Trustees Executors (TE) chief, Ryan Bessemer, has called for tighter regulation of the burgeoning investment platform sector.
In the just-released Financial Services Council (FSC) ‘Money and you’ survey of the local digital investment scene, Bessemer says platform innovation has been a positive development.
However, he says in the report “I do feel very strongly that we should apply the same rigour and protection to these emerging products as we do for KiwiSaver and managed funds”.
“There are gaps in our current regulation of micro-investing platforms and these gaps are a risk consumers should be cognisant of.
“This should not become a handbrake to innovation of course, and a focus must also be to ensure investors’ wellbeing and access to the right tools and information for making confident and informed financial decisions.”
In a speech at the launch of the FSC report last week, Bessemer said the rapid growth of direct-to-consumer investment services such as Sharesies, InvestNow and Hatch reflected an inevitable march of technology into financial services.
But he warned that as “self-investment becomes easier our industry needs to address what this means for regulation and consumer protection”.
“I’m not talking about digital tulips – that’s a conversation for another time – but with new technology comes risk for less experienced and skilled consumers,” Bessmer said. “In NZ there are no current regulations or licensing regimes that specifically cover micro-investment platforms and custodial wraps.”
The platform regulatory problem was compounded, he told Investment News, because custody is also an unlicensed service in NZ, creating a dual risk for new-age investors.
Without strong regulatory standards for either platforms or custody, Bessemer said there was a danger that retail investors would not have adequate protection on unlicensed digital services.
For example, he said licensing would set rules for the amount of cash platforms need to have to support custody functions as well as the capital levels required for the business itself.
Some of the new platform providers also don’t have a background in financial services and may not fully understand the consequences for consumers of poorly constructed back-end investor protections, Bessemer said.
“… I do want to make sure there are appropriate warnings and mechanisms in place so we have safety fences at the top of the mountains rather than the coroners vans at the bottom,” he told the FSC survey launch audience.
NZ is an outlier in its light-touch custody regulations – as the International Monetary Fund (IMF) pointed out in 2017. After carrying out a ‘thematic review’ of the sector in 2019 in response to the IMF concerns, the Financial Markets Authority (FMA) “noted some practices that could be improved to strengthen the safeguarding of client money” but recommended no changes yet to current regulations.
At the time, then director regulation, Liam Mason, said the FMA was increasing its understanding of the NZ platform sector, too.
Mason, now FMA general counsel, said in 2019: “Platforms don’t fall neatly into our regulatory system,” he said. “We’re looking at them right now… including how they interplay with custody.”
In the following two years, of course, the NZ direct-to-consumer investment platform market has seen exponential growth. As the recent FSC report found, since March 2020 the proportion of New Zealanders investing via online services – dubbed ‘micro-investing platforms’ in the study – climbed almost 7 per cent.
“Close to 40% of respondents currently or plan to use micro-investing platforms such as Sharesies, Hatch and Stake, with around 55% of Generation Y (39 years old or less) the most likely to use them,” the FSC survey says.
“Sharesies reported 355,000 investors in April, up from a quarter of a million in December 2020 when they raised funds to expand into Australia. Hatch report 85,000 investors,while Stake, an Australian-based online brokerage that launched in New Zealand in April 2020, has a reported 40,000 investors holding $100m of investments on the platform.”
Based on research by Australian firm CoreData, the FSC study found that despite the growing appetite about “two-thirds of respondents highlighting some nervousness around ‘micro-investing’ platforms being fraught with risks”.
More traditional adviser-focused platforms – notably, MMC Wealth (formerly Aegis), FNZ and the NZX-owned Wealth Technologies – have also seen growth and significant changes in recent years.
TE, in partnership with Harbour Asset Management and the Australian firm Research IP, has built a new platform – Flint Wealth – to operate in the adviser space or for advised consumers.
Bessemer said Flint, which has been in development for a couple of years, should fully launch later this year following a period in beta-mode with “family and friends” as users.
Flint would have a second release for the test audience in August before a market roll-out later in the year, he said.