When advice needs licence

By Michael Coote

Friday 20th December 2002

Back in August it was reported a New Zealand financial adviser, Alan Goldman, had been arrested and released on $A10,000 bail in Australia with a prohibition on leaving the country because allegedly neither he nor his New Zealand incorporated company, Mauer-Swisse, held an Australian financial services licence as required by law across the Tasman. Mr Goldman was said to have been promoting shares in US-based Orbit E-Commerce.

Considering virtually anyone in New Zealand can trade as a financial adviser, even without qualifications or experience, this was something of a shock. Although financial advisers are occasionally prosecuted, it is usually for some breach of law, such as fraud or misappropriation, rather than simply giving advice.

The authority heading the Goldman case was the Australian Securities & Investment Commission (Asic). It is one tough cop. The Australian Money Management website has a string of stories about financial advisers who have fallen foul of it. A ban from working as an adviser for two years seems to be a common minimum punishment. Examples include Robert Campbell, sole director of Melbourne-based Bell's Financial Services, who was put out of business for two years for recommending failed property developer Lifestyle.

Specifically Mr Campbell was charged with breaching the Corporations Act by "giving investment advice to clients without being appropriately licensed, marketing securities recommendations without a reasonable basis, and failing to disclose to clients the commissions or fees that Bell's Financial Services would receive as a result of recommending investments in the Lifestyle Group Property Development Partnerships."

He is but one of several accountants and advisers banned, fined and jailed for involvement with Lifestyle. Asic managed to stop short of imposing the rack and the stake. If he wants to practice again as an adviser, Mr Campbell must complete "courses in relation to ethics, compliance and investment planning prior to applying for an Australian Financial Services Licence (AFSL), or applying to act as a representative of an AFSL."
Mr Campbell got off lightly. Asic can seek lifetime bans on working in the financial advice industry.

John Michael Higgins, formerly an adviser at Garrisons, was banned for life for placing client funds into his own business account. He was also required to surrender his passport, sell or refinance his assets to compensate former clients, and prohibited from dealing in his assets without Asic's permission.

But even Mr Higgins may have been lucky. Asic prosecutions can lead to a spell in the slammer. This happened to two employees of Lifestyle. Managing director Jon McKenney got four and a half years' jail (minimum term three years) and John Caust two and a half years (minimum 18 months) plus an order to pay back $A5.5 million compensation to bilked investors. Their main offences were to oversell units in property trusts and to misappropriate investment monies for general company expenditure.

Former Asic staffer Jane Diplock now heads the New Zealand Securities Commission. On her watch bans and prosecutions have increased, and a tougher regime for advisers is on the way. A cleanout of the industry can be expected but not by Asic-style carpet bombing. Instead it will be by intensified compliance requirements and soaring professional indemnity insurance costs.

Asset magazine has reported a rapid escalation of premiums here and overseas. Few insurers want to provide cover for financial advisers and those who do typically charge high fees and impose many exclusions.

In the investment market downturn, with grumpy clients, falling revenues, business retention problems and weak sales growth, many advisers will not have the pricing ability to pass on higher risk-cover costs. Interestingly, Asic's powers, which may be coveted in some quarters in New Zealand, do not seem to prevent financial advisers from going astray. But in conjunction with higher liability costs, these powers will hasten the demise of the independent financial adviser. Peacekeeping in Afghanistan is probably a safer line of work.

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