Main | September 2004 »

Regulation Update

There is something each way in this speech. Some regulation, which the industry has been awaiting so long that it will almost accept with relief. BUT assurances that the Australian model will not be adopted wholesale.

The Aussie model had the effect of 'harvesting' a large number of advisers - taking them out of the industry because the cost to comply was too great an investment for the level of business that they did - or the time that they had remaining in the industry.

Most of the rest of the 'independent' advice crowd went into dealer groups. At the outset most of these were independent. But the economics of a dealer group favour scale, or focus. You may be small, high cost, and niche, or large. Increasingly these groups are in part owned by financial institutions that can provide capital to build systems and processes within dealer groups.

This does, of course, mean less independence. The disclosure model tends to be more rigorous - but with more institutional control the advice model is NOT what purists would like.

This has potential - to be good, or bad, but we are assured not too much down-side on the bad. Let's keep an eye on that task force.

The essential links on financial services regulation:

The minister's speech.

The new taskforce to be set up.

Tax Project Must Present a Conundrum

financialalert - Stobo on track with tax project

While Stobo is reported as being on track one cannot help but wonder how this circle is to be squared.

If the aim really is to develop:

"a solution which will ensure the equitable and consistent tax treatment of investments regardless of the structure of the investment vehicle chosen or whether they are made directly or indirectly, or are based onshore or offshore"

We know that is a big ask.

One of New Zealand's most popular investments is residential property. Which famously defers tax and suffers no tax on capital gains. After McLeod the Government quickly stepped back from introducing any change there. Recent fiddling with depreciation rates notwithstanding - will they touch this prickly number?

It seems more likely that a limited closing of inequities between financial products rather than all investment choices will eventuate. Unfortunately, would leave plenty of distortion in the system.

AMP Price cutting on super

Business News - Paul McIntyre: Bankers passing the bucks

In an article titled about banks there is actually an interesting segment on AMP price cutting super fees. This is not happening here, but over there.

It's interesting to see how the Australian market for super is developing. It would be nice to think that our Government is perhaps inching, incrementally, towards a similar regime. First state sector, then requiring business to offer superannuation, and then requiring choice which will foster a healthy fee competition. Of course, this is a complex issue and deserves a longer post - which I promise to do in the near future.

Health Insurance Directions

This post on US health-care is interesting.


The situation in the US is clearly very different. What's interesting is how this looks very similar to an answer for helath care for the elderly back here in NZ.

They face a Hobson's choice: long waits for care in the public system, or high premiums for private cover.

We've come across a client recently who is 80 years old waiting for a hip replacement operation. She is not considered 'bad enough' for the operation yet - but she is concerned that by the time she qualifies then something else will have gone wrong. Or she will get an infection and be too sick for surgery.

It turns out the reason so many people keep health insurance in their old age in spite of the cost is the relative waiting periods are very different:

At age 30, to wait on year for surgery is minor. At age 80, when your personal life expectancy may be only another 10 years (if you are not in great health) then its a substantial part of the balance of your life.

High excess cover, combined with a medical savings account (preferably ringfenced by an appropriate trust structure) would go a long way to help out - especially if sold in large numbers to people in their 50's and 60's.

Contributory Mortgages

STUFF : BUSINESS - STORY : New Zealand's leading news and information website

Another incarnation of New Zealander's obsession with supposedly 'fixed rate' investments. Tackling individual investments piecemeal may have virtually killed the contributory mortgage as an investment vehicle - but there are still plenty of other examples out there.

Are investors fairly rewarded for the risks taken in the large pool of unrated corporate bonds pushed at retail?


The good folk at the NBR have done a 'wee' article on the change in business mix in the life industry. This may be available for subscribers only, but have a look and see.

Sadly the author only shows a table of business mix figures year on year. The figures for 10 years would have been startling. Perhaps 15 years even more so.

There was a time when Whole of Life and Endowment Insurance were the routine contracts sold, term a poor rider to boost cover levels for clients with slender budgets.

The relative rise in income protection business looks impressive but has, in fact, been a disaster - barely breaking even in good times, the portfolios have required most large writers of the business to raise claims reserves and premiums on several occasions in the last five years. Trauma is not an unqualified success either.

The business is capital intensive and very competitive. No easy returns for shareholders here. In another part of the print edition we see a further reason for decline: a creeping welfare dependency has reduced the urge to insure amongst a good portion of the market.

Now lets think back to the future. Although a return to Whole of Life would be assailed by consumer advocates, lets say that we returned at least to level premiums, less income protection, term life as a rider. Maybe back to the future is the right strategy for the life industry.

Free Trade Anyone?

Over here we have a fairly silly discussion about free trade. Farrar's comments on the articles are cogent, the original proposal - for a 'social democratic system of free trade' are plain strange. Why even comment? Well - its like this, free-trade in abstract is a hard thing. It is successfully defined by many journalists as a 'Bad Thing' that tends to only benefit big companies. Its only when its personal that it makes any sense. I'll give you a few examples:

1) A friend recently bought a VW Passat that had been parrallel imported. It was a steal, a real bargain - try telling him he's not allowed and... well, you have a free trade advocate.

2) If your job has just recently been outsourced to a call centre in Bangalore, unless you just got a new one, you feel pretty unhappy about globalisation aspects of free trade.

3) Even though some progress has been made in recent years, I remain amazed at the difference in the cost of groceries between here and the UK. Of course, UK relatives come here and see the difference and ask why it is... I have no hesitation in explaining the difference in the price of many items - say lamb - as a consequence of the EU's CAP. More advocates appear.

Once people have enjoyed the benefits, they rarely go back. Triple the price of children's clothes and see how many votes you win. Double the price of shoes. Do whatever you like to the price of cars.