Chapter 18

Regulation of advisers

18.3In this area, occupational regulatory regimes apply to lawyers, chartered accountants and financial advisers.353 Trustee companies are regulated by a specific statutory regime.354 The Securities Trustees and Statutory Supervisors Act 2011 introduced a licensing regime for trustees and statutory supervisors of unit trusts and retirement villages.355 However, these regimes do not cover everyone who provides advisory and management services to settlors and trustees. There are companies and individuals providing services that are not covered by any professional standards regime.
18.4For completeness, we mention also the Anti-Money Laundering and Countering Financing of Terrorism Act 2009 which, since 30 June 2013, has imposed anti-money laundering reporting requirements on any person in the business of forming trusts (unless exempted) and statutory trustee companies.356 Under this regime, those providing trust-related services as a business are reporting entities required to comply with the regime’s requirements.357 Of course, the purpose of the regime is to deter and detect money laundering and the financing of terrorism. It is not concerned with monitoring or regulating the professional competence of the advisers involved in the activities covered, although one might anticipate some flow-on benefits here.

18.5Finally, general consumer protection regulation is also relevant. The Consumer Guarantees Act 1993 applies to all trade and professional services of a personal or consumer nature. This Act guarantees that such services will be carried out with reasonable skill and care and that they will be fit for any particular purpose that the consumer makes known to the service provider. It also guarantees that services will be completed within a reasonable time and at a reasonable cost. Where a service provider fails to meet these standards, consumers are able to cancel services, refuse payment (or part-payment) or claim compensation.

18.6The Fair Trading Act 1986 prohibits traders from making false or misleading representations about their services. Remedies are also available under that Act where service providers breach that obligation.

Regulatory “gap”

18.7There is currently a regulatory “gap” in occupational regulation. Everyone who is in the business of providing trust formation and management services or advice to consumers, rather than to other commercial clients or businesses, is covered by consumer protection legislation, but that consumer legislation does not set occupational standards and obligations in the way occupational regulation does. Not all advisers or service providers are required to be registered or required to comply with standards of professional competence in the way that lawyers and financial advisers are. Also, consumer protection does not apply in a commercial context.

18.8The extent and significance of the regulatory gap is unclear. The number of service providers that operate in this unregulated gap and the nature and quality of the services they provide are not specifically monitored. However, as discussed in our earlier papers, the (then) Ministry of Economic Development advised us that it considered the gap in occupational regulation to be very small.358

Additional regulation not recommendedTop

18.9The Commission considered but rejected the option of requiring everyone providing trust formation and management services or advice in relation to trusts to be registered and regulated. We canvassed the issues fully in the Fifth Issues Paper and summarised the different regulatory options in the Preferred Approach Paper.359

18.10A few submitters who favoured regulation commented on the Preferred Approach Paper. The point was made that without some form of registration it would continue to be difficult to gauge whether unregulated service providers are a problem. Given the large numbers of trusts in New Zealand containing significant wealth, these submitters said that it is important that trusts are well administered. They said that there is some anecdotal evidence to suggest that some service providers are not reaching an acceptable standard.

18.11We carefully weighed these points when reaching our final view. We recognise that there are some difficulties in forming an accurate picture of the sector. However, the information that is available does not indicate any significant problems. We found no evidence of the type of systemic problems that would justify the costs and intrusion involved in establishing a register of service providers and resourcing a regulator to establish and monitor standards.

18.12The majority of those providing advisory and management services in relation to trusts are already regulated. The financial advisers’ regime, current professional regulation and the anti-money laundering legislation together cover most of those operating in this market. We think that the gap in occupational regulation is relatively small and it should, at least at this stage, be left to the market and general consumer protection legislation to moderate the standard of services. In our view it would be appropriate for the Ministry of Business, Innovation and Employment to continue to monitor the situation for developments.

Foreign trust industry

18.13A few submitters, most of whom did not favour regulation for domestic service providers, considered that there may be a separate case for regulating organisations acting as professional trustees or otherwise providing trust related services to foreign or offshore trusts in New Zealand. They argued that this would be desirable to help protect and support New Zealand’s reputation as a global centre for trust administration. The New Zealand Branch of the Society of Trust and Estate Practitioners were concerned that unscrupulous service providers could harm New Zealand’s international reputation. The New Zealand Branch of the Society of Trust and Estate Practitioners and a few other submitters supported a standalone, light-handed regulatory model for trust and company service providers servicing the offshore market. They considered that this would help develop and promote New Zealand as a jurisdiction of choice. It was noted by one submitter that other jurisdictions regulate their international trust administration industries because internationally there is a competitive advantage for trust companies to hold themselves out as being regulated. Regulation can attract foreign trusts and promotes confidence in the jurisdiction.

18.14We acknowledge the development in New Zealand of the offshore market and the accompanying international trust administration industry. We have not formed any views about whether New Zealand might wish to consider regulating to promote the development of an offshore market. Nor have we attempted to address any issues relating solely to New Zealand developing as an offshore jurisdiction for foreign trusts in this Report.

18.15Our focus throughout our review has been on New Zealand’s domestic or onshore jurisdiction and on addressing the central matters of trust law in that context. In ensuring that core matters of trust law are appropriate for our onshore jurisdiction, we will also protect and support New Zealand’s international reputation in trust law. This in turn promotes confidence in New Zealand’s trust law jurisdiction, which may have flow-on benefits for the offshore or foreign trust industry in New Zealand.

18.16Whether there should be a specific regulatory scheme to cover those individuals and organisations servicing the foreign or offshore trust industry in New Zealand is not an issue we have considered as part of this review. That question is part of a broader question concerning whether New Zealand wishes to develop specific regulatory infrastructure to promote and protect the foreign trust industry. Such economic issues fall beyond the scope of this review and will need to be considered elsewhere.

353Lawyers are regulated under the Lawyers and Conveyancers Act 2006 and the Lawyers and Conveyancers Act (Lawyers: Conduct and Client Care) Rules 2008. Chartered accountants are a self-regulated professional group. They must be members of the New Zealand Institute of Chartered Accountants and are subject to its regulatory standards, mandatory professional development, code of ethics and professional standards. Financial advisers and financial service providers are regulated by the Financial Advisers Act 2008 and the Financial Service Providers (Registration and Dispute Resolution) Act 2008.
354Trustee companies listed in s 2 of the Trustee Companies Act 1967 are regulated by that Act, the Trustee Companies Management Act 1975, and the Trustee Companies Management Amendment Act 1978.
355The Securities Act 1978 requires all public issuers of debt and equity securities to appoint a trustee and the issuers of other participatory securities to appoint statutory supervisors. The Unit Trusts Act 1960 similarly requires that a trustee be appointed in respect of a unit trust, and the Retirement Villages Act 2003 requires retirement villages to appoint a statutory supervisor. Note that the Financial Markets Conduct Bill 2011 (342-2) currently before Parliament will repeal the Securities Act and the Unit Trusts Act, and also amend and rename the Securities Trustees and Statutory Supervisors Act 2011.
356Since 30 June 2013, all reporting entities have been required to maintain records and report against anti-money laundering measures contained in the Anti-Money Laundering and Countering Financing of Terrorism Act 2009. A reporting entity is partially defined in the Act but also includes a person or class of persons declared by regulations to be a reporting entity; see s 5. Reg 17 of the Anti-Money Laundering and Countering Financing of Terrorism (Definitions) Regulations 2011 provides that a person who carries out, as a principal part of their business, the formation of trusts will be a reporting entity. However, reg 20 exempts lawyers who do this in the ordinary course of their business.
357Anti-Money Laundering and Countering Financing of Terrorism (Definitions) Regulations 2011.
358Ministry of Economic Development “Comment on External Paper” (21 November 2011). The Ministry of Economic Development is now a part of the Ministry of Business, Innovation and Employment.
359Fifth Issues Paper, above n 350, at ch 10; Preferred Approach Paper, above n 352, at ch 15.