Chapter 10 - Regulation of trust service providers

 

Options for reform

Option 1 – No further regulation

The financial advisers’ regime, current professional regulation and the anti-money laundering legislation together cover most of those providing services in the market. The regulatory “gap” is relatively modest and it might therefore be appropriate to wait until the new regimes have bedded in and reassess the situation. One option is to do nothing further and simply leave it to the market to moderate the standard of services that fall outside these regimes.

Unregulated providers will have to compete with those covered by the financial advisers’ regime now as well as the regulated professionals. The public therefore do have the option of choosing regulated service providers.

Professional trustees and advisers who fall outside existing regulatory regimes can form self-regulating associations.

Within this option steps might also be taken to promote a code of best practice for professional trustees, advisers and trust administrators.

Option 2 – Registration and regulation

The alternative option is to regulate and require trust service providers to be registered and meet certain statutory standards of conduct set by a regulatory authority. Such a regime could also be extended to cover paid or professional trustees.

This option would either include a professional body or association as regulator or a state authority which would undertake the task of registration, monitoring and enforcement. Within the legislative framework the regulator would set competence and good practice standards and would enforce these. The regime would also need a mechanism for resolving complaints about service providers.

If this option is favoured, then one approach might be to extend the coverage of the financial advisers’ regime to bring in a wider group of trustee companies and trust service providers. The regime could, for example, be extended to cover all trust service providers and companies providing trustee services, rather than only some of these as at present. This would essentially be the same broader group who will be required to comply with the reporting requirements imposed by the Anti-Money Laundering and Countering Financing of Terrorism Act from June 2013.

Extending the reach of the financial advisers’ regime is consistent with the approach taken in many overseas jurisdictions where a broader group of trustee companies and trustee service providers are currently regulated under equivalent financial markets regulation. However, being a trust adviser or professional trustee is different than being a financial service provider. Although some financial services may be involved, trustees have wider duties in relation to the beneficiaries and trust property. Those advising trustees would need to be competent across this broader range of functions also. Some changes would be needed to accommodate them within the financial advisers’ regime. There would obviously be additional costs associated with extending that regime in this way. The Commission has not attempted to quantify these.

The alternative approach would be to enact a new and separate regime specifically for professional trustees and trust service providers.

It should be acknowledged that the costs associated with the introduction of a registration regime could be significant, even if it were implemented as an extension of the existing financial advisers’ regime. There would be the compliance costs for providers associated with obtaining and maintaining their registration. In addition there would be the cost to the state of establishing the registration and enforcement mechanisms, running registration systems, and developing appropriate regulatory standards. These would be more significant if a separate regime was considered necessary.

Comment

As has already been noted, there is little information (other than the few anecdotal examples mentioned) available to indicate whether unregulated trust service providers are a real problem, or merely a potential problem. Without such evidence it is difficult to make the case for regulatory intervention in this area. At this stage the Commission’s view, based on feedback and its research to date, is that the problems in this area are not extensive or significant. It is unlikely therefore that the benefits of regulating would justify the cost.

It seems appropriate, however, to continue to monitor the situation. 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 be properly assessed. These changes are likely, even without any further extension to the financial advisers’ regime specifically to trust service providers, to address many of the problems over unqualified advisers working in the sector.