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Securities sheriff needs more bullets

By Nick Stride

Friday 21st March 2003

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Later this year a band of briefcase-toting bureaucrats will touch down at Wellington Airport and disappear into the tower blocks of The Terrace.

The exciting mission of the team from the the World Bank and the International Monetary Fund will be to audit New Zealand's financial sector regulatory framework. One of the deficiencies they will find, according to Securities Commission chairman Jane Diplock, will be the regulations governing investment advisers, or "financial intermediaries."

At present there aren't any but the commission and the government have the area under review.

A commission review published in February last year recommended a raft of basic-level rules for advisers such as requiring them to disclose criminal convictions or bankruptcy before giving advice, and making it an offence to recommend or deal in illegal securities.

That no such rules existed before astonished many. Equally astonishing is the fact the law allows anyone to offer investment advice, and no one has the power to stop them practising no matter their sins or shortcomings.

Discussing her thoughts on the subject Ms Diplock chooses her words carefully. Recruited from the Australian Securities and Investment Commission (ASIC), she has been at pains to dispel the suspicion harboured in some quarters that she was brought over here to "Australianise" securities regulation.

That suspicion has led some in the industry to speculate the commission and the government are leaning toward an Australian-style regime under which advisers will have to be licensed to operate and can be barred from the profession if they fall below specified standards of good practice.

While both Ms Diplock and Commerce Minister Lianne Dalziel insist a licensing regime is not inevitable, both plainly have concerns with the present system of self-regulation by industry associations.

Ms Dalziel has acknowledged New Zealand is out of step with the rest of the world but insists licensing is not a foregone conclusion.

Ms Diplock points out ASIC has banned 62 advisers over the last two years and put another 10 behind bars.

"In New Zealand all 72 would still be practising."

Fuelling fears of an Australian-style approach was last month's ASIC-ACA (Australian Consumers' Association) quality of advice survey, which blasted some client financial plans as "mediocre" and "lazy." It described the industry's track record as "disgraceful" and its prospects as "depressing."

Ms Diplock is aware New Zealand's smaller size means the Australian regulatory jersey won't necessarily fit. But the commission at the minimum wants powers to run cowboys out of town.

"Regulation by itself won't lift standards. But it does give you the opportunity to eliminate those who've fallen below the bar and to set the standards against which people are tested before they enter the industry."

The aim, she says, is to lift the industry's standards to "comfort level" while avoiding imposing regulation compliance costs that are inordinate to the benefit. Besides policing financial advisers Ms Diplock has a wish-list of powers she would like the commission have. One of these is to examine the financial reporting of listed companies (as, incidentally, ASIC does).

She has given some thought to the separation of enforcement jurisdictions between the commission and the Companies Office: "It's odd one agency investigates while the other prosecutes." Ms Diplock says she has been talking to Registrar of Companies Neville Harris "to make sure we work hand-in-glove." In Australia, ASIC undertakes both roles. But Ms Diplock hasn't considered the benefits of merging the two New Zealand bodies ASIC-style.

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