Contents

Chapter 15
Regulation

Regulation of trust service providers

Proposal
P56 Further regulation of individuals and companies providing services to settlors establishing trusts, or to trustees administering and managing trusts, should not be introduced at this stage.
Please give us your views on this proposal.

Current position

15.13Regulatory regimes apply to lawyers, chartered accountants, financial advisers and trustee companies.337  The Securities Trustees and Statutory Supervisors Act 2011 introduced a licensing regime for trustees and statutory supervisors of unit trusts and retirement villages.338  However, these regimes do not cover everyone who is providing administrative and advisory services to settlors and trustees.
15.14From 30 June 2013 the Anti-Money Laundering and Countering Financing of Terrorism Act 2009 will impose anti-money laundering reporting requirements on trust service providers and trustee companies and corporations.339  Most of the companies and individuals that currently fall outside other regulatory regimes will be covered by this Act. Under this new regime providers of trust-related services will be required to comply with anti-money laundering reporting requirements from 2013.340

15.15General consumer protection regulation is also relevant. The Consumer Guarantees Act 1993 applies to all trade and professional services of a personal or domestic 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 made known to the 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. The 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.

Issues

15.16There is currently a small regulatory “gap”. It is, however, confined to occupational regulation. Although trust service providers are covered by consumer protection legislation and anti-money laundering legislation they are not under any occupational obligations. They are not required to be registered or required to comply with standards of professional competence in the way lawyers and financial advisers are.

15.17The extent and significance of the regulatory gap is a little unclear. The number of service providers that operate in this unregulated gap and the nature and quality of the services they provide is not monitored. Without registration requirements it is also difficult to assess the size of any problem. However, the then Ministry of Economic Development has indicated that it considers that this gap in occupational regulation is very small.341

15.18Unregulated advisers provide their services as an alternative and in competition with trustee corporations and regulated professional advisers. Given they are claiming similar specialist skills and expertise, we have considered whether they should be similarly regulated to ensure their services meet a certain standard to better protect the consumers of such services.

15.19If regulation is appropriate, a further issue is whether individuals and companies who act as professional paid trustees should also be covered. Trusteeship carries with it specific duties and liabilities. Where trustees claim to have specialist skills and expertise and act as trustees in the course of business for reward they hold themselves out as having special skills and expertise. They are also in a position to obtain indemnity insurance. In chapter 3 we have proposed that the duty of care applying to professional trustees should take into account any special knowledge or experience that it is reasonable to expect of a person in that role. In the Fifth Issues Paper the option of regulating professional trustees under any new regime applying to those providing trust-related services was also raised.342

Options for reform

15.20The following options for reform were considered:

15.21A further option, which we do not consider viable, is to simply prohibit anyone who is not a lawyer, chartered accountant, financial adviser, or trustee company from providing trust-related services. We rejected this option because a blanket restriction of this type is very heavy-handed. It is also inconsistent with the current approach to professional regulation, which minimises the areas of work that are reserved for particular professions.343

15.22If option 2 or 3 is favoured, then one approach to consider is to extend the coverage of an existing occupational regime, such as the financial advisers’ regime, which could be extended to cover all individuals and companies providing trustee services.

15.23In the Fifth Issues Paper we discussed the ways that these issues have been addressed in other jurisdictions. While many have regulated those providing trust advisory services, we noted variations in the scope and coverage of their regimes. Some only regulate specialist trust companies, while others regulate a broader group of professional service providers.344

Discussion

15.24A handful of submitters commented on this topic. Two-thirds favoured a light-handed approach to regulation, with an obligation for those providing trust-related services to be registered and to retain basic trust documents and information. Others including the Ministry of Economic Development and the NZLS were not in favour of an additional layer of regulation.

15.25There are a number of points in favour of regulation. The practices of unregistered and unregulated service providers, and the quality of services they are providing, are difficult to gauge while services are not monitored. Light-handed regulation that required service providers to register would give a clearer picture. Some submitters expressed concerns that some of those operating in the market are probably not meeting appropriate quality standards, and that the numbers providing unregulated services would likely continue to grow. Regulation would either force these service providers to improve or exit the market.

15.26There is also some interest in developing New Zealand’s foreign trust jurisdiction. A couple of submitters suggested that given the increased interest in New Zealand providing foreign trust services, regulation was appropriate to help develop and promote New Zealand as a jurisdiction of choice. They thought that regulation would force those who did not meet the quality standards to either improve or leave the market and that it would improve public confidence and ensure that providers had an appropriate level of financial stability. Regulation of service providers is a significant feature of off-shore trust jurisdictions so could assist with such development.

15.27Extending regulation to paid or professional trustees might improve the quality of services provided by some trustees. Regulation may also address existing concerns about the poor administration of some trusts.

15.28Submitters provided views about the type of regulation that could be introduced. Some favoured a regime that applied to all companies or individuals who charge for advice about trust establishment or administration, or who prepared documents for these purposes, or anyone who is paid to act as a trustee. Some considered that it should not cover all paid trustees but only organisations and individuals that are in the business of providing professional trustee services to multiple clients. The suggestion was made that statutory trustee corporations, persons who act as trustees gratuitously and persons who act as trustees for a limited number of trusts (for example up to five) should be exempt.

15.29The Financial Markets Authority (FMA) and the supervisory bodies under the Anti-Money Laundering and Countering Financing of Terrorism Act, which will be the Department of Internal Affairs for trustee service providers and the FMA for trustee companies, were suggested as possible regulatory authorities.

15.30However, in our view the arguments against regulation are more compelling. Although some submitters favoured light-handed regulation, no-one has identified any significant regulatory gap or any serious problem with the quality of services available. As the Ministry of Economic Development’s submission notes, settlors and trustees are able to obtain a full range of trust services from regulated professional service providers. The Ministry saw no obvious need to protect consumers who choose to obtain services from unregulated persons. It seems unnecessary to regulate further, particularly when regulation would increase compliance costs and the administrative burden already imposed on trusts. There would be costs involved in establishing a register and resourcing a regulator. In our view the size of the regulatory gap here simply does not justify the additional cost.

15.31After weighing the arguments, we consider that additional regulation is unnecessary because the occupational regulatory gap is very small. The financial advisers’ regime, current professional regulation and the anti-money laundering legislation together cover most of those providing services in this market. We propose that it should be left to the market and to general consumer protection legislation to moderate the standard of services that fall outside these occupational regimes.

15.32However, it would be appropriate for the Ministry of Business, Innovation and Employment to continue to monitor the situation for developments. It will take time before the impact of recent amendments to the financial advisers’ regime, and the Anti-Money Laundering and Countering Financing of Terrorism Act can properly be assessed. These changes are likely to address many of the problems of unqualified advisers working in the trust sector.

15.33Finally, we consider that it is unnecessary to impose additional regulatory requirement on paid trustees. We have proposed in chapter 3 that new trusts legislation strengthen trustee duties. Trustees are under duties which are enforceable by beneficiaries through the courts. We agree with the NZLS that these remedies against trustees should be adequate to address situations where trustees fail to meet appropriate standards.

337Lawyers 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. Trustee 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.
338The Securities Act 1978 requires all public issuers of debt and equity securities to appoint a trustee and the issues 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 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.
339From 30 June 2013 trust service providers and trust companies will be required to maintain records and report against anti-money laundering measures contained in the Anti-Money Laundering and Countering Financing of Terrorism Act 2009. That Act applies to all “reporting entities”. 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 Anti-Money Laundering and Countering Financing of Terrorism Act 2009, s 5.
340Anti-Money Laundering and Countering Financing of Terrorism (Definitions) Regulations 2011.
341Ministry 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.
342Fifth Issues Paper, above n 334, at [10.37]–[10.38].
343For instance, under the Lawyers and Conveyancers Act 2006 the only areas of work reserved solely for lawyers are advising on the direction and management of court proceedings and providing representation in the courts, and giving legal advice or carrying out other action that is required to be carried out by a lawyer under any enactment (ss 6 and 24). Non-lawyers are not prohibited from entering the legal service market and giving advice on legal and equitable rights or obligations, although, they must not call themselves “lawyer”, “law practitioner”, “barrister”, “solicitor”, “counsel” or “an attorney-at-law” (s 21).
344Society of Trust and Estate Practitioners (STEP) “STEP Policy Briefing January 2010 – Trust Reporting Systems – An International Comparison” (2010) Society of Trust and Estate Practitioners at 2 <www.step.org>.