set conduct standards for all intermediaries. Conduct standards are rules that an intermediary would have to follow when acting as an intermediary. These conduct standards will address matters such as minimum standards of behaviour and statutory duties of care.
130. Those intermediaries who belong to approved professional bodies will also be subject to conduct standards set by approved professional bodies. These approved professional body standards will not themselves be set in legislation, but high level intermediaries are likely to have a statutory obligation to comply with approved professional body rules.
131. Currently, under tort law, a financial intermediary can have a duty of care in giving of financial advice and may be liable if they breach that duty of care (for example, by negligent misstatement), and loss can be attributed to that breach.
132. There are also a number of different conduct requirements already in New Zealand legislation (e.g. those relating to misleading or deceptive advertising).
Deceptive, Misleading or Confusing
133. The proposed financial intermediary legislation is likely to require that:
- conduct relating to financial advice is not deceptive, misleading or confusing
- disclosure is not deceptive, misleading or confusing
- advertising is not deceptive, misleading or confusing.
134. These three obligations would apply to all intermediaries - information only, product marketer and high level, on the basis that misleading information at any level can put consumers at risk, and on the basis that the Fair Trading Act 1986 already applies to prevent misleading deceptive and confusing behaviour in those who provide goods and services in trade.36
135. This requirement is already present in some existing sector specific legislation, for example, in relation to dealings in securities, section 21 of the Securities Legislation Bill proposes to insert section 13(1) into the Securities Markets Act 1988:
A person must not engage in conduct, in relation to any dealings in securities, that is misleading or deceptive or likely to mislead or deceive.
136. This is described as a "general dealing misconduct provision" - it is a strict liability offence which only requires loss to be proven. The penalty which can be applied to a breach of this requirement is a compensatory penalty.37
137. Other penalties are described further in the Securities Legislation Bill in relation to specific behaviour relating to listed securities. For example, in relation to certain insider trading and market manipulation behaviour, a person can be subject to imprisonment.38
138. The Ministry proposes that the financial intermediary regime would have the equivalent of a "general dealing misconduct" provision and a statutory duty of care.
139. In this section, the Ministry is keen to seek your views on whether or not proposed legislation should also contain more specific obligations on financial intermediary behaviour, and the type of penalties that failing to meet such behaviour obligations should attract.
Statutory Duties in Other Jurisdictions
140. In Australia, there are a number of "good faith" statutory duties on those holding an Australian financial services licence (being licensed to provide financial advice) including the obligations:
- not to engage in conduct that is, in all the circumstances, unconscionable;39
- to accord the instructions of the client priority over other instructions or transactions;40
- to ensure advice is appropriate to the client and reasonable in all of the circumstances, having regard to the relevant personal circumstances in relation to giving the advice;41 and
- warn clients if their advice based on incomplete or inaccurate information.42
141. In England, under the Financial Services and Markets Act 2000, the Financial Services Authority (FSA) has the power to issue (and has done so) statements of principle and a code of practice on the conduct expected of approved persons (that is, someone who FSA has approved to carry out a certain function).43
142. The Statement of Principle requires an approved person to:
- act with integrity in carrying out his controlled function;
- act with due skill, care and diligence in carrying out his controlled function;
- observe proper standards of market conduct in carrying out his controlled function; and
- deal with the FSA and with other regulators in an open and cooperative way and disclose appropriately any information of which the FSA would reasonably expect notice.44
Options for New Zealand Legislation
143. In light of the UK and Australian obligations, and the current tortious obligations that can apply to some financial advisers, the statutory duty of care in the proposed legislation could require high level financial intermediaries to:
- Exercise reasonable care, diligence and skill45 - that is, demonstrate the required skill to advise consumers. This could extend to a statutory duty to ensure that the advice is appropriate for that consumer;
- Warn consumers if they cannot exercise reasonable care, diligence and skill (e.g. where they are acting on incomplete information);
- Act in accordance with the Act;
- Act with integrity; and
- Act in the best interests of the client.46
144. The Ministry notes that some financial intermediaries already have duties which may conflict, for example, in some situations, insurance intermediaries are deemed to be acting as agent for an insurer in relation to premium received, and hence could not always act in the best interests of the client, where that clashed with the best interests of the insurer.47
Additional Obligations on High Level Intermediaries
145. In addition to statutory duties of care, high level intermediaries could also have a statutory obligation to:
- Belong to an approved professional body;
- Adhere to approved professional body standards; and
- Provide information to an approved professional body for the purposes of registration.
146. These requirements may be necessary to ensure that a breach of an approved professional body rule has some effect.
Professional Indemnity Insurance
147. There is the power under the Securities Legislation Bill for regulations to require investment advisers to have a minimum level of professional indemnity insurance, and prescribe that amount, or give an undertaking that the adviser has adequate professional indemnity insurance for the protection of the person to whom the adviser gives investment advice.48
148. Ministry officials already have considerable information on this matter through submissions received under the Securities Legislation Bill Regulations discussion document on whether such regulations were required. Ministry officials will not address this matter in this document.
Questions
Q30. In addition to a general strict liability provision requiring intermediaries not to engage in conduct that is misleading or deceptive or likely to mislead or deceive, would it be useful to have additional specific prohibitions on financial intermediary conduct?
Q31. Do you agree with the possible statutory duties listed at paragraph 143 above?
Q32. Should any of the additional duties apply to all intermediaries, or just high level intermediaries? Why?
Q33. What would be the costs and benefit of imposing such duties?
Q34. And, what type of penalties should attach for breach of the duties listed at paragraph 143 above? For example, should there be criminal penalties?
Obligations on Execution Only / Transaction Intermediaries
149. There are likely to be increased obligations on those financial intermediaries who handle money. This is to:
- Ensure that intermediaries are accountable to clients for how their money and property is handled; and
- Counter risks of money laundering and terrorist financing.
Money Handling
150. The Taskforce suggested that there is an absence of transparency in many cases around the status of money held by an intermediary on behalf of a consumer (for example, whether those funds are held on trust for the consumer). The Task Force endorsed the requirement under the Securities Legislation Bill to disclose whether or not the money or property received by a broker is held on trust and proposed that, as a general rule, client funds should be required to be held on trust in an account which is separate from the intermediary's.49
151. Currently under the Securities Legislation Bill, investment brokers have certain obligations to disclose to members of the public how they deal with investment money or investment property.50 In addition, the NZX Participant Rules require market participants to hold client funds on trust at all times, and to protect those funds from the date of receipt.51
152. The proposed financial intermediary legislation could apply money handling requirements to all financial intermediaries who will hold money or property if these terms were defined by reference to the new "financial product" definition above, rather than simply to securities.
153. This could require any intermediary who receives money or property in relation to the buying, selling of financial products to meet trust account and reporting standards, which could include:
- Holding that money or property on trust for the client in a separate trust account with (e.g.) a registered bank;
- To describe that account as a trust account;
- Not using funds in the account as security for any entity other than the client;
- Accounting to the client for that money (including disclosing to the client that the money is held on trust);
- Keeping a record of the transactions on that account; and
- Not using that account for the intermediaries' own funds.
154. Ministry officials note that there may have to be separate reporting for trust accounting, as not all intermediaries who handle client money will be subject to monitoring by the approved professional body, as only those high level intermediaries are required to be approved professional body members.
"Fit and Proper" Person Requirements
155. New Zealand has signed up to the Financial Action Task Force (FATF) 40 Recommendations on combating money laundering and the financing of terrorism. These recommendations apply to "financial providers" which includes those intermediaries who handle client monies.
156. Execution only intermediaries could be subject to positive regulation, which means that they could only handle or receive client money or property if they first meet certain further "fit and proper" requirements.
157. These are likely to contain requirements that an execution only intermediary has not breached relevant financial prohibitions, (for example, prohibitions against fraud, insider trading, etc) and that the intermediary has not been convicted of certain criminal offences, been made bankrupt or been banned from being a director or manager of a company, within a defined period of time.
Questions
Q35. What types of intermediaries, in addition to investment brokers, would receive money and property from members of the public?
Q36. Should these intermediaries be subject to money handling legislative requirements?
Q37. Which types of intermediaries hold trust accounts now? Are there some sectors of financial intermediaries which use a trust account more than another sector?
Q38. Are the requirements listed at paragraph 153 appropriate for those who hold client money?
Q39. What would be the cost and benefit of applying these obligations to intermediaries who receive money and property from members of the public?
Q40. Who would be responsible for monitoring these trust accounts?
Back to Top