Discussion Paper

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2. Background - Improving Regulation of the Finance Sector

11. In September 2008, three pieces of legislation were enacted to improve the regulation of financial institutions, financial products and financial service providers: the Reserve Bank Amendment Act 2008, the Financial Advisers Act 2008 and the Financial Service Providers (Registration and Dispute Resolution) Act 2008.

12. The main requirements arising from the new legislation are:

• Registration of all financial service providers to provide a means of identifying and monitoring financial service providers;
• Prudential supervision by the Reserve Bank of non-bank deposit takers;
• Regulation by the Securities Commission of financial advisers to encourage professionalism and improve consumer confidence in the sector; and
• Providing for a comprehensive approach to consumer dispute resolution and redress.

13. The outcomes desired from this new legislation and existing legislation regulating the finance sector are:

• Achieving a sound and efficient financial sector;
• Investment which encourages growth and innovation;
• An environment which facilitates wealth accumulation; and
• Confidence in the sector which encourages participation by consumers and market participants.

14. The need for sound regulation of the finance sector has been heightened by the recent collapse of numerous New Zealand finance companies and the current global financial crisis. Full implementation of these Acts is scheduled by December 2010.

15. The Reserve Bank is the sole regulator of New Zealand's financial system, including the non-bank deposit taking sector. The Reserve Bank Amendment Act 2008 provides for prudential regulations for non-bank deposit takers that are currently being developed by the Reserve Bank. These regulations will introduce consistent standards for the measurement and management of capital, liquidity and related-party exposures, and will require deposit takers to comply with new governance and risk management requirements.

16. The Financial Advisers Act 2008 specifies who may perform a financial adviser service and the financial products and services they may advise on. The Act establishes different tiers of disclosure and conduct obligations, according to the complexity and risk posed by the advice given. Those who wish to provide advice on securities, futures contracts or an interest in land, or who provide a financial planning service, will be required to be authorised by the Securities Commission, as well as registered on the register of financial service providers. Those who wish to provide advice in regards to a call debt security, a bank term deposit, an insurance product (excluding a life insurance product issued after 31 December 2008) or a consumer credit contract will be required to be registered, but not authorised. The Act also provides for advisers to operate as part of a qualifying financial entity for certain financial adviser services. In this case, the entity itself takes on responsibility for ensuring the individual advisers within its organisation comply with their obligations under the Act. To receive qualifying financial entity status the entity must seek approval from the Securities Commission.

The Financial Service Providers (Registration and Dispute Resolution) Act 2008

17. The Financial Service Providers (Registration and Dispute Resolution) Act 2008 was enacted to improve both market discipline and consumer access to redress.

18. The Act has three parts. Parts 1 and 2 concern the registration of financial service providers. The registration system is being developed and implemented by the Companies Office, Ministry of Economic Development.

19. Part 3 concerns consumer dispute resolution, which is a mandatory requirement of registration for those providing financial services to the public. The implementation of the dispute resolution regime is being undertaken by the Ministry of Consumer Affairs. Registered financial service providers ( FSPs) must be either a member of an approved dispute resolution scheme or the reserve scheme that will be set up by Consumer Affairs. The Act sets out the principles and minimum requirements for the rules of approved dispute resolution schemes and the reserve scheme.

20. In summary, the rules of any approved scheme and the reserve scheme need to comply with the following principles¹ which are considered international best practice:

• Accessibility: The scheme makes itself readily available to customers by promoting knowledge of its existence, being easy to use and having no cost barriers;
• Independence: The decision-making process and administration of the scheme are independent from scheme members;
• Fairness: The scheme promotes decisions which are fair and seen to be fair by observing the principles of procedural fairness, by making decisions on the information before it and by having specific criteria upon which its decisions are based;
• Accountability: The scheme publicly accounts for its operations by publishing its determinations and information about complaints and highlighting any systemic industry problems;
• Efficiency: The scheme operates efficiently by keeping track of complaints, ensuring complaints are dealt with by the appropriate process or forum and regularly reviewing its performance;
• Effectiveness: The scheme is effective by having appropriate and comprehensive terms of reference and periodic independent reviews of its performance.

21. A separate consultation document – Draft Guidelines to Assist Schemes Applying to Become an Approved Dispute Resolution Scheme Under the Financial Service Providers (Registration and Dispute Resolution) Act 2008, is available at this website xxx or contact xxxx.

22. The policy underpinning the Financial Service Providers Act anticipates that financial service providers will seek to have their own dispute resolution schemes approved. The Government believes that a dispute resolution scheme that is developed by FSPs for their own particular industry will be more effective as it will have better knowledge and expertise regarding the participants' products and services and receive more support and commitment.

23. It is anticipated that existing voluntary industry-based dispute resolution schemes, such as the Banking Ombudsman and Insurance & Savings Ombudsman may apply to become approved dispute resolution schemes.

24. Other FSPs such as building societies, credit unions, finance companies and financial advisers, who currently do not have independent dispute resolution schemes, are encouraged to establish a scheme(s) or join another approved scheme if that scheme's rules allow.

25. Where a FSP does not have its own industry-run dispute resolution scheme, the FSP may join the reserve scheme.

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