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158. Legislation will also place disclosure obligations on intermediaries. These disclosure obligations are likely to extend to all classes of intermediaries.

159. Disclosure is a useful tool to addressing information asymmetries in the market, but there are limits to disclosure's usefulness if it results in cumbersome documents that do not inspire consumers to actually read the information. Officials are aware of the number of submissions to the Taskforce and the subsequent discussion document on the Securities Legislation Bill Regulations which sought simpler and lower cost disclosure obligations.

160. This section discusses the type of disclosure obligations, and seeks input on how to balance the costs and benefits of providing such disclosure so that the regime addresses the information asymmetries about the intermediaries themselves.

Disclosure Obligations on Investment Advisers and Brokers

161. Under the Securities Legislation Bill, prior to giving advice, investment advisers will be required to disclose:

• information on their qualifications and experience;
• whether they are a member of a professional body;
• whether they have professional indemnity insurance;
• whether there are dispute resolution facilities available;
• any past criminal convictions;
• the nature and level of the fee, as well as any relevant remuneration (including the amount or rate, and the name of the person from whom remuneration will be received, whether the adviser is an associated person or has a relationship with anyone connected with the investment, or someone who may influence the provision/content of investment advice); and
• details of securities about which advice is given.⁵²

162. Investment brokers are required to disclose criminal convictions, and procedures for dealing with money (in addition to investment adviser disclosure, when they are also "investment advisers").⁵³

163. At the date of the release of this discussion document, Ministry officials are reviewing submissions on the form and method of these disclosure obligations, and whether there should be additional disclosure obligations on financial intermediaries. Work on these submissions will be incorporated into work on disclosure in relation to financial intermediaries. Further submissions are not required on the proposals under the Securities Legislation Bill regulations.

Taskforce Recommendations

164. The Taskforce recommended that there should be enhanced disclosure obligations for financial intermediaries. This is on the basis that disclosure will assist a consumer is making an informed assessment on the suitability of an intermediary, and matters that may affect the appropriateness and quality of the advice. Effective disclosure can help investors to compare intermediaries. Most submitters agreed, concluding that disclosure should be consumer focussed, well timed, proportionate and monitored.⁵⁴

165. The Taskforce recommendations are attached at Annex Two.

Disclosure Obligations on Information Only Intermediaries

166. The Taskforce suggested that information only intermediaries should disclose:

• The nature and level of fee that they receive for giving advice; and
• Remuneration options (if any).

167. These intermediaries have few disclosure obligations as there is a small risk that consumers will rely on these intermediaries heavily in making investment decisions and it is easier to manage the risks as most information only intermediaries are employed by businesses, which themselves are financial intermediaries.

168. However, it is noted that as these intermediaries are not members of approved professional bodies, all obligations must be placed on these intermediaries by way of statute.

169. Ministry officials wish to seek views on the suggested disclosure requirements, and whether there are any other disclosure obligations which may be appropriate for an information only intermediary to have to provide to members of the public, for example:

• Should an intermediary have to tell a member of the public about dispute resolution facilities? If not, is there another place from where that member of the public would get this information?
• Does a member of the public need to know about an information only intermediary's fees or bonus system?

170. Ministry officials are keen to hear your views on whether you agree that information only intermediaries should have to make these (or any) disclosures, and the costs and benefits of these disclosure obligations as attached to the different classes.

Disclosure Obligations on Execution Only Intermediaries

171. The Taskforce suggested that, in addition to meeting the disclosure obligations placed on "information only" intermediaries,⁵⁵ "execution only" intermediaries should also have disclosure obligations in relation to:

• dispute resolution;
• previous convictions, previous bankruptcies, certain prohibitions and Court findings; and
• fees, including fees on switching products.

172. In relation to disclosure on previous convictions etc, under the FATF requirements (discussed at paragraph 155), execution only intermediaries can only handle money if they do not have any such previous convictions. In other words, there could be a positive requirement that intermediaries have to be "fit and proper" before they can handle money - which means that there would be nothing to disclose, as consumers could rely on these requirements to ensure that the intermediary was acting appropriately.

173. Ministry officials also seek your views on whether fees on switching products would be included in the general information on remuneration that a broker would be required to provide.

174. Currently, investment brokers are required to disclose the following prior to receiving investment money⁵⁶ or investment property:⁵⁷

• how payment or delivery of money or delivery of property should be made to the broker;
• whether or not the money or property received by the broker will be held on trust for the investor, and will be so held until it is disbursed or distributed in accordance with the investor's instructions;
• what records will be kept by the broker in relation to the money or property, whether the investor has access to those records, and the terms of that access;
• whether or not the receipt, holding, and disbursement of the money and the receipt, holding, and distribution of the property, by the broker will be audited by an auditor and, if so, the name of the auditor; and
• the extent, if any, to which the broker can use the money or property for the benefit of the broker or any other person (as well as any other information that must be disclosed under regulations to be made under the Securities Markets Act, to be amended by the Securities Legislation Bill).

175. Ministry officials consider that the current investment broker requirements could extend to all financial intermediaries who act as brokers in relation to financial products. This would mean that any intermediary who receives money or property in relation to the buying, selling of financial products would be subject to these disclosure obligations.

Disclosure Obligations on Product Marketer Intermediaries

176. The Taskforce suggested that product marketer intermediaries should disclose:

• Whether dispute resolution facilities are available;
• In the previous five years before the service is provided:
  • relevant convictions;
  • whether the adviser has been adjudicated bankrupt;
  • prohibitions from managing a company or business;
  • any successful court action taken against the financial intermediary in the intermediary's professional or business capacity; and
  • whether the intermediary has been expelled from or prohibited from being a member of a professional body.
• Where advice or marketing relates to switching products, disclosure of remuneration to the intermediary, the cost to the client (for example, exit fees, entry fees and implementation fees), and the benefits of the alternative as against the existing product.
• Details of the types of products about which the intermediary gives advice or markets and, if the intermediary only advises or markets in relation to products of a particular product generator or generators, a statement to that effect and the name of each of those product generators.
• Disclosure in dollar terms, on a periodic basis, of the difference between the aggregate gross returns on all investments organised though the financial intermediary, and the actual net return received by the consumer, with an explanation of the difference.
• To the extent practicable, total benefits to the intermediary of the consumer's business (including "soft dollar" benefits) where those benefits are not already disclosed as part of the actual gross and net gross return disclosure above.
• The role being undertaken by the intermediary, including a statement as to whose interests the intermediary is acting in and a description of those interests, and for product marketers, a "health warning" about the limitations in the information provided (for example, "I have not considered your personal circumstances, and accordingly, the product may not suit your needs").⁵⁸

177. The Ministry is most interested in the costs and benefits that this disclosure will provide, as it is the intention that disclosure is consumer focussed, well timed, proportionate and monitored.

178. When thinking about this disclosure, it may help to consider what you would expect a product marketer to disclose (e.g.) should a call centre employee selling general insurance products disclose this information? Should a property developer marketing investment for non-owner-occupiers in a new apartment development disclose this information?⁵⁹

179. The Ministry is receiving and reviewing feedback on these disclosure obligations in relation to the Securities Legislation Bill discussion document on investment adviser and investment broker disclosure, which asked submitters for their views on these disclosure obligations.

180. If you have not submitted on these disclosure requirements, please comment on the cost and benefits posed by these suggestions. If you have already submitted, please note that Ministry officials are reviewing your submissions.

"Health Warning"

181. To address the risk that some consumers may treat product marketers as providing a higher level of advice than anticipated, officials seek views on whether or not it is appropriate to have product marketers provide a health warning.

182. Health warnings may take the form of a statement to consumers noting that the product marketer is providing advice on a product from a particular provider, and that a consumer may wish to seek independent financial advice, or to consider options themselves.

183. Ministry officials are keen to hear your views on whether you agree that product marketer intermediaries should have to make this disclosure.

Disclosure Obligations on High Level Intermediaries

184. The Taskforce suggested that, in addition to those obligations placed on product marketer intermediaries,⁶⁰ high level intermediaries should disclose:

• Experience;
• Qualifications;
• Membership of professional bodies; and
• Nature and scope of any professional indemnity insurance.

185. Some of these requirements will be imposed on an investment advisers under the Securities Legislation Bill and are discussed in paragraph 161. Other requirements were recommended by the Task Force, these are contained in Annex Two.

186. These additional disclosure obligations reflect the higher quality advice that high level intermediary are expected to provide - consumers should be able to rely on intermediaries to be professional. It is assumed that intermediaries who have experience and qualifications will be better advisers than those who do not have appropriate experience and qualification.

187. Ministry officials are keen to hear your views on whether you agree that high level intermediaries should have to make these disclosures, and the cost and benefit of these disclosure obligations

Timing of Disclosure

188. In most cases, officials have assumed that disclosure would be required to be made by intermediaries prior to providing the advice or the service.

189. The timing of disclosure was raised in the Securities Legislation Bill Regulations discussion document, where submitters noted that it may be difficult to provide complete remuneration information prior to the advice being given, and that it may be more appropriate for some disclosure to be made within 5 days of providing the advice or service. Earlier submissions on the Securities Legislation Bill Regulations discussion document will be considered by the Ministry. This is also being considered in relation to current work on the Supplementary Order paper under the Securities Legislation Bill.

Sector Specific Disclosure

190. We note that there may it appropriate to have be some additional or replacement specific disclosure obligations, which may be based on separate sectors of industry, or the type of the intermediary. For example, investment advisers and brokers have special obligations through the Investment Advisers (Disclosure) Act.

191. Ministry officials are considering consultation with targeted groups such as those financial planners who are not "investment advisers" and mortgage brokers to ensure that any required sector specific disclosure obligations / exclusions are considered.

192. As part of the Review of Financial Products and Providers, the Ministry is also considering the role and responsibility of insurance intermediaries towards product providers and the client and some more specific questions on insurance intermediary disclosure will be asked in the context of that review.

193. Ministry officials are interested in hearing your views on any specific disclosure obligations.