26 August, 2009
Latest Developments and Legislative Objectives
Thank you for the introduction and for welcoming me to the 5th Annual Securities Law Update.
Over the past five years, the Annual Securities Law Update has become a great forum for sharing ideas about the legal environment in which our financial sector operates.
I have been looking forward to this opportunity to share with you my priorities for the future of New Zealand's securities law.
This year, the Update has a whole day dedicated to "reviewing the roles and products of financial and investment advisers".
I think this is an acknowledgment of the real improvements we have recently made to the regulation of this important aspect of our financial markets.
Today, I would like to take stock of this and other recent progress toward improving investor confidence and assisting firms to raise capital.
But first, I will outline in more detail these and my other objectives for New Zealand's financial markets. I will also acknowledge the contribution the financial sector makes to our economy more generally.
Times are tough for businesses and communities, but New Zealand is not alone in feeling the effects of the world-wide recession.
This Government spent its first 100 days focusing on actions to make it easier for employers, workers, and households to weather the downturn.
And though we are still facing significant challenges as a result of the global financial crisis, we have shown the resilience to avoid the worst effects of the crisis and we must now focus on the long term.
Six weeks ago, the Prime Minister announced the Economic Growth Agenda for New Zealand, which is all about maximising our opportunities and emerging from the downturn in a stronger position relative to the countries we compete with.
Our Government is seeking to achieve its economic growth objectives by making innovativeness and hard work more rewarding.
The global crisis has given us an opportunity to review the legal framework for the financial sector and test some of the assumptions on which our regulation is based.
I'm positive we can learn from global events.
The global crisis has amply shown what can go wrong with finance markets. But it also demonstrated just how important the finance markets are to the wider economy.
While we need to be ensuring that investors are not exploited, we also need to be making sure the wheels of commerce turn smoothly.
I want legislation that will enhance the efficiency of our capital markets.
We need well-informed investors who can invest their money with confidence, and businesses that can access capital so they can grow.
The Government has a key role to play in achieving these objectives.
Poorly designed and ineffective regulation can stifle growth by imposing unnecessary costs, diminishing incentives to invest, hindering business performance, and failing to address unfair conduct and poor governance.
We want to ensure New Zealand has a sound regulatory regime that supports efficient and dynamic financial markets that contribute to economic growth.
Our primary focus is to develop regulatory frameworks for capital markets that improve investor confidence and help companies seeking to raise capital.
So let's consider the most recent improvements we've made to further these objectives.
Last year, the industry-led Capital Market Development Taskforce was established to produce a blueprint and action plan to develop New Zealand's capital markets.
In response to the global financial crisis, the taskforce released an interim report calling for immediate action to help companies access capital. We have already acted on a number of the taskforce's recommendations.
A month ago Parliament passed the Securities (Disclosure) Amendment Act 2009. This Act will make it easier for businesses to raise capital while ensuring that prospective investors have the information they need for decision-making.
It provides for a simplified disclosure prospectus that may be used by listed issuers who are already subject to continuous disclosure requirements and who would otherwise be required to produce a separate disclosure document for each offering.
Listed issuers will be required to only produce one disclosure document for a securities offering, instead of producing both a full prospectus and an investment statement.
The intention of the simplified disclosure prospectus is not to reduce the amount of information provided to investors, but to reduce duplication between forms of disclosure.
The regulations giving effect to the simplified disclosure prospectus regime, which will come into force on October 1, provide for two distinct types of simplified disclosure prospectus:
• One for offers of securities of the same class as listed securities (which will rely more strongly on continuous disclosure), and ...
• One for offers of securities that rank equally or in priority to listed securities (which will rely on continuous disclosure to a slightly lesser extent).
Listed unit trusts will be able to utilise the simplified disclosure prospectus for offers of additional listed securities, and to offer higher ranking debt securities.
These regulations remove unnecessary impediments to raising capital in New Zealand, while continuing to ensure the timely disclosure of relevant information to prospective investors.
I would like to take this opportunity to once again record my appreciation of the input of the Capital Market Development Taskforce with regard to the legislation and their input into the drafting of the regulations.
The Act also made relatively technical changes to categories of people who are exempt from the disclosure requirements for offers of securities under the Securities Act.
This will make it easier for all businesses -- listed or unlisted -- to raise capital.
In addition to the new simplified disclosure prospectus regulations, I can also announce today that new Securities Regulations 2009 were made earlier this week.
These regulations, which replace the Securities Regulations 1983, will come into force on October 1.
They aim to reduce compliance costs and improve flexibility for issuers, and enhance disclosure to investors.
Among the large number of changes incorporated in these regulations are measures aligning the requirements for financial statements in prospectuses with generally accepted accounting practice, and providing for a short-form disclosure prospectus for unit trusts.
I also allowed the most recent changes to NZX's Listing Rules to ease capital-raising requirements for listed issuers.
I expect NZX to propose a large number of further changes to its Conduct Rules before the end of the year. I note they will be presenting on their Listing Rules at the conference this afternoon.
The role of trustees has really come under the spotlight through the troubling collapse of several finance companies.
As a result, Cabinet agreed on Monday to a package of measures designed to improve the quality of trustees' supervision of issuers. This includes a licensing regime for trustees that supervise debt issuers and certain collective investment schemes.
This regime will see the Securities Commission licensing trustees according to a stringent set of approval requirements relating to matters such as the trustees' infrastructure, monitoring systems and processes, and financial strength.
In addition, the commission will have an ongoing role in monitoring trustees to ensure they continue to meet the relevant licensing criteria.
As well as this core licensing regime, the package of measures includes:
• Giving the commission the power to take proceedings against trustees who fail to comply with their duties.
• Giving the commission the power to direct trustees to take certain action in respect of issuers in circumstances where the trustee fails to take adequate measures.
• Strengthening trust deeds through specifying matters that all trust deeds must address, and considering whether additional terms need to be deemed into trust deeds.
I note with interest that the regulation of trustees and their supervisory role is to be discussed during tomorrow's panel discussion after lunch, and I look forward to finding out what conference attendees think about these issues.
I'm also pleased to announce today that Cabinet agreed on Monday to the development of regulations to simplify and clarify disclosure obligations for finance companies in relation to moratoria proposals.
These regulations will ensure that investors are provided with the relevant information in order for them to make appropriate decisions for their circumstances.
The regulations will require debt issuers who are proposing to go into moratoria to produce clear and concise investment statements that disclose the details and merits of a moratoria proposal, the basis on which the relevant directors and trustees are recommending the proposals, and other relevant information.
These regulations will ensure that the right information is made available in a transparent and easy-to-understand way.
We hope to have these regulations in force by the end of the year.
I'm also progressing the passage of the Settlement Systems, Futures, and Emissions Units Bill, and expect it to be passed in the near future.
This bill will make it possible for NZX and other operators to seek government designation for the rules of their settlement system in acknowledgment that the system meets international standards.
There will also be a presentation after lunch today on the trans-Tasman mutual recognition of securities offerings.
This is another great advance in the regulatory framework for New Zealand companies seeking to raise capital, and I hope to see the initiative increase capital flows from Australia.
Increasing investor confidence is another key priority for me, and we are working hard to ensure the successful implementation of the Financial Advisers Act and the Financial Service Providers Act.
They are a big step toward ensuring greater transparency for consumers and investors, and greater accountability for those who provide financial advice.
This conference will dedicate the whole of tomorrow to considering these reforms. It's encouraging to see the influence that the two Acts are already having on the way we think about the role of advisers and the needs of investors.
The Acts will come into force towards the end of next year.
I know that everyone is anxious to see immediate progress with implementation to get certainty about how to comply with the new regime. Implementation relies on the successful completion of a number of related projects.
I'm sure my officials will provide more details on this work at tomorrow's session, but I would like to outline the core implementation projects:
• In March, I appointed Annabel Cotton as the Commissioner of Financial Advisers, paving the way for the selection of a Code Committee.
• The Code Committee has been appointed to draft a Code of Professional Conduct for authorised financial advisers. It will set minimum competency standards. The committee hopes to have a draft code early next year.
• The Companies Office is building the register for financial service providers, which is sure to meet their usual award winning standards for service and online performance.
• The Ministry of Consumer Affairs is developing the dispute resolution framework for financial service providers. It is considering submissions received on its recent discussion documents.
• The Securities Commission has an important new role under the Financial Advisers Act. The commission is preparing the processes for the approval and supervision of financial advisers, and it won't be long until applications open.
• The Ministry of Economic Development is considering submissions on financial adviser disclosure. Regulations will need to be in place by early next year.
In response to discussions with financial sector participants, I have decided to make some limited changes to the Financial Advisers Act and Financial Service Providers Act where I think this will assist with implementation.
I think the proposed amendments will improve the practical operation intended by the policy. We need to act quickly so as not to affect implementation timeframes, so you can expect to hear more about these changes shortly.
The recent improvements we have made to financial sector regulation have given us a good foundation for a more comprehensive review of New Zealand's most important piece of securities legislation - the Securities Act 1978.
I believe this Act has served us well for the past 30 years, but it has not kept pace with market developments. I have instructed my officials to focus on four key areas:
1. The scope and objectives of securities law: we need to clearly state what it is we're trying to achieve with our securities law and then make sure the law is effective.
2. Investor information: we need to make sure investors receive adequate, timely, but above all, relevant information about their investments. We also need to ensure businesses do not produce hundreds of pages of information that go straight into the bin. More disclosure is not the same as better disclosure if no one reads or understands it.
3. Managed funds: New Zealand has at least six different ways of offering managed funds, and there are different rules for each. We need to make sure there are clear, consistent requirements for these important products.
4. Institutional arrangements: We need to make sure our regulatory institutions are appropriate for our needs. My officials are looking at the makeup of the assorted regulatory bodies in New Zealand and the powers of those bodies.
My officials have already spoken to many members of the business community about their views on the Securities Act. They tell me they have received excellent feedback and suggestions for reform.
I am particularly excited by some of the suggestions.
For example, several people suggested far greater tailoring of investment statements. These were introduced 10 years ago and were designed to give the "prudent but non-expert" investor the information they needed to make investments.
But these statements are out of control. I have been advised some are 40 pages long and so generic that they are meaningless - even if you can get people to read them.
But, by tailoring these requirements far more, I hope we can bring home to investors just what it is they are investing in.
I'm also particularly interested in the question someone asked: what would disclosure documents look like if a graphic designer produced them instead of lawyers? Believe it or not, that question was posed by a lawyer!
As a result, we're exploring ideas, first implemented in the Netherlands, of "wealth warnings" -- where the first page of a disclosure document contains simple-to-understand "traffic lights" which give investors an instant overview of matters such as risk, return, and fees.
These are just some ideas that have been presented. We are still working out the exact details, but I think they will provide an excellent basis for continuing the review.
I intend to release a detailed discussion document canvassing all these issues by the end of this year -- though I do promise to give you plenty of time to get your views in. I hope to have the new legislation in place by 2011.
I'm excited by the potential of this project. I think we can make a real different to business in New Zealand.
On one last note, I see that the Australian Securities and Investments Commission (ASIC) is to take over responsibility for the supervision and enforcement of real-time trading on Australia's domestic licensed financial markets from the Australian Securities Exchange (ASX) and the independent Disciplinary Tribunal.
I'm waiting for the Capital Market Development Taskforce to respond to the NZX report issued on Monday on the allocation of certain regulatory functions across New Zealand.
There are some very interesting ideas there, and I'm looking closely at them, particularly in light of the Government's inclination towards further harmonisation with Australia.
I would like to conclude by thanking you for the contribution you make to the development of our financial sector regulation, directly through your submissions and through your expertise and advice.
I hope to see some good ideas coming out of this year's Securities Law Update. It's a great opportunity for experts to get together to discuss solutions to the changing issues facing our financial markets.
As I have said, my main focus is to develop regulatory frameworks that improve investor confidence and help companies seeking to raise capital.
I'm pleased with the progress we have made and I look forward to making continuing improvements in the face of new challenges from the financial sector.