L0505TE281 Ross Kent Task Force Member General Manager Alliance Capital New Zealand The Regulation of Financial Intermediaries in NZ Implications of The Task Force Recommendations

Presentation Code 1 What We Set Out To Do  Suggest options for reform that will  enhance the quality of financial information and advice  assist New Zealanders to make the most of their savings  Regulation should be proportionate  Structural change outcomes should be explicit  Take into account international developments

Presentation Code 2 Key Issues We Found: No Crisis But...  Lack of financially capable consumers  Opaque and inconsistent charges, complex conflicts of interest  Adviser inadequacies and variable quality standards  Incentives do not directly reward cost-effective, quality advice  Incomplete dispute resolution and complaints coverage  Difficulties removing intermediaries for misconduct  Inconsistent redress mechanisms for consumers =  Reducing confidence in financial intermediaries

Presentation Code 3 Reform Recommendations  Enhanced standards  Enhanced redress, sanctions and enforcement  Enhanced disclosure and financial literacy

Presentation Code 4 Recommended Co-Regulatory Framework Minister Regulator Approved Professional Body Advice Monitoring Approve Personal Financial Adviser Membership Disputes Resolution Body Disciplinary Body Complaints Information & Execution Only Product Marketer Disclosure

Presentation Code 5 Recommended Product Scope Home, contents, motor and travel insurance Any product or security with an investment, risk or credit component Tangible property Commercial general insurance Investment property Owner-occupied property

Presentation Code 6 Am I a Broker or Not?  Promotes financial products  More than factual information  Does not advise on suitability for customer’s personal circumstances  May promote products; or  Broad financial advice  Implicitly or explicitly advises on suitability for customer’s personal circumstances  Member of APB and subject to APB rules  On register of Personal Financial Advisers Personal Financial Adviser Product Marketer

Presentation Code 7 Difference In Statutory Standards  Not to engage in conduct that is misleading or deceptive  To exercise reasonable skill, care and diligence  Remunerated on a basis agreed with consumer in writing  Have appropriate qualifications  Standards addressing conflicts so client’s interests have priority Personal Financial Adviser Product Marketer Apply to both individuals and businesses

Presentation Code 8 Disclosure Obligations For Marketers and Advisers  Nature and level of fee charged (if any)  Nature and extent of any interest or relationship that a reasonable person would find reasonably likely to influence the intermediary  Amount or rate of any remuneration, excluding salary or fixed wages  Account for difference between gross and net returns for investments  The role being undertaken, i.e. for whose interests?  Product marketers: “Health warning” of information limitations

Presentation Code 9 Redress Sanctions and Enforcement  Established by statute  Can make binding decisions on any consumer complaint relating to ANY intermediary  Complaints based on breach of a statutory duty or APB rules relating to a statutory duty  Award compensation up to a maximum amount  Established by statute  Covers ALL intermediaries  Can impose orders to:  Ban  Supervise a business  Correct information  Reimburse fees to consumers  Fine Disciplinary Body Disputes Resolution Body

Presentation Code 10 Implications : Industry Bodies  Functus Officio  Co-regulation has a chequered history  Success of APB-model requires:  Mature central regulator careful to keep industry reputation in tact  Mature industry ready to confront vested interests  APB not the same as an Industry Body  APB role limited to statutory functions  APB governance could include consumer representation

Presentation Code 11 Implications : Compliance Challenges  Should our business seek to become an APB?  Businesses can carry out all intermediary functions  Process needed to comply with APB rules and statutory standards  Statutory standards for PFAs are tricky:  Priority to clients’ interests  Reasonable skill, care and diligence for function undertaken  Disclosure requirements:  Periodic reporting of difference between gross and net returns  Role undertaken / health warning  Remuneration

Presentation Code 12 Implications : Challenging Implementation Schedule  2008 implies full speed ahead  Contrast with Australian FSR  CLERP – Implementation March 2004  Contrast Securities Legislation Bill  Sec. Comm. Paper August 2001 – Implementation 1H2006  Inter-dependent with Non-Bank Review, eg.  Statutory Regulator  Broader product disclosure requirements  Broader Single Economic Market developments