I want to talk about two issues: My vision for New Zealand’s capital markets, and the role of government in those markets.  I will do this with the global financial crisis as a backdrop.

What successful capital markets will look like

Discussions around capital-raising, regulatory frameworks, and the government’s role in the markets sit at the heart of debate on ways out of the current global financial crisis.

Regulators and the market are reassessing how we can best achieve successful capital markets able to withstand future shocks.

Successful markets are efficient and liquid. Successful markets work to ensure all relevant financial risks can be identified, priced, and allocated to those best able to manage them.  They are about providing people with access to an appropriate level of risk in order to be appropriately rewarded.

What I want to see from New Zealand’s capital markets is an increased range of products available for companies and consumers to meet their capital markets needs.  This includes derivative products to allow companies better opportunity to hedge risk.  Issuers and investors should have access to the full set of products that are relevant to the New Zealand environment.

I also want to see more companies keeping their headquarters in New Zealand. They should be attracted and retained because their capital market needs can be effectively met here, even when they grow to be large players in the Asia-Pacific region.

I would also like to see overseas companies whose activity is linked to strengths in the New Zealand economy moving their headquarters here.  This will provide spin-off benefits to supplier companies and professional services firms. 

I want to see company owners in New Zealand who are more informed of the capital market options available, and who are confident in using those options.  I also want to see confident investors with a higher level of financial literacy, who know how to interpret risk and return, and can “vote with their feet”. I want to see more households holding capital market assets. 

I want to see markets that can help consumers understand risk by identifying and pricing it fairly. Investors and consumers need to be appropriately informed about investments – and illegal and unethical behaviour should not be tolerated. Fair markets should reward ethical behaviour.

Finally, successful markets are markets that are resilient in the face of shocks and unexpected events.

It's clear that the global financial crisis has demonstrated that the New Zealand market has some of the flexibility and resilience needed in a capital market. The crisis has made it clear that the levels of indebtedness that were possible in recent years are, in general, no longer sustainable.  This applies to banks and other financial institutions, as well as to other businesses.

As a result, debt finance is likely to be available on different terms than it was in the past.  It will, it seems, become harder and more expensive to raise capital directly from offshore.

Much of this is a rational response to the poor economic outlook and, as a result, companies have had to ensure their balance sheets are in good shape and are able to withstand shocks.  They have had to look at new ways to access capital.  Debt and equity capital markets play an important role in that.  And we have seen a number of companies successfully tap into the retail bond market in recent months.

I'm sure that you, as NZX shareholders and representatives of companies trading on the NZX, are aware that capital-raising through the local debt market has been exceeding expectations this year.

In fact, more than $1.2 billion in debt was raised on the NZDX market in the first three months of this year. That's up 87 per cent on last year.  We should use this shift towards capital raising via the debt market as an opportunity to develop and deepen our capital markets.

We should take note of how well our capital markets have come through this crisis.  It's time to strengthen our markets, and re-work the framework of regulation of our markets to bring success and growth to the sector.

The government’s role (regulatory priorities and goals)

The government has a key role to play in the operation of our markets.

Unregulated securities markets can fail to produce efficient outcomes because of a lack of balance in the information held by issuers and investors, unfair conduct and poor governance, and the possibility of systemic dangers and failures. These are issues which cannot be adequately addressed in the absence of regulation.

However, any regime needs to strike a balance between the risk of over-regulation, which may impose unnecessary costs, and under-regulation, which may fail to achieve its objectives.

The financial crisis has brought us an opportunity to reassess the shape of our securities legislation.  The crisis has influenced the way we must think about long-term regulatory settings, and has highlighted the importance of getting the regulatory framework right. 

My officials are working on key areas in relation to this. The government is responding to the need to help companies raise capital, the need to improve investor confidence, and the need for a fundamental review of New Zealand’s securities legislation.

Capital-raising

The global financial crisis and the global economic downturn have shown a pressing need to respond to the needs of companies in these times.

You'll be aware of the general downturn in liquidity on the NZX. Activity in the first quarter of this year was down on recent years, and registered a 29 per cent fall in total value traded. 

Capital-raising has become increasingly difficult, even though the situation for our retail debt market is strong, and despite the welcome news that in the first quarter NZX has lifted net profit 40 per cent from a year earlier – and I must congratulate you on that.  Though the outlook for our markets is brighter than it was two or three months ago, the government needs to continue to work quickly to address the needs of business.

In the first quarter of this year we have responded to key recommendations of the Capital Market Development Taskforce which, as many of you will know, is a group made up of industry representatives heavily involved in the financial sector.

The taskforce released an interim report in November last year on the measures to combat the financial crisis, and its final report is due to be released in September this year.  I have encouraged the taskforce to be adventurous in its recommendations.

NZX's recent changes to its listing rules to ease capital-raising requirements for listed issuers were in response to those recommendations. In my role as Minister of Commerce I decided to allow those changes, and I will watch with interest their effect on the market.

I also recently released a discussion document on proposed changes to the Securities Regulations.  These proposals aim to reduce compliance costs and improve flexibility for issuers, and enhance disclosure to investors.  Submissions are due to close next week.

I have also introduced the Securities Disclosure and Financial Advisers Amendment Bill to address some of the recommendations from the taskforce’s interim report. 

This bill provides for a “simplified disclosure prospectus”, which may be used by listed issuers who are already subject to continuous disclosure requirements, but who would otherwise be required to produce a separate disclosure document for each offering.  The regime should promote effective disclosure to investors in a streamlined form.

Further, the recent Jobs Summit also identified stimulating the development of the debt market as a near-term, high-priority initiative.  You will no doubt have heard of the idea of a ‘supercharged debt market.’ One part of the Summit's proposal seeks to reduce the barriers to entering that market experienced by mid-range companies. The detail is currently being worked out by my officials, in partnership with a private sector group led by the NZX.  It is being treated with high priority, and I look forward to updating you on it soon.

Investor Confidence

The recent events of the financial crisis and the collapse of finance companies have also shown a pressing need for the government to address investor confidence.

The government has to balance the message that we are sending to the markets. As I have outlined, we are working on freeing up the flow of capital at one end of the market while tightening regulation around financial companies and advisers to bring some order to the other end of the market.  The unifying theme is investor confidence. 

Finance company collapses have highlighted how, more than ever, investors and consumers need to be appropriately informed about investments, and how we need to have a sound net to catch illegal and unethical behaviour. 

The financial advisers and financial service providers regimes, which are due to be implemented toward the end of next year, will contribute significantly to the goal of markets as fair places to conduct transactions. Through the financial advisers regime we will be increasing the transparency and accountability of those on the front line. The Financial Service Providers Act will also make the sector more transparent and improve investor confidence by the creation of a public register and a dispute resolution regime.

As well as this net to catch unethical behaviour, investors need to have information.

They need to be appropriately informed about their potential investments.  The average investor gets a lot of valuable information under the Continuous Disclosure regimes of the NZX listing rules and securities legislation.  But we must be aware that less sophisticated investors may not have the knowledge or tools to interpret this information appropriately.  This is where financial literacy becomes a key concern.  Companies and the government have a role to play in enhancing the financial literacy of investors. Studies show there is much room for improvement in financial literacy levels.

The next big step for government is a comprehensive review of the key piece of securities legislation – the Securities Act 1978.

This is a central piece of legislation more than 30 years old trying to regulate an area that has seen a lot of innovation. In addition, the lessons we are learning from the global financial crisis, along with the recent series of finance company collapses, highlight the need for a modernisation of this area of the law.

Alongside this review I have asked officials to fast-track work on a trustee supervisory model. This model will increase accountability and competence standards for trustees.  I’m not interested in making cosmetic changes here – substantive change is needed to address issues with the role of the trustee in our financial markets and to rebuild investor confidence.

The government will also focus on developing a regime flexible enough to meet the needs of a relatively small capital market like our own. 

It's a key concern of the government that any regulatory framework from this review does not stifle innovation.  Good rules allow market players the freedom to innovate within clear boundaries.  They should have incentives that motivate them to play and not be constantly seeking to invoke the referee.

Conclusion

Today I have outlined the vision I have for New Zealand’s capital markets.  

The government has responded rapidly to the volatile global financial environment. 

But there is more to be done, and the current context of the financial crisis affords us a great opportunity to review the role and scope of government in regulating these markets.

Of course, the success of the capital markets is not purely a government responsibility. That depends on the shape, ability, and drive of the commercial sector.  Though we can regulate for unlawful conduct and acknowledge high ethical standards, there is a large spectrum of conduct within those extremes that can produce very different results for the market. In this, the commercial sector has a role to play in promoting and exemplifying ethical conduct and good behaviour.

Tonight I will be speaking at the INFINZ awards where we will be celebrating some of finance’s high achievers, and recognising that there is much that is good to be said about the New Zealand financial sector.  Such personal high performance, combined with a cohesive and flexible regulatory structure, will help ensure our capital markets begin to flourish again.

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• 2006 ANZ-Retirement Commission Financial Knowledge Survey


• 2007 Reserve Bank poll on the understanding of financial information, carried out by UMR research.

There have been several others which analysts have drawn on:

• October 2007 Veda Advantage study of financial literacy amongst young adults.


• June 2007 Reserve Bank study into Financial Literacy and its role in promoting a sound financial system.


• September 2007 Reserve Bank study into NZ Household Attitudes towards Savings, Investment and Wealth.


• December 2007 Roorda Research study of the effectiveness of financial education in New Zealand, commissioned by the Retirement Commission.