No names - no visibility - no impact.

The recent decision from the F.M.A. not to reveal the names of the two Kiwisaver providers who fell short of compliance requirements has attracted little comment from the market. Certainly, Mike Naylor’s prediction that soft-dollar incentives would be banned in the foreseeable future created more controversy.

For my part, I am pleased Mike has chosen to involve himself in our industry, and his report on under-insurance (which one correspondent exhorted him to address – go figure!!) is an excellent piece of research.

The KiwiSaver scheme logo.

If he questions the relevance and validity of some of the industry’s scared cows – so what? He’s entitled to question the accepted orthodoxy and I welcome the examination. Too much of our industry is concealed, hidden from public view, or veiled in semi-disclosure where not all is made plain to the consumer, nor are the implications fully explained.

Soft dollar incentives fall into this category, and their cost impact on company expenses should be made public for all to see and to assess if such incentives have a role to play in determining where an “independent” adviser places business.

But I digress. The name suppression granted to the two Kiwisaver providers and to the 5 firms which apparently are in breach of the regulations in the Discretionary Investment Management Services (DIMS) area is inappropriate.

The Ross Asset Management shock hasn’t yet been fully absorbed, yet 5 DIMS providers showing a blatant disregard for the requirements are effectively granted protection from the consequences of their actions. There are hundreds of millions of investors’ dollars at stake here, and consumers are entitled to know which firms are compliant and which firms are errant.

This lack of transparency is contradictory to the stated intent of the regulatory regime.

A call for transparency was made at a recent Finsia lunch in Auckland by Sue Brown of the FMA, and a laudable request it most certainly is.

However, in the same vein, the FMA should surely be calling the errant Kiwisaver and DIMS providers to order by making consumers and potential investors aware that they are actively policing such entities with a consistent and firm hand.

There are a number of points which suggest FMA could do better in this regard.

  1. If FMA is looking to inspire confidence in our capital markets, establishing transparency is a paramount requirement. Concealing the names of non-compliant Kiwisaver and DIMS providers will have the opposite effect of that which they seek to achieve. The DIMS operators in particular should be obliged to observe certain financial management standards in order to prove their own financial bona fides to investors. If such entities cannot manage their own financial affairs effectively, how can they be trusted to handle investors’ money?
  2. Making a misleading statement in an offer document can hardly be regarded as a minor transgression. This surely goes to the heart of what the regulations are all about. If a provider cannot get this fundamental aspect of compliance right, why are they permitted to look after people’s retirement and investment savings?
  3. I understand that one of the providers made incorrect and/or misleading statements regarding past performance. Excuse me, but isn’t this what Huljich did? The cause may have been the injection of his own funds, but the effect was to display past performance which was not due to competent investment management strategy. Therefore, it was held that subsequent investors were misled as to the past performance of the fund. That seems to me to be exactly what has happened here, yet the FMA proposes taking no action – not even informing consumers that a provider has been less than accurate with published material.

To quote from the FMA’s website:-

Every KiwiSaver provider must report the performance of their investments separately from the overall performance of their KiwiSaver fund. This is because other factors can affect the fund's performance, like fees. These other factors mustn't be used to create a false impression that the KiwiSaver provider is more successful at investing than it really is.

Yet here we are faced with a blatant disregard for this, and FMA chooses to protect the perpetrators.

To be fair, Sue Brown was calling for transparency as the industry moves away from the prospectus regime and into the Product Description Statement era. While the prospectus idea resulted in totally incomprehensible tomes being churned out ad nauseam at the expense of a few rainforests, no doubt, I harbour some reservations that the PDS concept will solve the problem.

Words contained in offer documents and supporting material have frequently been the root cause of investor troubles. Many people will not have forgotten the communications issued prior to the ANZ/ING CDO debacle, implying that such financial instruments were akin to bank deposit accounts. Patently untrue and misleading – so how does a provider disclose fully the nature of the investment product on offer via a PDS?

And what constitutes the proper level of disclosure in a PDS?

Well, I doubt if the FMA will be offering a PDS vetting service, so the alternative to regulatory body approval lies with legal advisers. As Ms Brown so eloquently opined in the new era of the PDS “less is more”. But it might be a case of less words giving rise to more litigation.

Hopefully, the NZ principles-based regulatory regime can make this work because such efforts have failed elsewhere. In Australia, ASIC’s criticism of providers’ PDS as being too long and too complicated drew little response as legal advice pointed towards the likelihood of defending the wording of such documents in court. Lawyers, while always willing to accept instruction to litigate, advised deploying the words, terms, and conditions which appeared in the eventual contract of insurance or investment. While this minimised the chances of being sued, it made the PDS documents as long and as incomprehensible as anything that had gone before.

In the circumstances, product providers should be very careful about distilling down the words or changing the terminology without considering very carefully the legal advice offered.

The use of jargon and industry-speak is one aspect of our business which sets consumers’ teeth on edge, but taking a scalpel to documentation which forms the basis of the contract is fraught with danger.

While the call for reduced PDS is sensible, I’d be inclined to suggest that hoping that the regulator doesn’t take issue with ‘sins of omission’ in the event of dispute is imprudent.

Unless, of course, you happen to be one of the two Kiwisaver or five DIMS entities so generously treated by the FMA as recently reported.


The Laird of Albany