21. Annex Two: Taskforce Recommendations
Regulatory Framework
1. The Task Force recommends that there should be a co-regulatory framework for the regulation of financial intermediaries.
Different Obligations Depending on Function
2. The Task Force recommends that different obligations attach to an intermediary depending on the role the intermediary is undertaking, that is whether they are acting as a:
- personal financial adviser - those who provide broad financial planning advice or advice on financial products, and implicitly or explicitly advise the consumer on the suitability or appropriateness for the consumer's personal circumstances.
- product marketer - those who promote financial products, and provide more than factual information but do not advise on the suitability or appropriateness of the product for the consumer's personal circumstances.
- information only intermediary - those who undertake a factual information function.
- execution only intermediary - those who execute client instructions, where that execution function is linked to personal financial advice or a product marketer role.
3. The Task Force recommends limited obligations for intermediaries who undertake an information or execution only role.
Obligations on Business and Individual
4. The Task Force recommends that the obligations recommended in this report (which differ depending on the intermediary's function) be placed on:
- Each person who provides financial advice or who advises on, or markets a financial product to a member of the public ("individual obligations"); and
- Each person who carries on a business that includes the provision of financial advice, or who advises on, or markets, a financial product to a member of the public ("business obligations").
Disclosure
5. The Task Force's recommendations in relation to disclosure are set out in the table of disclosure recommendations. These incorporate:
- Extension of the investment adviser disclosure regime in the Securities Legislation Bill to (with particular disclosure varying depending on the intermediary's function):
- advice or marketing on any financial product within the scope of the recommendations, including risk, investment property and credit;
- financial intermediaries providing financial advice without advising on financial products (including financial planners); and
- information and execution only intermediaries.
- Additional disclosures by product marketers and personal financial advisers.
Form of Disclosure
6. The Task Force recommends that any disclosure should be clear, concise and effective and enable comparisons across intermediaries.
7. The Task Force recommends that disclosure documents be standardised where possible, place important information prominently, provide dollar amounts rather than percentages and be clearly distinguishable from marketing material.
8. The Task Force recommends that disclosure reflect the medium of operating (for example, oral short form disclosure, despite the evidential difficulties, with a possible subsequent written confirmation, would be sufficient for telephone transactions for risk products and basic bank products).
9. The Task Force recommends that disclosure be consumer focused, and analysed from the perspective of benefit to the consumer.
10. The Task Force recommends that before determining the final content and form of disclosure there should be research into consumer views, in particular, what consumers would consider useful information and what form of disclosure would be most effective in conveying that information.
Standards
11. The Task Force recommends that core minimum standards should be set out in industry specific legislation.
12. The Task Force recommends that the following statutory standard (in addition to any other statutory or common law standards) should apply to all intermediaries:
- Not to engage in conduct that is misleading or deceptive or is likely to mislead or deceive including as to the nature, characteristics or suitability for purpose of the information, advice or financial product (all intermediaries).
13. The Task Force recommends that the following statutory standards (in addition to any other statutory or common law standards) should apply to all individuals or businesses undertaking a personal financial adviser role:
- To exercise reasonable skill, care and diligence having regard to the function being undertaken;
- To be remunerated on a basis agreed with the consumer in writing;
- To be subject to effective standards addressing conflicts as set out in this report;
- For individuals only, to have appropriate qualifications and/or experience for the functions undertaken (on an initial and ongoing basis); and
- For businesses only, to have in place adequate processes and policies to enable employees and the business to comply with the statutory standards and APB rules.
14. The Task Force recommends that businesses be liable for breach of standards by an employee.
15. The Task Force recommends that the legislation provide for consumers to bring actions for relief (including seeking compensation) in relation to statutory breaches.
Dispute Resolution
16. The Task Force recommends that there be a single Disputes Resolution Body established by statute that has jurisdiction over all financial intermediaries.
17. The Task Force recommends that the Disputes Resolution Body be able to consider complaints about breach of a statutory standard or, in relation to personal financial adviser standards, an APB rule relating to that standard.
18. The Task Force recommends that:
- The Disputes Resolution Body should be, and be seen to be, independent of the industry. This could be achieved, in part, by the governing body of the Disputes Resolution Body being composed of persons who have experience of the perspectives of consumers and industry (who could be appointed or approved by the Minister);
- The rules governing the jurisdiction and procedures of the Disputes Resolution Body being subject to Ministerial approval/veto;
- To reduce the incidence of parties to the dispute process taking an overly formal approach: (i) evidence adduced in the dispute proceedings which is relevant to the dispute would not be admissible in any other forum (including the Disciplinary Body and/or the statutory regulator); (ii) the decision of the Disputes Resolution Body though would be made available, on written request, to the disciplinary body and/or the statutory regulator; (iii) the jurisdiction of the Disputes Resolution Body would be limited to claims below a specified amount (for example $200,000); any claims above that would be a matter for the Courts;
- The Disputes Resolution Body, in conjunction with the APBs, be responsible for promoting to consumers the presence and role of the disputes resolution body; and
- The Disputes Resolution Body, in conjunction with the APBs, agree a process for considering the complaint at the first instance at the APB or member level to see if satisfactory resolution can be achieved without the need to commence a disputes resolution process.
The Task Force recommends that the Disputes Resolution Body be able to award compensation to consumers up to a certain level and that failure by any individual or business who undertakes a personal financial adviser role to pay compensation would be grounds for removal from an APB.
Disciplinary Body
19. The Task Force recommends that all financial intermediaries, and all persons carrying on business as a financial intermediary be subject to the jurisdiction of a single Disciplinary Body established by statute.
20. The Task Force recommends that sanctions available to the Disciplinary Body include:
- Temporary and permanent banning orders;
- Orders for supervision or management of practice;
- Orders for correction of information;
- Orders for reimbursement of fees to consumers; and
- Fines.
21. The Task Force recommends that there be an appeal from decisions of the Disciplinary Body to the District Court.
22. The Task Force recommends that there be:
- A threshold for bringing proceedings, for example, that there has been a significant breach of the obligations; and
- Effective safe harbours to excuse behaviour that is reasonable in the circumstances, although technically a breach of the legislation, for example, that "the breach is immaterial or, in all the circumstances, ought reasonably to be excused".
Authorisation Framework for Personal Financial Advisers
Approved Professional Bodies
234. The Task Force recommends that every individual and business who undertakes a personal financial adviser role must belong to an approved professional body (APB).
24. The Task Force recommends that an APB have the following roles:
- To consider and if thought appropriate make rules for those statutory standards that relate to its members and such other rules as the APB thinks appropriate, having regard to the statutory objectives including establishing what are appropriate qualifications and/or experience for advising in particular segments of the market, whether ongoing competency requirements need to be satisfied and if so, what they might be;
- To monitor compliance by members;
- To resolve low level disciplinary and consumer dispute matters;
- To fund a Disputes Resolution Body and Disciplinary Body;
- To report material breaches of standards to the Disciplinary Body and bring disciplinary proceedings against members when there has been a material breach;
- Either collectively with other APBs or individually, to promote to consumers their rights and the role of the APB; and
- To consider, and if thought appropriate, make rules relating to the financial capacity of businesses to provide for consumer redress for established breaches of standards and rules.
25. The Task Force recommends that the APB rules be subject to a Ministerial approval/veto process.
26. The Task Force recommends that the Government discuss with existing industry bodies their likely approach to rationalisation if the Task Force's recommendations are adopted.
Registration
27 The Task Force recommends that:
- There be a register of all individuals or businesses undertaking a personal financial adviser role;
- No individual or business will be permitted to undertake a such a role unless they are on the register;
- No individual intermediary should be able to register unless they satisfy the qualification requirements (defined to also include experience requirements) of their APB;
- An intermediary can be removed from the register for a serious breach of standards;
- The title "Registered" in relation to roles undertaken by financial intermediaries would be reserved in legislation to those intermediaries who are on the register;
- The register be administered centrally (for example, by a Government department or agency) and be available to the public (including being available on the internet);
- That the register contain the following details about each registered individual financial intermediary (and similar details about business carrying on a personal financial advisory role):
- their name;
- a contact address (which could be the business address);
- their qualifications;
- any disciplinary sanctions imposed on them;
- their employer; and
- the industry body or bodies that they belong to; and
- That there be a statutory obligation on each intermediary seeking registration to supply these details and to notify of changes to them for as long as they are on the register.
Statutory Regulator
28. The Task Force recommends that a statutory regulator have a market overview role including:
- Providing advice to the Minister on the approval/disapproval of APBs;
- Providing advice to the Minister on the approval/disapproval of APB rules;
- Providing advice to the Minister on the rules of the disciplinary and disputes resolution body;
- The power to impose temporary orders (for example stop order or temporary banning orders) in relation to businesses and individuals where there is a prima facie case of breach of standards, with the ability to refer the matter to the Disciplinary Body for full consideration; and
- To have stop, banning and rectification powers in relation to the new intermediary statutory disclosure requirements recommended by the Task Force (similar to the powers provided to the Securities Commission under the Securities Legislation Bill).
Minister
29. The Task Force recommends that the Minister have the power to approve or disapprove APBs and their rules, and the rules governing the composition and procedures of the Disputes Resolution Body.
30. The Task Force recommends that legislation identify core principles that should inform the exercise of discretionary powers under the regime.
31. The Task Force recommends that these core principles include:
- An intermediary industry that warrants public confidence;
- An intermediary industry that places a high priority on transparency of key information for consumers and enables accessible and effective enforcement of obligations;
- The encouragement of a dynamic, innovative and competitive intermediary industry that provides cost efficient and effective services to consumers;
- Restrictions and obligations imposed on industry participants are in proportion to the expected benefits for consumers and the industry; and
- The maintenance of a proper relationship between the costs of compliance with the regulatory regime and the benefits resulting from it.
Funding
32. The Task Force recommends that funding of the regime be a mixture of state and industry contribution, and that further consideration be given to the details of the funding mechanisms.
Scope
33. The Task Force recommends that the general approach be that the proposed framework should be broad in coverage but not "one size fits all" in its application. Accordingly the Task Force recommends that obligations and standards vary depending on the role a financial intermediary undertakes; and that some occupations and products be excluded from the reform proposals. The Task Force specifically recommends that:
- With the exception of journalists and authors, particular occupational groups should not be excluded from its recommendations;
- That the regulatory regime capture intermediaries who are providing financial advice or marketing to members of the public;
- That some risk products (for example, travel insurance, car insurance, house and contents insurance) be excluded from the regulatory framework; and
- That "not for profit" organisations which provide financial advice services (such as budget advice, debt management and/or debt restructuring), be included but that issues around regulation of the voluntary sector, including mitigating compliance costs, be addressed at a more detailed design phase.
Implementation and Transition Arrangements
34. The Task Force's preference would be for a specified notice period for introduction of the regulatory framework, rather than a "grand parenting" arrangement.
35. The Task Force recommends that a regulatory impact analysis be undertaken after further development work on the recommendations, as many of the specific costs will reflect the detailed design of the proposed regime.
Prudential Regulation
36. The Task Force recommends that wraps (custodian based administration and portfolio management services) and master trusts be considered as part of the Government non bank product and provider review.
Handling of Client Funds
37. The Task Force proposes that, as a general rule, client funds be required to be held on trust in an account which is separate from the intermediary's business funds.
Secret Commissions Act 1910
38. The Task Force recommends that the Secret Commissions Act be generally reviewed and not relied on in considering implementation of the Task Force's recommendations.
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