Govt responds to capital market recommendations

  • Simon Power
Commerce

Commerce Minister Simon Power today released the Government's action plan for responding to the Capital Market Development Taskforce report.

In December, the taskforce made 60 recommendations as part of a blueprint for the development of capital markets.

Mr Power said the Government shared the taskforce's view that capital markets are key to improving the financial wellbeing of all New Zealanders and a vital source of finance for business.

"We need to rebuild mum and dad investor trust in capital markets which has been severely dented by the global recession and finance company collapses.

"We want everyday investors to feel more confident about putting their savings into capital markets, through understanding the basics of investment, getting advice they can trust, and making informed choices.

"We need to build opportunities for people to invest and to invest safely.

"These changes will achieve that and build on changes that the Government already has in train to fix the financial system, such as legislation on trustees, financial advisors, moratoria regulation, and auditors.

"The taskforce identified flaws in our markets and where there are opportunities for improvement, and we need to act quickly to fix them."

Some of the recommendations the Government is committed to implementing are:

  • Introducing plain English into investment statements and prospectuses, with warnings on risky or complex products.
  • A more co-ordinated approach to the Government's role in improving the financial literacy of New Zealanders.
  • Ensuring the duties of fund managers and supervisors are clear and enforced.
  • Considering consolidating parts of the Companies Office, Securities Commission, and the NZX Disciplinary Tribunal into a new market conduct regulator.
  • Making it easier and cheaper for companies to raise capital privately by clarifying and broadening the exemptions to the Securities Act and Takeovers Act.
  • Improving risk management in the economy by supporting the development of derivatives markets in commodities and energy.

"We want capital markets that are fair and efficient.

"It's vital we develop our capital markets to allow for business growth while ensuring that investors get proper levels of protection.

"For companies, capital markets need to be more accessible and more effective at providing funding at least cost, and tailored to their growth aspirations. This requires the Government to better support the development of our capital markets, and to reduce compliance costs as far as possible.

"As well as steps to improve capital markets, the Government has started work on a business case to develop the taskforce recommendation of establishing an Asia-Pacific financial services hub. Further details are expected to be announced in May.

"This could be of great benefit to New Zealand, creating jobs and exports. We have asked officials to determine what steps we would need to take to make that a reality.

"During this parliamentary term I expect to make substantial progress on what is a coordinated and wide-ranging response to capital markets, because they are crucial to economic growth and the wellbeing of New Zealanders."

The action plan can be viewed at www.med.govt.nz/cmdtaskforce.

Questions and Answers:

What are capital markets?

Capital markets are the markets in which companies and governments raise capital, and where securities that represent claims to capital - such as shares and bonds - are traded.

Capital markets complement other sectors of New Zealand's financial system, such as its banks. For companies, capital markets expand the range of funding sources - including public equity markets, private equity, and the issuance of debt securities such as bonds. For savers, they provide alternative investment opportunities and risk-adjusted returns.

Capital markets solve a number of problems that people face when they either raise capital to fund productive activities or search for somewhere to invest their savings. For the investor, these problems include deciding: which projects are most worthy of funding; how much to pay for investments; whether to get "locked in" to investments for long periods; how much of their savings to put into particular risky investments, and whether the managers of the company might use the investment unwisely or to benefit themselves at the expense of the investor.

In the absence of capital markets to balance the demand and supply of investment products, these problems can discourage savings and investment.

What was the Capital Market Development Taskforce?

The taskforce was established in July 2008 to develop and launch a blueprint for improving New Zealand's capital markets. It released its final report on 16 December 2009. The taskforce was chaired by investment banker Rob Cameron of Cameron Partners, and had 14 other members from the private and public sectors. Further information about the taskforce and copies of its reports are available from http://www.med.govt.nz/cmdtaskforce.

Will the Government be implementing the taskforce's recommendation to partially list state-owned enterprises?

Government policy is not to sell any state-owned company over this term of Parliament. Partial stock market listing of local government-owned companies should be a matter for local government to decide.

How will the Government respond to the taskforce's recommendation to review regulatory agencies?

The government is considering the regulatory landscape across the financial sector and securities markets as part of the current review of the Securities Act 1978. This will look at the role and structure of the regulators, including the Securities Commission, Companies Office, and the regulatory functions of the NZX. Discussion documents on potential changes will be released in April 2010, and changes implemented by October 2011.

What will the Government do to restore confidence in the financial sector?

Over the past year, the Government has undertaken a range of actions to help restore investor confidence.  Much has already changed since the finance company collapses, and there is significant work ahead to improve regulation in the financial sector:

  • The Reserve Bank Amendment Act 2008 is currently being implemented, and allows the Reserve Bank to impose minimum prudential standards, such as capital adequacy requirements and a credit rating from an approved credit rating agency, on finance companies and other non-bank deposit takers.
  • Parliament is considering the Securities Trustees and Statutory Supervisors Bill.  When passed, this will establish a licensing regime for the trustees that supervise debt issuers and collective investment schemes.
  • The Ministry of Economic Development is currently reviewing the key piece of legislation governing offers to the public, the Securities Act 1978. Some of the main aims of this review are to provide better information to investors, improve the governance of managed funds, and improve monitoring and enforcement by regulators.

How much of a difference will implementing these recommendations make?

Efficient and effective capital markets are critical for economic growth. Implementing the Taskforce's recommendations will mean that companies will have cheaper and easier access to the capital they need to grow. Investors will be better informed and protected, and will be able to participate more confidently in New Zealand's capital markets.

What is the proposal for New Zealand to become an Asia-Pacific financial hub?

The taskforce recommended in its final report that New Zealand pursue an opportunity to establish itself as an Asia-Pacific investment funds domicile. A domicile is the legal "home" of a managed fund, such as a unit trust or superannuation scheme. The domicile also tends to be a centre for fund accounting and administration.

Why would managed funds want to domicile in New Zealand?

The majority of international funds in the Asia-Pacific region are domiciled in Luxembourg, Dublin, or the Cayman Islands. The Asia-Pacific region is unique among major economic blocks in not housing a mature offshore funds domicile. The need for a regional domicile has been limited until now as the industry has only hit ‘critical mass' in most markets very recently.

The taskforce's preliminary analysis identified that New Zealand has the potential fundamental characteristics for a fund domicile in respect of:

  • A transparent, stable, neutral jurisdiction
  • A high quality regulatory environment
  • Standard international source basis taxation
  • A unique time-zone advantage

What are the anticipated benefits of the Asia-Pacific fund domicile?

Preliminary analysis found that capturing a small part of this market could generate significant high-value exports and jobs. The domicile activities would also strengthen the New Zealand funds management industry and capital markets, raise New Zealand's profile as a successful niche player in financial services, and broaden the skill base of the associated professional services. This has been the experience of the funds domiciles in Dublin and Luxembourg.

How will the Government be responding to the recommendation that New Zealand become an Asia-Pacific funds domicile?

The Government is keen to investigate what steps would be required to realise this opportunity. Officials from DPMC and MED are working with the private sector participants from the Taskforce to prepare an implementation plan by 31 May 2010. This will enable Cabinet to decide if it should proceed to the implementation and the associated financial and other commitments this entails.

The preliminary analysis of the taskforce suggested that capturing this opportunity would require changes to tax and regulation, as well as marketing. It is important to note that the Taskforce did not propose any preferential tax treatment for these firms. Tax changes would aim to treat managed funds the same as other sectors of the economy: only taxing income earned in New Zealand or by New Zealand residents.