In a nutshell, the Financial Service Providers (Registration and Dispute Resolution) Bill:

1.    requires that financial service providers and financial advisers be registered; and

2.    provides for the establishment of approved dispute resolution schemes to deal with consumer disputes.

Origins

The bill is the second to arise from the Government’s Review of Financial Products and Providers, the first being the Reserve Bank Amendment Bill (No. 3), which introduces a prudential regulatory regime for non-bank deposit takers, and the third being the Financial Advisers Bill.

The first reading of the bill took place on 11 December 2007 and the bill was referred to the Finance and Expenditure Select Committee. The bill is being considered alongside the Financial Advisers Bill.

Submissions to the select committee closed on 28 February 2008, and the committee’s report was due on 10 June 2008. However, the report has been delayed until 1 September 2008.

Who does the bill apply to?

The bill applies to people in the business of providing a:

1.    financial service; and/or

2.    financial adviser service.

Who provides a financial adviser service will be covered in by Megan Salt from the New Zealand Mortgage Brokers Association.

The definition of financial service provider was taken from the Financial Action Task Force’s (FATF) definition of financial institution.

Who provides a financial service?

The following entities provide a financial service

1.    banks;

2.    building societies;

3.    credit unions;

4.    dealers in securities and futures contracts;

5.    finance companies;

6.    financial leasing businesses;

7.    friendly societies;

8.    insurers;

9.    investment brokers;

10.    issuers of collective investment schemes;

11.    issuers of equity and debt securities;

12.    lending businesses;

13.    money and currency changers;

14.    money or value transfer services;

15.    platform and portfolio service providers and custodians; and

16.    trustees supervising the issuers of collective investment schemes and equity and debt securities.

The Minister of Commerce stated in her first reading speech that the definitions "are intended to be as broad as they can possibly be".

Who doesn’t the bill apply to?

The bill doesn’t apply to the following people:

1.    a lawyer in the course of that person’s professional practice as a lawyer;

2.    a chartered accountant in the course of that person’s professional practice as a chartered accountant;

3.    a prescribed Crown agency;

4.    an employee of the above people; and

5.    an employee of a financial service provider.

Registration

What will the registration system for financial service providers do?

The Ministry of Economic Development (MED) states that the registration system for financial service providers will:

1.    identify financial service providers;

2.    allow more effective monitoring and evaluation of individual financial service providers as well as the financial sector generally;

3.    provide easy access to information about financial service providers;

4.    assist in meeting New Zealand's anti-money laundering obligations under the FATF recommendations; and

5.    ensure that the shareholders, directors and senior management of entities providing financial services:

(a)    have no record of criminal activities;

(b)    have not been bankrupt; and

(c)    have not been the subject of a director/management ban under companies or securities legislation.

What is wrong with the status quo?

Existing registration requirements do not give any information about the financial services an entity provides.

The MED states that this makes it difficult for:

1.    consumers and market participants to find information about financial service providers and the services they provide; and

2.    regulators to identify risks in the sector.

The MED also states that currently there are no specific measures to ensure that the shareholders, directors and senior management of financial sector entities meet negative assurance requirements in accordance with the FATF recommendations.

What are the qualifications for registration as a financial service provider?

To be registered as a financial service provider, the person:

1.    must not:

(a)    be an undischarged bankrupt;

(b)    be prohibited from being a director or promoter of, or concerned in the management of, a company under companies or securities legislation;

(c)    have been convicted of a crime involving dishonesty or fraud within the preceding five years;

(d)    have been convicted of a crime involving money laundering or financing of terrorism; and

(e)    have been subject to a confiscation or forfeiture order under proceeds of crime legislation;

2.    must be a member of an approved dispute resolution scheme; and

3.    must have a licence to provide any licensed services the person provides or offers to provide.

What information is required for registration of financial service providers?

An application for registration must include the following information:

1.    the name and address of the applicant;

2.    the name and address of the dispute resolution scheme to which the applicant belongs;

3.    whether the applicant is providing any licensed services, and if so, which particular licensed services; and

4.    details of shareholders, directors and senior management for negative assurance checks.

Who will establish and maintain the register and what powers will they have?

The Registrar of Financial Service Providers will be responsible for:

1.    establishing and maintaining a register of financial service providers;

2.    carrying out checks of applicants; and

3.    removing entities from the register.

For the time being, the Registrar of Companies will also be the Registrar of Financial Service Providers.

Dispute resolution

What will approved dispute resolution schemes do?

The MED states that approved dispute resolution schemes will provide a simple, low-cost avenue for consumers to seek redress (as an alternative to the courts).

Who has to join an approved dispute resolution scheme?

The bill requires that:

1.    all financial service providers that are required to be registered; and

2.    all financial advisers,

must join an approved dispute resolution scheme if they transact with consumers.

This requirement only applies if there is a reserve dispute resolution scheme.

It is anticipated that more than one scheme will be approved, and financial service providers will have freedom to choose which scheme they wish to join.

What is wrong with the status quo?

At this time, there are two voluntary industry-based dispute resolution schemes:

1.    the Banking Ombudsman; and

2.    the Insurance & Savings Ombudsman.

The MED points out that there are large gaps where consumers don’t have access to dispute resolution services, in particular customers of:

1.    building societies;

2.    credit unions;

3.    finance companies;

4.    financial advisers; and

5.    some superannuation schemes.

Who is a consumer?

The bill defines consumers as:

1.    natural persons; and

2.    businesses that have no more than 19 full-time equivalent employees.

Who will approve the dispute resolution schemes?

It is the responsibility of the Minister of Commerce, in consultation with the Minister of Consumer Affairs and Minister of Finance, to approve dispute resolution schemes.

When deciding whether to approve a dispute resolution scheme, the Minister of Commerce must take into consideration:

1.    whether the scheme has an appropriate purpose;

2.    whether the applicant has undertaken appropriate consultation with members and representatives of consumers;

3.    whether the scheme’s dispute resolution processes are timely and appropriate;

4.    whether the applicant’s governance arrangements ensure the independence and accountability of the scheme;

5.    whether the applicant has adequate funding to enable it to operate the scheme;

6.    whether the applicant’s directors and senior managers are competent to manage the scheme;

7.    the cost, if any, to lodge a complaint with the scheme, and whether that cost is reasonable and appropriate;

8.    whether the scheme is capable of resolving disputes about the types of financial services provided by the members of the scheme;

9.    the amounts of money that complaints lodged with the scheme may be about, and whether those amounts are reasonable and appropriate; and

10.    whether the rules about the scheme are adequate and comply with the principles of accessibility, independence, fairness, accountability, efficiency and effectiveness.

These considerations must be looked at in light of the principles of accessibility, independence, fairness, accountability, effectiveness, and efficiency.

What if there is no approved dispute resolution scheme the financial service provider can join?

The Minister of Commerce may establish a reserve dispute resolution scheme if:

1.    there are no approved schemes; or

2.    there is not full coverage of the financial industry by those schemes which are approved.

A dispute resolution scheme can only be appointed as the reserve scheme if it is capable of resolving disputes relating to all types of providers of all types of financial services and financial adviser services.

Financial service providers can join either the reserve scheme or an approved scheme.

What is the Government’s involvement in approved dispute resolution schemes?

The Government’s involvement in approved dispute resolution schemes is limited to:

1.    approving schemes (including periodic renewal);

2.    receiving periodic reports; and

3.    powers of inspection (if necessary).

Regulations will require an annual report to the Minister of Commerce.

Why industry-based (as opposed to one or more dispute resolution schemes established by the Government)?

Industry-based dispute resolution schemes allow for tailoring and specialisation to ensure that each scheme appropriately addresses the types of disputes it is set up to consider.

Can consumers appeal an approved dispute resolution scheme's decision?

Consumers will still retain their right to take court action if they wish.

Can members appeal an approved dispute resolution scheme's decision?

A member may only appeal on the grounds that the proceedings were carried out in an unfair manner.