Amanda Morrall talks to Securities Commission director of supervision Angus Dale-Jones about new regulatory regime facing finance sector

By Amanda Morrall

Financial advisors could be held to account for unnecessary losses suffered by investors under legislative reforms aimed at restoring public confidence and transforming the  industry from a trade to a profession.

Securities Commission director of supervision Angus Dale-Jones said new laws governing the financial advisory sector - which have gone from being the most lax to the most stringent in the world - meant that investors could potentially have money returned if losses were a result of 'bad advice.'

Among a raft of changes set to take effect July 1 is the need for financial advisors to be part of a 'dispute resolution scheme' where unhappy customers can vent their frustrations if the relationship sours - or they suspect they have been steered in the wrong direction.

The new Financial Services Act also establishes a disciplinary committee where complaints can be further challenged and penalties meted out. See our earlier article on how many advisers could miss out if they don't meet fast-approaching deadlines.

Dale-Jones said it was possible that investors who suffered material losses as a proven result of bad advice be financially compensated.

"The financial market is all about taking risks of some nature. If you take a properly informed risk and you lose money, there's nothing anybody can do about that. That's part of the process of investing and making a risk/return decision. But if your loss is based on bad advice? Absolutely.

"The dispute resolution body or disciplinary committee might be able to assist. The dispute procedure might get your money back. It's less direct if your advisor is disciplined, but it might be easier then to prove in a court process if disciplinary action has been against your advisor.''

Deadline looms

Under the new regulations, financial advisors that want to continue dispensing personalised investment advice are required to register themselves as such as well as pass two sets of mandatory tests. The deadline for booking to sit those exams is at the end of this month (March 2011). Applicants then have three months to complete the required tests before the full force of the law takes effect July 1.

Dale-Jones said even before the Christchurch earthquake, compliance rates (for registration and examinations) were low. He surmised that it was due to a case of last-minute filers.

The Institute of Financial Advisers said previously the industry could be cleansed of thousands of practitioners, who were either taking time to upgrade, changing careers or realigning themselves with financial institutions (Qualified Financial Entities) that could cover the back-room costs required for compliance.

Dale-Jones said the net effect of the regulatory revamp would ideally restore public faith and guard against losses the scale of which were suffered when the finance company sector fell. Billions of dollars were lost by New  Zealand investors with an estimated NZ$8.5 billion still at risk of potential loss. See our Deep Freeze list for details on which finance companies collapsed.

Overlooked in the rapid criticism of the financial advisory sector, was the fact that many losses suffered were a result of do-it-youself investors, said Dale-Jones.

"To the extent that those losses arose out of bad advice, it (the new rules) might have helped. But in general with investments in finance companies, there were many people that invested without going to an adviser. And as a nation, we are not particularly good about going to a financial adviser and getting help."

'Scrap commissions'

Whilst Dale-Jones is stepping down from his position in advance of the Financial Markets Authority taking over the Securities Commission job next month,  he was hopeful the financial advisory environment in New Zealand would be greatly changed for its current state.

Moving away from commissions to a fee-based system would go a long way to improving it, he said.

"It would be much easier for consumers to trust their advisers if they knew there weren't financial and other incentives for advise to be given in a particular direction."