'Unscrupulous' foreign firms exploiting finance services register, action needed, says industry

Friday 23rd October 2015 1 Comment

New Zealand's reputation as a responsible member of the world's financial community is undermined by holes in the financial services provider register, which is still open to abuse by unscrupulous foreign firms, industry groups say.

The Ministry of Business, Innovation and Employment is revisiting the register in a legislative review of the 2008 Financial Advisers and Financial Service Providers (Registration and Dispute Resolution) acts, which were intended to revive the public's confidence in financial advisers by imposing a licensing regime and introducing a new level of professionalism in the industry. It's preparing an options paper to be released late next month.

The register has come under scrutiny in recent months as overseas firms signed up without operating in New Zealand to bolster their credibility in the eyes of investors. That sparked a legislative response last year giving the Financial Markets Authority the power to de-register or block firms where it felt they misled consumers into believing the companies provided services in New Zealand or were regulated locally.

Submissions from industry participants generally saw the register's controls as being underdone and leaving New Zealand at risk of appearing to regulate overseas firms when it didn't.

The Institute of Finance Professionals New Zealand says in its submission the status of registered firms and the use of the term 'Registered Financial Adviser' as a major issue, which "allows unscrupulous or careless international financial service providers to shelter under the term and the apparent supervision of the FMA to sell their services, generally to offshore customers.

"This is damaging for New Zealand's reputation as a responsible member of the world financial community and for the reputation of the regulator system at home," INFINZ said in its submission.

The industry group suggested subjecting companies to anti-money laundering regulation, or requiring them to pay a bond in favour of their dispute resolution scheme to "provide practical disincentives for such behaviour."

Broking and research house Craigs Investment Partners said misuse of the register undermines the integrity of New Zealand's capital markets and should be addressed as a priority, and that regulators should consider adding requirements such as local directors or licensing of financial services providers. Bank of New Zealand agreed it was a priority and said it might be appropriate to consider extra obligations for New Zealanders acting as agents or directors of foreign-based registered providers.

In a report to Commerce Minister Paul Goldsmith on the registration aspect of the review in August, MBIE officials said the register was a useful, if limited monitoring tool for enforcement, but had let foreign-based firms register to cash in on New Zealand's reputation as a well-regulated jurisdiction. The report said the issue was a priority for submitters, though the number of fraudulent cases was small.

"Increased risk profiling and integrity checking by the FMA and Companies Office and new powers to prevent registration and to de-register has reduced the number of FSP applications from offshore entities in recent months," the report said. "However, these new powers are resource intensive and have yet to be thoroughly proven as an effective tool."

MBIE officials recommend changing the territorial scope and registration requirements of the law to exclude providers who don't offer services to or from New Zealand.

The New Zealand Shareholders' Association said misuse of the register was a "significant risk" and supported the FMA's de-registration powers, but said they were "an ambulance at the bottom of the cliff approach" and that consideration should be given to amending the rules "so that only those actively carrying on business in New Zealand are able to register."

Law firm Minter Ellison Rudd Watts said the misalignment between the register and anti-money laundering legislation allows "financial service providers to arbitrage the registration regime under the FSP Act and the regulatory regime of the AML/CFT (Anti-Money Laundering and Countering Financing of Terrorism) Act, leading to the potential misuse of the register and policy concerns about New Zealand's reputation."

The extension of the FMA's oversight granted last year "does not deal with the root problem, which is the ambiguity in the applicability of the FSP Act and the misalignment of the AML/CFT requirements" and have only added to the uncertainty. The law firm doesn't see any need to beef up the FMA's powers, and says the problem would be fixed by aligning the two acts.

BusinessDesk.co.nz

Comments from our readers

On 23 October 2015 at 7:58 pm Roger Gadd said:

The Financial Advisor legislative regime is a protectionist instrument that is oppressive to the public. Registration is an assurance neither of competence nor integrity. Excellent financial advisers would be excellent with or without regulation, and disingenuous incompetent manipulative advisers still succeed in being disingenuous, incompetent and manipulative while registered. I suggest no action should be taken regarding the issue raised in this article.