31 October 2014

Presentation by Rob Everett to the Grosvenor Annual Conference

Thank you for the invitation to speak today.

It’s great to speak to at a conference hosted by a fund provider and advisory firm that is fully New Zealand-run and that has been providing investment solutions for New Zealanders for almost two decades.

Most of the funds or big providers I speak to are at least partly run from offshore.

Indeed, many of them have Sydney or Melbourne on speed-dial.

There’s only a few of the medium-size or bigger firms - like you - that have their feet firmly planted in New Zealand.

It’s an opportune moment to speak to you today.

We are in the midst of a transformational period in financial services in New Zealand, with the Financial Markets Conduct Act about to take full effect, and the regulation of financial advice under the Financial Advisers Act about to be reviewed.

Today I want to cover four topics which I hope will resonate with you all:

  • Attention to standards.
  • The costs and benefits of regulation.
  • Our areas of focus for the immediate future and how they relate to you.
  • And, lastly, some big questions that I think the adviser sector faces in the immediate future

I am very happy to take questions at the end.

Firstly, raising standards.

How far have we come and what’s left to do?

It’s great to see so many advisers - including those of you in the room today - who have gotten on board with the spirit of the Financial Advisers Act reforms.

I recognise you – and your peers - are making a considerable effort to raise the standards of professionalism in the advice sector, and to improve consumer and investor outcomes.

It’s an ‘all passengers aboard’ drive to do this. Everyone – firms, boards, advisers – is participating.

I acknowledge that parts of this journey have been testing.

The reforms and compliance requirements may not have always struck the right balance, and even for those parts which are within the FMA’s discretion, it will take us a while yet to fine-tune the regulation.

Some of the more painful issues may require legislation in order to get significant adjustment.

I hear the criticisms – from within the sector - of the Financial Advisers Act, including the suggestions that it raises costs - particularly for smaller firms or individual AFAs.

And - potentially – that it’s forcing some people out of the market - thus making advice less accessible for New Zealanders.

Rest assured that - at the FMA - our objective is a strong and confident adviser community – of all shapes and sizes.

I know those concerns are deeper, in a firm like Grosvenor, which doesn’t have the scale of the High St majors, who can offset their adviser costs on a big product range.

I know that leads to considerable frustration for a firm like Grosvenor and many of you … particularly when you see the majors picking-up your fund and KiwiSaver customers.

Notwithstanding the criticisms of the Act, in the last four years the sector has come a long way.

We’ve implemented licensing and registration, so we now have about eighteen hundred (1,800) AFAs, and about six and a half thousand (6,500) RFAs.

We have mandatory NZQA-endorsed qualifications for AFAs.

And CPD requirements.

We’ve implemented the Code of Professional Conduct for AFAs, which is now in its second, updated edition.

The Code means we’re all working - or at least AFAs are - off the same minimum standards of ethical behaviour, client care, and competence.

Despite wrangling over the precise meaning in any given set of circumstances, personally I believe - very strongly - that starting the Code with a statement that requires AFAs to put the clients’ interest first, and to act with integrity, was absolutely the right thing to do.

I believe just as strongly that those within the big banks and fund managers that deal with retail money - and those that sell financial products to retail consumers - should have the same obligation.

This is not to treat FAs differently, but to ensure that all of those who provide financial products or services to individual consumers do so with that standard flying proudly above their door.

And that it is enforced – self-enforced by the industry, and enforced by the regulator - wherever and whenever necessary.


The sector has also accepted the need to enforce the Code where necessary, because without enforcement we become the proverbial hunting dog that dislikes loud noises.

So, we’ve had the Disciplinary Committee, making decisions on instances where advisers fall below the standards.

Overall, some great achievements in a short time.


But – taking David Lange’s famous advice – it’s time to stop for tea and consider how we can improve.

Hence, the review of the Advisers Act next year.

No doubt, you will all understand that whilst the FMA should and will have plenty to say during that review, the decision on what that review covers does not sit with us

We have already spoken to our new Minister, and to MBIE, on the topic.

And it is clear to me that the review will be taken very seriously and major efforts will be made to ensure it considers the full range of issues raised by the FAA as it stands today.

Including how that legislation interacts with other rule-making and the Code of Conduct.

One question that I think everyone accepts we will have to consider in the review is the three-way divide between AFA, RFAs and QFE advisers.

We have to ask: does the three-way divide produce unnecessary complexity, both for the sector and for consumers?

Indeed, I wonder if those who use – or might use – financial advice are sometimes forgotten in looking at the detailed set-up of the sector.

I anticipate the review will hear a lot – from professionals like you, who do the job every day – on effectiveness and efficiency, and whether regulation is enhancing access to advice for New Zealanders.

Indeed, I think that’s the big question we have to keep in mind, during the review:

Are we fulfilling the objective of the Advisers Act, which is to promote the effective and efficient delivery of adviser services, and grow confidence in the professionalism and integrity of the sector?


More immediately, we’re thirty (30) days away from the Financial Markets Conduct Act taking full effect.

Phase one took effect on the first of April.

Phase two – which is the remainder of the Act and the bigger part – takes effect from the first of December.

It’s the biggest reform in financial services and capital markets in New Zealand in at least thirty (30) years.

The scope of the Conduct Act is much bigger than that of the Advisers Act.

The Conduct Act will have an impact on just about everyone who works in financial services or capital markets in New Zealand.

Nonetheless, the two statutes are aligned in their overall objective.

Namely, higher standards so that professionals, firms, and investors enjoy better outcomes.

You are probably familiar with some of the new opportunities that the Conduct Act brings.

Peer-to-peer lending.

Crowd-sourced equity.

The new stepping-stone market planned by the NZX to make capital-raising easier for smaller firms.

And – importantly for financial advisers and their clients - improved product disclosure which will make offers of equity, debt, and other products, easier to follow.

Indeed, you can be reassured that the days of the three or four hundred page offer document – which didn’t make it any easier to figure out what the offer was really about - are gone.

We can all breathe a sigh of relief about that.

The prior situation - both here and pretty much everywhere else I have worked - was unacceptable.

Offer documents designed in anticipation of litigation, rather than for people trying to make, or trying to advise on, investment decisions cannot be right.

Cost of regulation

I wanted to come back to the subject of the costs of regulation, because professionals raise it with me as I get around the country.

I know it’s a concern for you.

And we completely recognise that burden.

Indeed, more broadly, across financial services, that subject was raised with me when I met the new Minister of Commerce, Mr Goldsmith – he’s focused on this topic.

Nonetheless, I’d suggest taking a different point of view about cost, and asking: what’s the cost of not being regulated, under a quality regulatory regime?

I argue that the cost of not being regulated - or being too loosely regulated - is twofold.

Let’s take a hypothetical case where advisers aren’t regulated.

Firstly, those of you who deal directly with consumers and investors would face questions about whether consumers should continue to be confident in your profession.

Indeed, that was one of the reasons for the original decision to regulate when the Advisers Act was passed in 2008. To raise consumer confidence in the professionalism and integrity of financial advisers.

Without comprehensive regulation, consumers would be entitled to say: most other professions, where we expect people to exercise highly-developed skills, are regulated and they must meet comprehensive standards of conduct.

Say, for example, lawyers, architects, medical professionals.

So why isn’t your one?

Some of you may have noticed – following the Christchurch earthquake – the pressure on the engineering profession, as a result of the shortcomings that are apparent in the regulation of engineers.

That’s led to the Government legislating to improve regulation of engineers.

That’s the type of pressure that is exerted when a profession lacks carefully-considered regulation, or where regulation fails to keep pace with the dynamics of business.

Secondly, without regulation it would become harder and harder for New Zealand to remain a part of the global economy.

Indeed, without a credible regulatory regime, we’d struggle to continue to be recognised as an economy where you can do business confidently.

I say that quality regulation raises the value of the profession – including as it is perceived by the people who are its clients – rather than imposing cost.

That’s not to dismiss the extra load that regulation imposes on you.

Absolutely not. As I said before, the FMA recognises that load.

You can be reassured that we constantly try to assess whether we -and the legislation we operate - over-burden you with demands.

But confidence and quality regulation go hand in hand.

Generally, good regulation – provided it is carefully applied by the regulator - is good for business.

Notwithstanding what I have said, I want to come back to the subject of ‘good for business’ shortly, specifically three big questions that I think the adviser sector faces.

Our strategic focus

Yesterday, in Auckland, I outlined at the INFINZ AGM some of our priorities, as the regulator, over the medium-term.

We’ll be publishing the full set of priorities – and the reasons we have identified them - in the next few weeks. Indeed, we’re still fine-tuning them.

But I can outline some of them now.

These are the areas where we’ll be putting the majority of our effort, the places you can expect to see us being most active.

It’s the areas where we will be focussing on ensuring compliance.

Where we will put the greatest weight of our supervision and attention to conduct.

And – if things go wrong – where we will take enforcement action.

Our aim in identifying these priorities is to improve outcomes – for professionals like you, for investors, for firms - and for the economy generally.

Two of the priorities are immediately relevant to you. Those are:
•Improving sales and advice
•And addressing conflicted conduct

We got to these priorities by running a risk analysis across the sectors we regulate.

In the case of sales advice and conflicted conduct, the dynamics we identified – factors that we see in our regulatory work - include:
•variable quality of advice to consumers and investors. That includes in the QFEs, as well as in the AFA and RFA sectors
•constraints on access to advice for consumers and investors, including in KiwiSaver decisions
•the absence of scalable advice that reflects the sophistication of the investor and their investment objectives
•conflicted remuneration arrangements
•incentives to mis-sell or churn products
•poor quality disclosure

and distribution models that exacerbate conflicts

Back in September, when we published our report on QFE monitoring, we named some of the results – effectively below-standard conduct – and which are results of the forces I’ve just named. [1]

You might have seen the media coverage of the QFE report at the time.

I recommend reading the report, because we set out some examples of good practices … the things we expect to see.

Notably, we challenged the KiwiSaver providers to think very carefully about their processes for winning new KiwiSaver clients.

We’ve seen considerable evidence of KiwiSaver providers switching clients, for no real benefit to the clients.

I know this issue came up here, at Grosvenor’s conference last year as a question to the FMA.

Some of the practices which we’re seeing - and which we reported on in the QFE report - include asking clients if they want to access their KiwiSaver online, alongside their transactional banking, without explaining that they would have to switch KiwiSaver provider to do so.

Another practice we identified is offering a better deal on a credit card, for clients who switch their KiwiSaver to the firm providing the card.

Another one is providing clients with documents to sign - for loans and other products - and including a KiwiSaver transfer authorisation without explaining it.

These practices led to unnecessary churning of KiwiSaver clients. Shifting them between providers without good reason and sometimes to their disadvantage.

Many of you will have recognised that several of the practices I have described are more likely in the QFE and RFA sector, where advisers are often tied to providers that offer daily banking services, alongside KiwiSaver and funds management.

And we anticipate we will be focusing on QFE and RFA adviser conduct over the near future, although not to the exclusion of AFAs.

We’ll be looking for systems and controls that reassure us that the providers are addressing the conduct we’ve identified, and that management can be reassured that that’s happening.


I should note that we’re not trying to portray a bleak picture of financial services with the priorities that we will publish shortly.

The majority of our supervision and compliance work is showing us good results. No significant issues to follow-up.

But – in other places - we do see shortcomings. And we do see the results of those, for consumers and investors.

Which leads us to identify publicly some of the shortcomings.

It’s our version of holding up a yellow card on the field of play.

Big questions ahead for the adviser sector

As I noted earlier, there’s some big questions ahead for the adviser sector.

I anticipate that some of those questions will be addressed in the review of the FinancialAdvisers Act.

But, notwithstanding the review, I think the sector will have to face up to some critical questions over the next three to five years.

Regulation is solving some problems. But it has highlighted some others.

Let me start by repeating what I have said ever since I got into - and indeed was being interviewed for - this job.

I believe that the existence of a strong and respected advisory sector is critical for New Zealand’s financial markets, and I believe the FMA has an important role in encouraging the use of financial advisers.

We want - very much - to feel confident in making that recommendation for consumers and investors – as I have been doing since my first speech in New Zealand, back in April.

I think there are a number of questions for the sector in the medium-term.

1. First is a big question. Which is the sector deciding what it offers New Zealand investors and consumers, and how you sell that.

In marketing-speak, financial advice in New Zealand needs to firmly define a widely-recognised, long-term value proposition.

And one that accommodates the regulatory framework.

I know that there are firms and individuals that have a great reputation.

I meet many AFAs who are committed and passionate about what they offer their clients and who have clearly earned the trust their clients put in them.

But – generally – across the piece, the sector might be said to be lacking a good ‘reason why’.

What’s the reason New Zealand investors and consumers would come to your door.

Is it better returns?

Is it quality advice?

Is it access to products they can’t access otherwise?

Is it a combination of these things?

Or is it something else completely?

Whatever the answers to these questions - and there won’t be just one - I don’t think New Zealanders understand the sector sufficiently to confidently draw on the value of advice that professionals like you offer.

I anticipate that some of you will argue that the existing regulatory arrangements don’t assist investors or the sector.

That includes the three-way divide across AFAs, RFAs, and QFE advisers.

Reducing complexity like this might help.

I have said repeatedly that the current structure is too complicated for users, too complicated for you all, and - frankly - too complicated for regulators as well.

But whilst that issue needs to be addressed before we can confidently direct investors to the sector, reducing complexity is not the solution in itself.

The solution to this question – what do advisers offer New Zealanders and what are we doing to encourage New Zealand investors to seek advice? - is largely down to the sector.

There’s an advocacy role for the sector professional bodies here, in assisting the sector to resolve its value proposition and ensuring that proposition is understood.

By the Government.

By the regulators.

And by consumers.

2. Second is keeping the pressure on to raise standards – such as the minimum qualifications set by the Code.

Some people are calling for mandatory, relevant tertiary or degree-level qualifications for advisers.

The mood in Australia is shifting to raising the formal qualifications of advisers there, and imposing further professional development.

Indeed, the Financial Services Council, which is Australia’s largest representative body in financial services, is calling for a new sector-wide regulator and new professional standards. [2]

On this side of the Tasman, the competence standards in the Code were always intended to be a starting point. Not a destination.

I’d argue the sector has to ask itself – in the near-future - whether it’s ready to raise the bar, and advocate for higher qualifications and CPD requirements.

Is it a profession – with professional standards – or a sector with a low bar to entry and a reliance on good old-fashioned integrity and some part-defined notion of competence?

3. Third is the question of ensuring independence - or at the very least transparency - in advice, particularly for that group of advisers who both sell or recommend products, and who also provide advice.

From the perspective of consumers, it’s hard to find the separation between the two roles – of selling and advising. That means it’s always a perceived conflict, even in instances where it’s not an actual one.

From our point of view – as the regulator – the absence of separation has the potential to cause what we call ‘conflicted conduct’. Where there are incentives for advisers to do one thing when, in the interests of the client, they should do something else.

This is an especially tough question, but one that the sector has to confront, and work with us to find solutions that are acceptable.

I believe that we all over-estimate people’s capacity to understand what they are being offered in terms of a service.

Those using a financial adviser need to be clear on what they are paying for and what incentives an “adviser” has to recommend a particular provider or product.

This is critical. And a number of jurisdictions have struggled with this area.

I think the sector has under-estimated the issue … and been slow to react.

This reluctance to confront this question - consistently across financial services - and I think of the insurance industry here too – does the sector no credit.

It just encourages overly-prescriptive and counter-productive regulation.

KiwiSaver over the medium-term

As a default KiwiSaver provider, you will know that KiwiSaver is emerging as one of the biggest savings vehicles for New Zealanders.

Right now - at 21 billion dollars in assets - it’s a fraction of the other main investment classes in New Zealand.

The NZX Top 50 is worth about three times KiwiSaver, at 61 billion dollars in free float capital.

The total value of bank deposits – held by Kiwi households – is 131 billion dollars.[3]

The total value of housing – some of which we have to count as an ‘investment’, because many New Zealanders buy it as accommodation and as accumulation - is about 690 billion dollars.

But it’s the speed of growth in KiwiSaver that is important.

Up 27 per cent in total assets in the year to the 31st of March. That’s contributions, plus returns on investments. [4]

You won’t find many other investment assets in New Zealand that are growing at that rate.

Five years on, and KiwiSaver total funds under management will add up to a big national investment.

I think it’s fair to say, the adviser sector is still working out its role relative to KiwiSaver.

There’s a good case for some KiwiSaver clients requiring advice.

Indeed, there’s a good argument that KiwiSaver clients need advice through the investment lifecycle, to ensure their investment choice keeps up with the sum of funds they have in KiwiSaver.

Plus, their age, their earnings, and their other financial commitments.

As the funds under management grow – and as younger members start to accumulate bigger funds – we’ll have to discourage the ‘set and forget’ approach to KiwiSaver.

Some well-considered decisions – backed by good professional advice - will make a big difference to the long-term investment result, especially for younger clients.

The need for access to quality advice “on the way out” is obvious, and will generate significantly higher need for investment advice in the next decade.

Let me make some observations which underline the need for deepening advice for KiwiSaver clients:

  • The low take-up of the eight per cent contribution option, which is the highest contribution step. Only five per cent of contributors were on the eight per cent step, according to the IRD data for 2013. Nearly 60 per cent were on the three per cent step, the lowest one. Many KiwiSaver clients, especially younger ones, would be well-advised to maximise their contributions, which requires a big leap in the number of people contributing at eight per cent [5]
  • The modest understanding of how much difference fund-choice makes, especially the difference between aggressive funds and conservative ones. That choice is critical for people who are investing over 20 years, or more. So, if you are under 40, you should be paying attention to the type of fund you are in and the performance you can anticipate
  • Low levels of understanding of decumulation, and the need to maximise value for people who are drawing down their fund. That partly reflects the youthfulness of the scheme in New Zealand – it’s only just over two years since the first people over 65, with five years membership, became eligible to start drawing down. Interestingly, the IRD reports that of the 74 thousand people eligible to draw down in 2013, nearly 40 per cent of them withdrew all their funds, indicating they either spent them or immediately invested in something else [6]

These are all areas where good-quality advice would help clients.

I also recognise that KiwiSaver is probably channelling funds away from direct equity investment on the NZX.

There will be many who see KiwiSaver as a replacement – or a better choice – than buying listed equities or listed debt products.

Again, that’s a subject for quality advice, given that we want to deepen the public equity market.

The key – for the adviser sector – is making KiwiSaver advice accessible and affordable from the perspective of consumers.

And also – from your point of view – making it a viable service, that advisers want to take on, recognising that the majority of KiwiSaver clients still have relatively low balances. Just under 9,500 dollars on average, according to the latest FMA report on Kiwisaver. [7]

And where the commissions on KiwiSaver are modest.

That’s a tough combination to make into a solid business proposition.

Relatively low balances, limited understanding of the product among many clients, a widespread ‘set and forget’ approach, and modest commissions.

But I am confident we can find a solution.

Indeed, the scale of KiwiSaver over the long-run – and the questions it raises about savings and investment in New Zealand - means we have to find a solution.


I wanted to close by reassuring you that there’s a place for quality advisers in the New Zealand investment landscape.

That’s advisers who are fully-trained professionals.

Advisers who work to externally-regulated standards.

Advisers who reassure investors that there’s value in drawing on their expertise

Advisers who can demonstrate that value.

As the regulator, our job is to back advisers in ensuring that you are becoming all of those things, and ensuring that the regulation you are working under provides reassurance as to quality.

That’s reassurance for you and for investors.

We’re fully committed to that role, and working with you constructively as we carry out our responsibilities.

In the next few years the advice sector faces a big test, as it becomes a fully-fledged profession that’s recognised by its clients for providing value.

It’s critical that the sector emerges from that test in a stronger state, in order to meet its mandate in the New Zealand economy.

A mandate that the FMA strongly believes in.

Thank you.


[1] QFEs Monitoring Report: 1 January – 30 June 2014, FMA, Auckland, New Zealand

[2] ‘FSC Admits Self-Regulation Not Enough’, Australian Financial Review, Sydney, 23 September 2014

[3] Reserve Bank of New Zealand data, August 2014. Includes offshore deposits.

[4] Annual Report on KiwiSaver to 30 June 2014, FMA, Auckland, New Zealand

[5] KiwiSaver Evaluation for the year to June 2013, IRD, Wellington, New Zealand

[6] KiwiSaver Evaluation

[7] FMA KiwiSaver report 2014