REGULATION

Regulation drum beats on

Regulatory change has been flooding the advice sector over the past year. But is it all too much for some advisers to cope with?

BY ERIC FRYKBERG

The regulation drum is beating on, to the dismay of some mortgage advisers who look set to quit the business in protest.

But the main enforcement body, the Financial Markets Authority (FMA), insists it is not to blame for advisers feeling they are being throttled by red tape.

While conceding that its job has been made harder by too many Government crackdowns all at once, the FMA insists it is not the bad guy and wants to help, not hinder, honest brokers.

In any case, its job is to enforce the law, not make the law, and is doing so in as fair a way as possible.

Take inspections of brokerages for example. This is no Orwellian knock on the door by Big Brother – it is wherever possible a collaborative effort, according to FMA staff.

A senior executive, Michael Hewes, put it this way: “The FMA does not turn up at anyone's door and demand to be seen. Our legislation does not enable that, we do not have that sort of remit or power.”

Instead, FMA staff would contact the adviser being inspected in advance, to arrange a time for a visit that suits both parties, and to say what sort of information was being sought.

“The last thing we want to do is arrive on site and ask to look at something that is not there or is not ready,” Hewes said.

The inspection teams would also try to avoid disrupting daily work at the office and would aim to give the inspected firm its verdict within 10 working days.

But if that is the view of the inspectors, what about the inspected?

The general manager of The Lending People, Andrew Scott, has qualified sympathy for the FMA.

He said its aim was education of advisers, not punishment.

However, it should be noted that the FMA was still extremely powerful, second only to the IRD in the state arsenal.

“The new director of the FMA, Samantha Barrass, is on record as saying the way to change the market is not to come in with a big stick, but to offer guidance,” he said.

“But I am pretty sure that within a short period of time the gloves will come off.”

Scott said he expected 99% of financial advice providers would eventually be inspected and sheer practicality would lead them to expect much tougher treatment before long.

“There are only so many auditors and there are a lot of advisers out there,” he said.

“So the workload will dictate that they become a little bit more hard-nosed,

‘We are encouraging people to try to get started now’

Anita Frazer

rather than softly softly, rather than, ‘we are all doing a pile of social work here’.”

Inspections are not the only source of potential conflict between advisers and the FMA. Another is the move towards full FAP licensing, which has become a faltering process badly in need of resuscitation.

As at July 18, only 36% of financial advice providers had either gained, or applied for a full licence, despite the fact that time is running out.

This led the FMA to deliver a blast on the referee's whistle and fidget nervously with the supply of yellow cards.

“We are encouraging people to try to get started [with licence applications] now,” another FMA official, Anita Frazer, told advisers.

“Don't leave it til December, January or February ….... because you may not be licensed by March 17.

“You will have to stop doing what you are doing.”

But the FMA is not just threatening the sin bin for advisers who drag the chain. It is trying hard to make sure it does not come to that. And it is working to revive the programme and make full licensing as easy as possible.

“We are not there to make it hard for you, we are there to make it work for you,” Frazer said.

“Information is (on the website) to show you how to complete your application and to explain what we are asking for and why we are asking it.”

Frazer said an eight-step plan had been put in place to tell people what to do. In addition, from August 9, people would be able to call in at special workshops.

“We will have people who will walk through every question on the application form live with you.”

So what do advisers think about this?

Tony Vidler of Strictly Business refused to cast blame on the FMA. He says the regulator has been proactive in getting advisers across the line.

He said the problem was not the FMA, but advisers themselves. They had known this was coming for a long time, but perhaps 15% to 20% had done nothing about it.

“A far larger proportion are still trying to figure out which way they want to go,” he said.

“They are asking themselves, do they want to go for their own licence or do they want to be an authorised body under someone else's licence.”

The third big instance of government rule-making is the Financial Markets (Conduct of Institutions) Amendment Act (COFI). This puts conduct rules on to banks, non-bank lenders and insurance companies. The law came close to applying similar principles to intermediaries such as mortgage advisers, but staged a last-minute detour.

This happened after the government accepted arguments that COFI could needlessly duplicate the FAP programme.

Nevertheless, advisers have not emerged unscathed from COFI. They will still have to comply, to an extent.

If advisers are working with a bank, then their customers would expect them to share that bank's standards of behaviour, and so would the bank itself.

So the FMA is developing codes of conduct which it is sending out to financial institutions, telling them what they need to do.

They say if a financial institution outsources a system or process, it must be satisfied that the provider can perform the service to the standard required of the lender itself.

The obligations include things like acting ethically and transparently, and not applying unfair pressure on customers.

The FMA proposals specifically prohibit sales incentives such as overseas trips for meeting volume targets, which the Government thinks encourage brokers to put pressure on vulnerable people.

And financial institutions must have a system in place to enforce these rules on its intermediaries.

The final regulatory load weighing down the hapless broker is the CCCFA. This proved so onerous the Government was forced into a partial backtrack less than two months after the law came into effect.

One initial reform by the Government removed the notorious measures of cups of latte that had been added to would-be borrowers’ outgoings, on the condition that hard economic data was already available.

A second reform removed savings and investments from the daily list of expenses, after the Government accepted that investment differed from consumption.

But few brokers think these changes will come anywhere near what is needed to allow responsible advisers and perfectly solvent borrowers to carry on business as usual.

At this stage a second tranche of reform has been worked on by the Government.

But Tony Vidler thinks it is all too little too late.

“The damage has been done. You have had months of banks being draconian ….. and that has turned off a lot of people in the housing market.

“We have seen brokers struggling to put any business on the books.... you change a clause or three of the law, but the damage has been done.

“It's like, 'the horse has bolted so let's nail a couple of planks back on the side of the barn'.

“This was badly thought-out legislation, pushed through by people who did not understand the industry.”

The Government always argued all this legislation was needed to stop predatory lending. The finance industry, though, argued it threw out a large number of babies with a limited quantum of bathwater. ✚