Thursday 3rd of September 2009

ASB fessed up this week that one of its investment advisers has been involved in an elaborate fraud involving millions of dollars. There’s not a huge amount of information about what actually happened but the question I ask is this: Would adviser regulation have stopped this happening? I think the answer is no. Despite all the claims about how regulation will make the industry a better place and give investors a greater degree of confidence in the advice sector, it won’t stop this sort of thing happening. If someone really wants to rip people off they will find a way to do it, no matter what sort of regulations are in place. What the story does is show what a great advantage bank advisers have over most of the IFA market. First up, the banks in New Zealand have been good at training and providing professional development for their advisers. In many cases the banks have arguably been the leaders here. Secondly, investors have a high degree of confidence using a bank adviser, as the companies have the resources behind them to make things good (or at least better) when things go wrong. While no figures are available with this case, ASB has indicated it had made good where possible. Considering it is a multi-million dollar rip-off, that is probably a not insignificant amount of coin. This has also been shown at the ANZ over the selling of the ING CDO funds. And the third thing is that if investors are dissatisfied with the bank advice, they have recourse to the Banking Ombudsman. The ombudsman is an independent body who can rule on complaints and make recommendations, where appropriate, that the bank put things right. This is a huge advantage for bank advisers. I sometimes wonder if investors thought about this, they wouldn’t be that interested in going to an IFA. While the Institute of Financial Advisers does have a complaints scheme, it is of no benefit to customers as it doesn’t make rulings whereby the investor receives any payout. Now it appears the institute is the only winner as it makes cost awards against advisers. In one of the more recent cases, and one you will hear more about, an adviser was cleared of some charges but still had costs awarded against her. Many aspects of regulation are positive. But it’s not the panacea some are painting and it won’t stop fraudulent activities.