‘‘An issue that has arisen out of the finance company failures over the past couple of years is whether inexperienced investors have been sufficiently aware of the nature of the risk they are taking.
‘‘Everyone knows that the higher the promised rate of return, the greater the degree of risk,'' Ms Dalziel said in a speech to the Australian and New Zealand Institute of Insurance and Finance Executives.
It seemed that some finance companies deliberately lowered their promised rate of return to minimise the apparent nature of the risk investors were taking.
There were also issues around ‘‘particularly high'' rates of commissions, which should have set off alarm bells for the financial advisers concerned although it was apparent that some of them only heard the ringing of cash registers, she said.
‘‘I suspect some of those will pay a deservedly high penalty for their lack of vigilance on behalf of consumers who entrusted them with their hard-earned money, which puts paid to the idea that investors are completely without any protection under the existing regime.''
In her speech, the minister took the opportunity to update the market on the review of financial products and providers (RFPP), which she said was an important part of the Government's economic transformation agenda.
In seeking the right balance between too much rigidity and insufficient rigour, Ms Dalziel said she had tried to provide a streamlined compliance process that minimised the cost to the industry.
But at the same time, she wanted as much protection as possible for the consumer in a sector where the rate of return on an investment was based entirely on the level of risk.
Not all investments paid off and people who invested in speculative ventures should know that, she said.
‘‘I have used what has occurred to remind people that governments cannot regulate to eliminate risk but we can minimise unnecessary risk by ensuring that we have a robust framework that benchmarks favourably against international best practice.''
That framework must ensure that investors had access to all relevant information before they decided to invest and that they could rely on people who described themselves as financial advisers to be professional in every sense of the word, Ms Dalziel said.
The new regime would require all financial services to be registered and all financial issuers and advisers to be licensed. Industry bodies would set standards for their members and monitor compliance.
Several pieces of legislation had resulted, or would result, from the review. The Securities Markets regulations covering changes to disclosure obligations for investment advisers and brokers comes into force on February 29.
Disclosure must be made up-front by investment advisers before investment advice was given to members of the public and by investment brokers before receiving investment money or investment property from members of the public, she said.
The new disclosure obligations required more information to be given to clients, especially about fees, commissions and other forms of remuneration, which had been extended to include ‘‘soft commissions'' such as travel incentives.
The disclosure was mandatory and must be provided without the client having to request it.
