The Finance and Expenditure Committee has examined the Financial Service Providers (Registration and Dispute Resolution) Bill and recommends that it be passed with the amendments shown.
Introduction
This bill seeks to regulate financial service providers by establishing a registration system for them, and requiring them to join an approved industry-led dispute resolution scheme or the reserve scheme.
The bill is one of a suite of measures to implement the recommendations of the Government’s Review of Financial Products and Providers. We have already considered and made recommendations on the Reserve Bank of New Zealand Amendment Bill (No 3), which imposes a regulatory framework on non-bank deposit takers. We are also considering the Financial Advisers Bill, which would set and monitor standards for financial advisers.
The Financial Service Providers (Registration and Dispute Resolution) Bill is the umbrella legislation for these measures. It would provide a basic regulatory framework for registration for all financial service providers.
Who must register
Clauses 5 and 6 of the bill determine the application of the legislation by defining the activities considered to be financial services, and setting out who would be excluded from the regime.
We recommend amendments to clauses 5 and 6 to ensure that the regulatory regime is appropriately targeted. We recommend the insertion of clause 5(A) and amendments to clause 6(2) to ensure that organisations who carry out financial services as a necessary but incidental element of their professional practice would not be included in the regime. This amendment would ensure that those who offer financial services only as a necessary consequence to their primary role, such as lawyers, chartered accountants, tax agents, and real estate agents would not be subject to further registration and dispute resolution requirements under this regime. We recommend similar amendments to clauses 10 and 11 to confirm that only those in the business of providing financial services are intended to be captured under the regime.
We also recommend amendments to allow a specific exemption for non-profit organisations that provide free financial services such as budgetary advice, as we consider the advice provided by such organisations an important community service. Although the exemption under this bill would apply only to organisations, we note that staff providing free budgetary advice for a non-profit organisation would be excluded from registration under the Financial Advisers Bill.
We recommend further amendments to ensure that the Crown agencies who are exempt (Government departments, the Reserve Bank, and statutory entities listed in Schedule 1 of the Crown Entities Act 2004) are set out in the bill rather than prescribed by regulation. We do not consider it appropriate that a regulation-making power might be used to determine the application of the legislation. We therefore recommend that clause 42(1)(b) be deleted and that all exceptions for Crown agencies be set out in the bill.
We recommend the deletion of clause 5(a) to ensure that arrangements where payment is made in arrears (such as hire purchase arrangements) are not captured by the bill. We consider that the regulation of such arrangements does not accord with the intention of the bill. We recommend amendments to clause 5 to clarify that those who act as deposit-takers or who are involved in offering debt securities, registered banks, investment brokers, and dealers in futures contracts would be subject to the regime. We also recommend the consolidation of subclauses (c) and (d) to simplify the provisions relating to credit contracts.
Financial adviser service
For simplicity we recommend removing separate references to “financial advisers” and “financial adviser services” from throughout the bill, and inserting “financial adviser service” as a new category within the meaning of “financial service” in clause 5.
We acknowledge that there is separate legislation before the House (which we are currently considering) that deals specifically with financial advisers. However we see no need to separate these terms out in this bill. We consider financial adviser services to be a type of financial service, and the amendment we recommend accords with the intention that the Financial Service Provider regime be the umbrella scheme for any regulation of financial advisers that may be implemented through separate legislation.
This amendment means that financial advisers would be required to be members of a dispute resolution scheme under this legislation. Although the bill as introduced did not require financial advisers to be members of a dispute resolution scheme, we note that this amendment would not change the obligations imposed on financial advisers in practical terms, as the Financial Advisers Bill (as introduced) contains provisions which require financial advisers to become members of a dispute resolution regime.
Registration
Disqualified persons
We recommend that clause 13, which sets out matters that disqualify a person from registering as a financial service provider, be amended to specify the types of offences that would count as fraudulent or dishonest in relation to the provision of a financial service. This amendment is intended to avoid doubt and to give clarity and certainty to those involved in administering the regime.
We recommend the inclusion of new subclause 13(ca) to provide that those who offend against the regime by being in the business of providing a financial service without registering, or by holding out that they are entitled to provide financial services when they are not, would also be ineligible to register.
Licensed service offence
We recommend the deletion of clause 10(2), which provides that it is an offence to provide a licensed service unless licensed. Whilst this legislation contains the requirement to be licensed, it does not contain particular licensed service requirements for each type of financial service provider. It is intended that each type of financial service provider will have its own legislation setting out particular licensed service requirements. This amendment is intended to allow offences for particular licensed services to be dealt with in the specific legislation for that licensing regime.
Deregistration of financial service provider
We recommend amending clause 17 to oblige the Registrar to deregister an applicant who has made a false or misleading application or whose registration fee has been dishonoured, declined, or reversed. We consider this amendment necessary to ensure that the register remains a reliable source of honest and credible providers.
We recommend amending clause 20 to provide that deregistration should be publicly notified. This would help to ensure that relevant information is available to all consumers who might deal with financial service providers, and we consider that this amendment would make the regime more transparent and effective.
Re-registration of financial service provider
We recommend inserting a new provision in the bill (clause 20A) to provide for re-registration of a financial service provider who was deregistered as a result of certain of the breaches outlined in clause 17. The Registrar would have the power to consider applications for re-registration where he or she determined that the reasons for deregistration no longer applied (for example, if the registration fee had subsequently been paid). However, providers who had been deregistered because they had provided false or misleading information on registration, or who no longer qualified, could not be re-registered, but might be able to reapply for registration under clause 14.
Responsible financial service provider
We recommend inserting new clause 20B to allow institutional registration as a “responsible financial service provider”, and an amendment to clause 6 to allow their affiliated entities to be exempt from registration. The bill as introduced focuses on the registration of individuals or businesses. We are concerned that this might pose compliance difficulties for some businesses, such as KiwiBank, whose franchise structure would mean that each franchisee would have to be individually registered and a member of a dispute resolution scheme. We consider that compliance in such cases would be unduly burdensome with no corresponding benefit to consumers.
Under new clause 20B, the Governor-General would be able to declare an entity a responsible financial service provider, on the recommendation of the Minister. This status would exempt any affiliated entities from the need to register separately under clause 6, and the responsible financial service provider would be held responsible for the financial services provided by its affiliated entities. We consider that this amendment would help to achieve the objectives of the bill in a way that accommodated the various structures of businesses.
Establishment of and access to the register
We recommend that clause 26 be amended to require the type of services a licensed provider is registered or licensed to provide to be recorded on the register. We consider that this information is vital in ensuring consumers are well informed when they deal with providers. However, we accept that there are practical difficulties in requiring information on the type of services to be provided from registered providers. As such, we recommend that at this stage only licensed providers be required to provide this information. However, we expect that regulations could be made in future under clause 42 that required the register to show which financial services a registered provider could provide.
We recommend an amendment to clause 30 to make it clear that it should be possible to search the register by the criteria specified in clause 26. In the bill as introduced, the search criteria were to be set by regulation. However, we consider it preferable that basic search criteria be included in the bill, and see no reason that the entire content as set out in clause 26 should not be accessible by searching. Other search criteria could still be added by regulation as necessary.
We recommend an amendment to clause 33 and the addition of new Schedule 2 to specify further bodies with which the Registrar may share information. Clause 33 as introduced includes four bodies or agencies. The additional agencies would include the New Zealand Police, the person responsible for an approved dispute resolution scheme or the reserve scheme, and any other body listed in Schedule 2 of the bill. Other agencies could still be added by regulation under clause 42(1)(e).
Registrar’s inspection powers
We recommend expanding the investigative powers of the Registrar in clause 36 to include investigation of false or misleading representations. This is an offence under the bill, and it is important that the Registrar be able to investigate such matters if the prohibition on such behaviour is to be effective.
Review of registration system and dispute resolution regime
We recommend the insertion of new clause 42A requiring that the registration system be reviewed within five years. The findings of the review would be reported to the responsible Minister, who would in turn be required to present a copy of the report to the House. We recommended a similar review provision for the Reserve Bank Amendment (No 3) Bill, given the novelty of some of the features of the regime and the allowance for matters to be determined by regulation; we consider that a similar case can be made regarding this bill, and that a co-ordinated approach should be taken to reviewing the new regulatory framework for the financial sector.
We recommend a similar provision be inserted as new clause 74A in regard to Part 3 of the bill (the dispute resolution regime).
Territorial application
We also recommend inserting new clause 42B for the avoidance of doubt to limit the territorial application of the bill to the provision of a financial service in New Zealand by a person who is in New Zealand. This new provision would clarify that it is not the intent of the legislation to apply to off-shore financial services.
Decisions continue until appeal
We recommend the insertion of a new clause (clause 41A) to clarify that any decision of a Registrar that is subject to an appeal would remain in force unless the High Court should determine otherwise. This should provide certainty for scheme members and ensure continuity in terms of recourse for consumers.
Dispute resolution schemes
Membership
Clause 44 in the bill as introduced requires a financial service provider to join an approved dispute resolution scheme only if it provides a financial service to individuals or to small and medium-sized businesses, and if a default scheme (the reserve scheme to be established under clause 65) is available.
We recommend replacing this with new clause 44, which would require every provider of a financial service to the public to be a member of an approved scheme or the reserve scheme. We regard it as important that all those who provide financial services to the public, bar the exemptions set out in clause 6, be subject to a dispute resolution regime. We recommend an associated amendment to clause 58 to confirm that only consumers and small to medium-sized businesses and organisations could make complaints for resolution by a dispute resolution scheme.
We recommend removing (as a condition of scheme membership) the requirement that a reserve scheme be available. We consider that this qualification could reduce consumers’ access to redress if no reserve scheme were appointed.
We considered an amendment to exempt credit unions from the requirement to join an approved dispute resolution scheme. However, whilst we acknowledge that credit unions have a dispute resolution regime available under the Friendly Societies and Credit Unions Act 1982, we are not convinced that the two schemes are sufficiently similar to justify an exemption from this bill. In addition, we expect that any overlaps between them could be addressed in the context of the current review of that legislation.
We also do not consider it necessary to exempt lawyers, accountants, and real estate agents who are acting as financial service providers, from membership of a dispute resolution scheme. We consider that the occupational regulation bodies of these industries are focused on professional conduct, and provide limited opportunities for redress where financial services are involved (as distinct from legal, accounting, or real estate services). We similarly do not think that funeral directors who offer pre-paid funerals should have a specific exemption.
However, we note that scheme membership would only be required if these businesses were offering services to the public.
Number of schemes
We recommend the inclusion of new paragraphs (k), (l), (la), (lb) and (m) in clause 47(1) to reduce the risk of a proliferation of small schemes, and to avoid schemes “cherry-picking” members to their advantage, or vice versa. We are concerned that this could hamper the development of a pool of dispute resolution expertise, and result in some schemes ceasing to be viable. The amendments we recommend would require the Minister to have regard to the number and type of approved schemes in existence, any other current applications for approval, and the proposed size and membership coverage, before approving a scheme.
These amendments are intended to allow multiple schemes whilst discouraging undue proliferation of new schemes.
Approval of schemes
We recommend deleting the ten-year expiry provision for approval of schemes (clause 45(2)). The bill already contains adequate accountability provisions, including provision for the withdrawal of schemes, independent review of schemes, and annual reporting (clauses 51, 58(m) and 62). We therefore consider the expiry provision under clause 45(2) unnecessary.
We also recommend an amendment to clause 48 to require the responsible Minister to consult the Ministers of Finance and Commerce before approving dispute resolution schemes. This change is necessary because we consider that the bill should provide separate ministerial responsibility for Part 3. As introduced, the Minister of Commerce would be the responsible Minister and would be required under clause 48 to consult with the Ministers of Finance and Consumer Affairs. We expect that the responsible Minister for Part 3 would be the Minister of Consumer Affairs rather than the Minister of Commerce because that Minister is advised by the Ministry of Consumer Affairs on matters of consumer dispute resolution. Consequential amendments are also recommended for clauses 66(3) and 67(3) to take account of the provision for separate ministerial responsibility.
Scheme rules
Public access to information
We recommend amending clause 57 to require that a list of the members of an approved dispute resolution scheme be displayed on the website of the scheme. This is intended to improve consumers’ access to information about the redress available through the scheme.
We recommend amendments to clauses 49 and 55, and the insertion of new clause 74AA, to require details of the approved schemes and withdrawal of approvals to also be publicly notified, with details to be made available for inspection at the head office of the Ministry free of charge, on the Internet, and in any other way the chief executive thinks fit.
Rules of the scheme
Clause 58 sets out a number of rules for the operation of an approved dispute resolution scheme.
We recommend amending clause 58 by deleting the provision for costs to be allocated to consumers (clause 58(i)). We believe that access to the schemes should be free for consumers, to ensure equitable accessibility.
We further recommend amendments to clause 58 for the following purposes:
to replace the requirement for an internal review of the scheme every three years with a requirement for an independent review of the scheme at least once every five years from the date of the scheme’s approval (clause 58(m)), and for the results of this review to be provided to the Minister (and we recommend a consequential amendment to clause 46(2)(d))
to require that a time limit be set for the investigation of complaints
to tighten the requirements regarding remedial action, requiring schemes to set out how they intend to enforce remedial action, including action after a member has left the scheme
to allow the termination of the investigation of any complaints if the complainant takes alternative court action against the member.
We consider that these changes would make the schemes more effective, leading to better outcomes for complainants and scheme members alike.
Duty to cooperate and communicate in certain circumstances
We recommend inserting new clause 61A, which would impose a duty on the person responsible for a dispute resolution scheme to cooperate with other schemes if a complaint involved their members, and other relevant financial service provider licensing authorities. The clause would also impose obligations of confidentiality to ensure that individual privacy is protected. This amendment is intended to help facilitate the fair and just resolution of cross-service complaints. We recommend an associated amendment to clause 51(1)(g) to allow the Minister to withdraw approval of a scheme on the grounds of failure to comply with this duty (clause 51(1)(ga)).
Reserve scheme
We recommend an amendment to clause 66 to require the appointment of a reserve scheme from an established recognised dispute resolution service. As introduced, the bill would only allow an approved scheme to be appointed as the reserve scheme. This amendment is intended to ensure that the body appointed is chosen on the basis of requisite experience and knowledge, and is well-respected in dispute resolution. We note that this amendment would not require a dispute resolution body to be chosen from within the financial sector. Its focus instead would be on the dispute resolution experience and ability of the body.
We recommend an amendment to clause 66(1) and the insertion of new clause 66(1A) to clarify that rules about the functions of the reserve scheme may be prescribed by Order in Council. The bill as introduced allowed these matters to be dealt with under clause 66(5). However we consider it preferable to have it clearly set out that rules must be made which provide for matters equivalent to the rules for approved schemes under clause 58. This amendment is intended to ensure that adequate rules for the reserve scheme are implemented.
We recommend the addition of clause 66(6) to require the Minister to recommend a reserve scheme within two years of the commencement of the Act. Clause 2(1) of the bill allows the commencement dates of the requirements for registration (Part 2) and membership of a dispute resolution scheme (clause 44) to be set by Order in Council. We asked about the likely commencement dates, as we were concerned that the regime might take some time to establish and financial service providers would need time to comply with the new arrangements. We were told that a two-year transition period is intended to allow dispute resolution schemes to be established and approved, and to give providers time to comply with the scheme. We expect that such a period would be reasonable, and trust that such an approach will be followed. The amendment we recommend to clause 66 would ensure that the reserve scheme would be established when registration commenced.
We recommend amendments to clause 67 to provide that appointment as a reserve scheme should be revoked should the appointee fail to comply with rules relating to the scheme, or otherwise breach an appointment condition. This amendment is intended to maintain the integrity of the regime. The amendments we recommend would require the Minister to recommend a replacement reserve scheme at the same time as the revocation of the first scheme. This amendment would ensure that adequate dispute resolution coverage was available to consumers at all times.
Appeals
We recommend amending the appeals provisions set out in the bill as introduced (deleting clauses 71 to 73). This appeals process was modelled on that of the Disputes Tribunal. We do not consider the Disputes Tribunal analogous to the disputes resolution schemes that would be available under this bill. For example, decisions of the Disputes Tribunal are binding on both parties, whereas decisions of the approved dispute resolution schemes would be binding on the financial service provider or adviser only. We therefore consider that the Tribunal’s appeals process is not an appropriate model. Parties would continue to have the usual right of appeal through judicial review.
Appendix
Committee process
The Financial Service Providers (Registration and Dispute Resolution) Bill was referred to the committee on 11 December 2007. The closing date for submissions was 28 February 2008. We received and considered 47 submissions from interested groups and individuals. We heard 26 submissions.
We received advice from the Ministry for Economic Development on Parts 1 and 2 of the bill and the Ministry of Consumer Affairs for part 3 of the bill. The Regulations Review Committee reported to the committee on the powers contained in clause 42(1)(b).
Commentary
Recommendation
The Finance and Expenditure Committee has examined the Financial Service Providers (Registration and Dispute Resolution) Bill and recommends that it be passed with the amendments shown.
Introduction
This bill seeks to regulate financial service providers by establishing a registration system for them, and requiring them to join an approved industry-led dispute resolution scheme or the reserve scheme.
The bill is one of a suite of measures to implement the recommendations of the Government’s Review of Financial Products and Providers. We have already considered and made recommendations on the Reserve Bank of New Zealand Amendment Bill (No 3), which imposes a regulatory framework on non-bank deposit takers. We are also considering the Financial Advisers Bill, which would set and monitor standards for financial advisers.
The Financial Service Providers (Registration and Dispute Resolution) Bill is the umbrella legislation for these measures. It would provide a basic regulatory framework for registration for all financial service providers.
Who must register
Clauses 5 and 6 of the bill determine the application of the legislation by defining the activities considered to be financial services, and setting out who would be excluded from the regime.
We recommend amendments to clauses 5 and 6 to ensure that the regulatory regime is appropriately targeted. We recommend the insertion of clause 5(A) and amendments to clause 6(2) to ensure that organisations who carry out financial services as a necessary but incidental element of their professional practice would not be included in the regime. This amendment would ensure that those who offer financial services only as a necessary consequence to their primary role, such as lawyers, chartered accountants, tax agents, and real estate agents would not be subject to further registration and dispute resolution requirements under this regime. We recommend similar amendments to clauses 10 and 11 to confirm that only those in the business of providing financial services are intended to be captured under the regime.
We also recommend amendments to allow a specific exemption for non-profit organisations that provide free financial services such as budgetary advice, as we consider the advice provided by such organisations an important community service. Although the exemption under this bill would apply only to organisations, we note that staff providing free budgetary advice for a non-profit organisation would be excluded from registration under the Financial Advisers Bill.
We recommend further amendments to ensure that the Crown agencies who are exempt (Government departments, the Reserve Bank, and statutory entities listed in Schedule 1 of the Crown Entities Act 2004) are set out in the bill rather than prescribed by regulation. We do not consider it appropriate that a regulation-making power might be used to determine the application of the legislation. We therefore recommend that clause 42(1)(b) be deleted and that all exceptions for Crown agencies be set out in the bill.
We recommend the deletion of clause 5(a) to ensure that arrangements where payment is made in arrears (such as hire purchase arrangements) are not captured by the bill. We consider that the regulation of such arrangements does not accord with the intention of the bill. We recommend amendments to clause 5 to clarify that those who act as deposit-takers or who are involved in offering debt securities, registered banks, investment brokers, and dealers in futures contracts would be subject to the regime. We also recommend the consolidation of subclauses (c) and (d) to simplify the provisions relating to credit contracts.
Financial adviser service
For simplicity we recommend removing separate references to “financial advisers” and “financial adviser services” from throughout the bill, and inserting “financial adviser service” as a new category within the meaning of “financial service” in clause 5.
We acknowledge that there is separate legislation before the House (which we are currently considering) that deals specifically with financial advisers. However we see no need to separate these terms out in this bill. We consider financial adviser services to be a type of financial service, and the amendment we recommend accords with the intention that the Financial Service Provider regime be the umbrella scheme for any regulation of financial advisers that may be implemented through separate legislation.
This amendment means that financial advisers would be required to be members of a dispute resolution scheme under this legislation. Although the bill as introduced did not require financial advisers to be members of a dispute resolution scheme, we note that this amendment would not change the obligations imposed on financial advisers in practical terms, as the Financial Advisers Bill (as introduced) contains provisions which require financial advisers to become members of a dispute resolution regime.
Registration
Disqualified persons
We recommend that clause 13, which sets out matters that disqualify a person from registering as a financial service provider, be amended to specify the types of offences that would count as fraudulent or dishonest in relation to the provision of a financial service. This amendment is intended to avoid doubt and to give clarity and certainty to those involved in administering the regime.
We recommend the inclusion of new subclause 13(ca) to provide that those who offend against the regime by being in the business of providing a financial service without registering, or by holding out that they are entitled to provide financial services when they are not, would also be ineligible to register.
Licensed service offence
We recommend the deletion of clause 10(2), which provides that it is an offence to provide a licensed service unless licensed. Whilst this legislation contains the requirement to be licensed, it does not contain particular licensed service requirements for each type of financial service provider. It is intended that each type of financial service provider will have its own legislation setting out particular licensed service requirements. This amendment is intended to allow offences for particular licensed services to be dealt with in the specific legislation for that licensing regime.
Deregistration of financial service provider
We recommend amending clause 17 to oblige the Registrar to deregister an applicant who has made a false or misleading application or whose registration fee has been dishonoured, declined, or reversed. We consider this amendment necessary to ensure that the register remains a reliable source of honest and credible providers.
We recommend amending clause 20 to provide that deregistration should be publicly notified. This would help to ensure that relevant information is available to all consumers who might deal with financial service providers, and we consider that this amendment would make the regime more transparent and effective.
Re-registration of financial service provider
We recommend inserting a new provision in the bill (clause 20A) to provide for re-registration of a financial service provider who was deregistered as a result of certain of the breaches outlined in clause 17. The Registrar would have the power to consider applications for re-registration where he or she determined that the reasons for deregistration no longer applied (for example, if the registration fee had subsequently been paid). However, providers who had been deregistered because they had provided false or misleading information on registration, or who no longer qualified, could not be re-registered, but might be able to reapply for registration under clause 14.
Responsible financial service provider
We recommend inserting new clause 20B to allow institutional registration as a “responsible financial service provider”, and an amendment to clause 6 to allow their affiliated entities to be exempt from registration. The bill as introduced focuses on the registration of individuals or businesses. We are concerned that this might pose compliance difficulties for some businesses, such as KiwiBank, whose franchise structure would mean that each franchisee would have to be individually registered and a member of a dispute resolution scheme. We consider that compliance in such cases would be unduly burdensome with no corresponding benefit to consumers.
Under new clause 20B, the Governor-General would be able to declare an entity a responsible financial service provider, on the recommendation of the Minister. This status would exempt any affiliated entities from the need to register separately under clause 6, and the responsible financial service provider would be held responsible for the financial services provided by its affiliated entities. We consider that this amendment would help to achieve the objectives of the bill in a way that accommodated the various structures of businesses.
Establishment of and access to the register
We recommend that clause 26 be amended to require the type of services a licensed provider is registered or licensed to provide to be recorded on the register. We consider that this information is vital in ensuring consumers are well informed when they deal with providers. However, we accept that there are practical difficulties in requiring information on the type of services to be provided from registered providers. As such, we recommend that at this stage only licensed providers be required to provide this information. However, we expect that regulations could be made in future under clause 42 that required the register to show which financial services a registered provider could provide.
We recommend an amendment to clause 30 to make it clear that it should be possible to search the register by the criteria specified in clause 26. In the bill as introduced, the search criteria were to be set by regulation. However, we consider it preferable that basic search criteria be included in the bill, and see no reason that the entire content as set out in clause 26 should not be accessible by searching. Other search criteria could still be added by regulation as necessary.
We recommend an amendment to clause 33 and the addition of new Schedule 2 to specify further bodies with which the Registrar may share information. Clause 33 as introduced includes four bodies or agencies. The additional agencies would include the New Zealand Police, the person responsible for an approved dispute resolution scheme or the reserve scheme, and any other body listed in Schedule 2 of the bill. Other agencies could still be added by regulation under clause 42(1)(e).
Registrar’s inspection powers
We recommend expanding the investigative powers of the Registrar in clause 36 to include investigation of false or misleading representations. This is an offence under the bill, and it is important that the Registrar be able to investigate such matters if the prohibition on such behaviour is to be effective.
Review of registration system and dispute resolution regime
We recommend the insertion of new clause 42A requiring that the registration system be reviewed within five years. The findings of the review would be reported to the responsible Minister, who would in turn be required to present a copy of the report to the House. We recommended a similar review provision for the Reserve Bank Amendment (No 3) Bill, given the novelty of some of the features of the regime and the allowance for matters to be determined by regulation; we consider that a similar case can be made regarding this bill, and that a co-ordinated approach should be taken to reviewing the new regulatory framework for the financial sector.
We recommend a similar provision be inserted as new clause 74A in regard to Part 3 of the bill (the dispute resolution regime).
Territorial application
We also recommend inserting new clause 42B for the avoidance of doubt to limit the territorial application of the bill to the provision of a financial service in New Zealand by a person who is in New Zealand. This new provision would clarify that it is not the intent of the legislation to apply to off-shore financial services.
Decisions continue until appeal
We recommend the insertion of a new clause (clause 41A) to clarify that any decision of a Registrar that is subject to an appeal would remain in force unless the High Court should determine otherwise. This should provide certainty for scheme members and ensure continuity in terms of recourse for consumers.
Dispute resolution schemes
Membership
Clause 44 in the bill as introduced requires a financial service provider to join an approved dispute resolution scheme only if it provides a financial service to individuals or to small and medium-sized businesses, and if a default scheme (the reserve scheme to be established under clause 65) is available.
We recommend replacing this with new clause 44, which would require every provider of a financial service to the public to be a member of an approved scheme or the reserve scheme. We regard it as important that all those who provide financial services to the public, bar the exemptions set out in clause 6, be subject to a dispute resolution regime. We recommend an associated amendment to clause 58 to confirm that only consumers and small to medium-sized businesses and organisations could make complaints for resolution by a dispute resolution scheme.
We recommend removing (as a condition of scheme membership) the requirement that a reserve scheme be available. We consider that this qualification could reduce consumers’ access to redress if no reserve scheme were appointed.
We considered an amendment to exempt credit unions from the requirement to join an approved dispute resolution scheme. However, whilst we acknowledge that credit unions have a dispute resolution regime available under the Friendly Societies and Credit Unions Act 1982, we are not convinced that the two schemes are sufficiently similar to justify an exemption from this bill. In addition, we expect that any overlaps between them could be addressed in the context of the current review of that legislation.
We also do not consider it necessary to exempt lawyers, accountants, and real estate agents who are acting as financial service providers, from membership of a dispute resolution scheme. We consider that the occupational regulation bodies of these industries are focused on professional conduct, and provide limited opportunities for redress where financial services are involved (as distinct from legal, accounting, or real estate services). We similarly do not think that funeral directors who offer pre-paid funerals should have a specific exemption.
However, we note that scheme membership would only be required if these businesses were offering services to the public.
Number of schemes
We recommend the inclusion of new paragraphs (k), (l), (la), (lb) and (m) in clause 47(1) to reduce the risk of a proliferation of small schemes, and to avoid schemes “cherry-picking” members to their advantage, or vice versa. We are concerned that this could hamper the development of a pool of dispute resolution expertise, and result in some schemes ceasing to be viable. The amendments we recommend would require the Minister to have regard to the number and type of approved schemes in existence, any other current applications for approval, and the proposed size and membership coverage, before approving a scheme.
These amendments are intended to allow multiple schemes whilst discouraging undue proliferation of new schemes.
Approval of schemes
We recommend deleting the ten-year expiry provision for approval of schemes (clause 45(2)). The bill already contains adequate accountability provisions, including provision for the withdrawal of schemes, independent review of schemes, and annual reporting (clauses 51, 58(m) and 62). We therefore consider the expiry provision under clause 45(2) unnecessary.
We also recommend an amendment to clause 48 to require the responsible Minister to consult the Ministers of Finance and Commerce before approving dispute resolution schemes. This change is necessary because we consider that the bill should provide separate ministerial responsibility for Part 3. As introduced, the Minister of Commerce would be the responsible Minister and would be required under clause 48 to consult with the Ministers of Finance and Consumer Affairs. We expect that the responsible Minister for Part 3 would be the Minister of Consumer Affairs rather than the Minister of Commerce because that Minister is advised by the Ministry of Consumer Affairs on matters of consumer dispute resolution. Consequential amendments are also recommended for clauses 66(3) and 67(3) to take account of the provision for separate ministerial responsibility.
Scheme rules
Public access to information
We recommend amending clause 57 to require that a list of the members of an approved dispute resolution scheme be displayed on the website of the scheme. This is intended to improve consumers’ access to information about the redress available through the scheme.
We recommend amendments to clauses 49 and 55, and the insertion of new clause 74AA, to require details of the approved schemes and withdrawal of approvals to also be publicly notified, with details to be made available for inspection at the head office of the Ministry free of charge, on the Internet, and in any other way the chief executive thinks fit.
Rules of the scheme
Clause 58 sets out a number of rules for the operation of an approved dispute resolution scheme.
We recommend amending clause 58 by deleting the provision for costs to be allocated to consumers (clause 58(i)). We believe that access to the schemes should be free for consumers, to ensure equitable accessibility.
We further recommend amendments to clause 58 for the following purposes:
to replace the requirement for an internal review of the scheme every three years with a requirement for an independent review of the scheme at least once every five years from the date of the scheme’s approval (clause 58(m)), and for the results of this review to be provided to the Minister (and we recommend a consequential amendment to clause 46(2)(d))
to require that a time limit be set for the investigation of complaints
to tighten the requirements regarding remedial action, requiring schemes to set out how they intend to enforce remedial action, including action after a member has left the scheme
to allow the termination of the investigation of any complaints if the complainant takes alternative court action against the member.
We consider that these changes would make the schemes more effective, leading to better outcomes for complainants and scheme members alike.
Duty to cooperate and communicate in certain circumstances
We recommend inserting new clause 61A, which would impose a duty on the person responsible for a dispute resolution scheme to cooperate with other schemes if a complaint involved their members, and other relevant financial service provider licensing authorities. The clause would also impose obligations of confidentiality to ensure that individual privacy is protected. This amendment is intended to help facilitate the fair and just resolution of cross-service complaints. We recommend an associated amendment to clause 51(1)(g) to allow the Minister to withdraw approval of a scheme on the grounds of failure to comply with this duty (clause 51(1)(ga)).
Reserve scheme
We recommend an amendment to clause 66 to require the appointment of a reserve scheme from an established recognised dispute resolution service. As introduced, the bill would only allow an approved scheme to be appointed as the reserve scheme. This amendment is intended to ensure that the body appointed is chosen on the basis of requisite experience and knowledge, and is well-respected in dispute resolution. We note that this amendment would not require a dispute resolution body to be chosen from within the financial sector. Its focus instead would be on the dispute resolution experience and ability of the body.
We recommend an amendment to clause 66(1) and the insertion of new clause 66(1A) to clarify that rules about the functions of the reserve scheme may be prescribed by Order in Council. The bill as introduced allowed these matters to be dealt with under clause 66(5). However we consider it preferable to have it clearly set out that rules must be made which provide for matters equivalent to the rules for approved schemes under clause 58. This amendment is intended to ensure that adequate rules for the reserve scheme are implemented.
We recommend the addition of clause 66(6) to require the Minister to recommend a reserve scheme within two years of the commencement of the Act. Clause 2(1) of the bill allows the commencement dates of the requirements for registration (Part 2) and membership of a dispute resolution scheme (clause 44) to be set by Order in Council. We asked about the likely commencement dates, as we were concerned that the regime might take some time to establish and financial service providers would need time to comply with the new arrangements. We were told that a two-year transition period is intended to allow dispute resolution schemes to be established and approved, and to give providers time to comply with the scheme. We expect that such a period would be reasonable, and trust that such an approach will be followed. The amendment we recommend to clause 66 would ensure that the reserve scheme would be established when registration commenced.
We recommend amendments to clause 67 to provide that appointment as a reserve scheme should be revoked should the appointee fail to comply with rules relating to the scheme, or otherwise breach an appointment condition. This amendment is intended to maintain the integrity of the regime. The amendments we recommend would require the Minister to recommend a replacement reserve scheme at the same time as the revocation of the first scheme. This amendment would ensure that adequate dispute resolution coverage was available to consumers at all times.
Appeals
We recommend amending the appeals provisions set out in the bill as introduced (deleting clauses 71 to 73). This appeals process was modelled on that of the Disputes Tribunal. We do not consider the Disputes Tribunal analogous to the disputes resolution schemes that would be available under this bill. For example, decisions of the Disputes Tribunal are binding on both parties, whereas decisions of the approved dispute resolution schemes would be binding on the financial service provider or adviser only. We therefore consider that the Tribunal’s appeals process is not an appropriate model. Parties would continue to have the usual right of appeal through judicial review.
Appendix
Committee process
The Financial Service Providers (Registration and Dispute Resolution) Bill was referred to the committee on 11 December 2007. The closing date for submissions was 28 February 2008. We received and considered 47 submissions from interested groups and individuals. We heard 26 submissions.
We received advice from the Ministry for Economic Development on Parts 1 and 2 of the bill and the Ministry of Consumer Affairs for part 3 of the bill. The Regulations Review Committee reported to the committee on the powers contained in clause 42(1)(b).
Committee membership
Charles Chauvel (Chairperson)
Hon Bill English
Jeanette Fitzsimons
Craig Foss
Hon Mark Gosche
Hone Harawira
Rodney Hide
Moana Mackey
Dr the Hon Lockwood Smith (Deputy Chairperson)
Hon Paul Swain
Chris Tremain
Judy Turner
R Doug Woolerton