Govt eyes Aussie, UK bans of financial advisor commissions; But any such NZ move, if there is one, might be 4 years off

Govt eyes Aussie, UK bans of financial advisor commissions; But any such NZ move, if there is one, might be 4 years off

The government is watching the effects of moves to ban financial advisor commissions in Australia and the UK, with an eye on doing the same in New Zealand.

But such a move may still be more than four years away, and there appears to be a high chance of it not happening in New Zealand, as the government says changes to industry and advisor regulations it has made since 2008 have reduced financial advisor reliance on commissions.

Commissions paid by finance companies to advisors who recommended their clients invest in those companies have been under the spotlight given more than 60 institutions and managed funds have fallen over since 2006, putting about NZ$8.6 billion worth of investments at risk (See our Deep Freeze list). In many cases, advisors did not disclose to their clients they were receiving commissions from the companies they were recommending.

The issues highlighted by the finance company failures pushed the 2008 National-led government to set up the Financial Markets Authority as an industry watchdog, and introduce a licensing regime for financial advisors.

'Ban commissions'

In a report on finance company failures that have occurred since 2006, Parliament's Commerce Select Committee recommended the government "investigate the possibility of banning conflicted remuneration structures in the provision of financial advice, including consultation with Australian authorities on the model proposed in that country."

The government this week responded to the Commerce Committee's recommendation, and noted the Australian government had committed to a ban on conflicted remuneration structures from 1 July, 2012.

That ban included commissions and volume payments, in relation to the distribution of and advice on retail investment products including managed investments, superannuation and margin loans and a ban on most soft-dollar benefits of A$300 or more.

"In addition, the Financial Services Authority in the United Kingdom has recently banned financial advisers from receiving commissions for selling investment policies," the government said.

"The government recognises the potential negative impacts of commission based remuneration on the incentives," it said.

"Officials will be monitoring the effect of the Australian and United Kingdom bans while liaising with relevant industry bodies and consumer organisations to better understand the role of advice in different sectors, the nature and extent of problems and the likely impacts of any ban," the government said.

"The government notes that it is a legislative requirement that the Financial Advisors Act 2008 and the Financial Service Providers (Registration and Dispute Resolution) Act 2008 are reviewed by mid-2016. This timeline will provide an opportunity to bed in the regime," it said.

"A baseline evaluation of financial advisor behaviour has already been carried out. The initial indications are that the new requirements contained in the regime established by these Acts have reduced reliance on commissions. Officials will better be able to determine toward the end of 2012 whether more should be done prior to the review."

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