Progress on rebuilding investor confidence

It's nice to be back in the presence of my old law firm, if only for the afternoon.

It's been nearly two years since I became Minister of Commerce, and from day 1 it was clear to me that a key issue for the new Government to tackle was the rather daunting challenge of trying to rebuild investor confidence in our financial markets.

And believe me, it has been a big challenge. But after nine years in Opposition I was ready for the odd challenge.

Since the global financial crisis and, closer to home, the collapse of 60-odd finance industry firms since 2006 - which put at risk around $8.5 billion of investors' money - investors have had every right to ask whether they should be putting their hard-earned savings into our financial markets.

Though commentators are generally welcoming the Government's work in addressing the shortcomings exposed by the finance company collapses, some are questioning whether it's too late.

Well, the action - or rather the lack of it - up till November 2008 is not really for me to comment on.

All I know is that this Government immediately grasped the major task of re-balancing the economy away from spending and consumption, to savings, investment, and growth through our tax switch agenda.

However, we accept that this is only a start, and giving people incentives to save and invest their money is pointless if the only place they feel confident about putting their savings is under their mattresses or, more commonly, into bricks and mortar.

That's why I made restoring investor confidence in financial markets my main focus as Minister of Commerce.

I knew if we could achieve that, then the flow-on effect would be that businesses would have access to more of the capital they need to grow, which would flow on into creating jobs, ultimately improving the financial wellbeing of all New Zealanders.  

The need for change across the sector was urgent. And we have responded.

Last year I said the Government was considering accelerating a new trustee supervisory regime - and less than a year later the legislation is about to be reported back to the House from the Commerce Select Committee. I expect this plank in further protecting investors' interests to be in place early next year.

But that was merely a taste of what we had to do. We knew that further regulatory change was needed to restore investor confidence.

Though we had focused on different sectors in the financial markets, we also needed to be thinking about our financial markets as one system. We had to ensure that innovation had to occur and it had to be beneficial. We had to find a balance.

On one hand, we knew we needed an environment that invited innovation, while on the other we knew we needed to make sure we didn't leave gaps for the unscrupulous to exploit the unwary. There has been way too much of that in recent years.

But neither did we want to remove investors' responsibility for their decisions. We had to get that balance right.

In late April, at the annual awards dinner for the Institute of Finance Professionals New Zealand (INFINZ), I laid out the moves the Government needed to make if we were to lift the confidence of mum and dad investors high enough to get the desired flow-on into our capital markets.

My first announcement concerned financial advisers.

They are a critical component in well-functioning financial markets, because if we are to get our markets working smoothly, investors and investment product providers have to have confidence in the standard of financial advice.

We're doing this through the implementation of the Financial Advisers Act, which imposes new conduct and competency requirements on advisers.

At INFINZ I said we were going to make changes to the recently introduced regime which, to put it frankly, needed to be made to make it work as intended.

Little more than a month later, the Commerce Select Committee reported back to the House with changes which provide greater certainty to both consumers and the financial sector. Just two weeks after that, Parliament unanimously passed the bill.

Since then I have approved the Code of Conduct for Authorised Financial Advisers, and I'm in the process of finalising the disclosure regulations as we head to December 1 deadline when all applications for authorisation and qualifying financial entity status must be received. 

This regime is essential if we are to have a competent financial adviser sector in which investors can have confidence. We are getting there and by 1 July next year I expect this regime to be working as it should.

The second announcement I made at INFINZ were changes to auditor oversight.

We had previously said practitioners who carried out statutory audits would be regulated as a specialised profession by the Institute of Chartered Accountants, and that a reconstituted Accounting Standards Review Board would oversee the institute's performance by monitoring and reporting on the adequacy and effectiveness of its auditor regulatory systems.

But because audit quality is a core element of financial market confidence, I came to the view that it would be inconsistent with my consolidation aims to have the oversight function being carried out by an agency other than the financial markets regulator.

Five months after announcing that change, the Auditor Regulation and External Reporting Bill is with the Commerce Select Committee with submissions being called for.

The third announcement I made at INFINZ was to speed up two sets of changes for retail KiwiSaver funds.

First, fund managers and trustees would have clear duties and obligations to investors, and we would move to a regime where the fund manager became the issuer, with primary responsibility for the disclosure documents under the Securities Act, and with a direct duty of care to investors. They would also be subject to the new trustee supervision regime.

Secondly, each fund would provide ongoing information to the public and regulators regarding their performance, fees, and the allocation of their assets, just as default funds did.

I could see no good reason why non-default retail funds should be subject to different reporting requirements than default funds. Investors need to be able to rely on the information they are given - and to do this, that information needs to be easily compared across funds.

If investors are to have confidence in KiwiSaver they need to be able to rely on information about fund performance without wondering if the figures have been doctored somehow.

Five months later, legislation that improves the governance and management of retail KiwiSaver schemes, ensuring that fund managers act in the best interests of investors is also with the Commerce Select Committee.

Another promise delivered in quick time.

But the biggest announcement I made that night was the formation of a new securities market regulator. Because this was the biggest and the most urgent of all the work we are undertaking.

It had been clear to me for some time that one of the missing pieces in the regulatory landscape was a single regulator focused on proactively monitoring and enforcing securities law.

On too many occasions in those scores of finance company collapses we heard of investors' money falling to the floor while regulators stood and looked at each other.

To restore public confidence in our markets we needed to do much, much better than that. We needed to re-design our regulators to give us one with a new culture and with the grunt to deal with the complexities of today's markets. And that's what we've done.

Just five months after that announcement, the legislation setting up the Financial Markets Authority passed its first reading in Parliament and was sent to select committee. It's due to be reported back to the House early next year, and it's my intention to have the new body up and running in the first quarter of next year.

Another big promise delivered in excellent time.

And let me assure you that, all going well in its passage through the House, this bill will well and truly deliver a regulator to rule them all.

It consolidates the regulatory functions scattered across the Securities Commission, the Government Actuary, the Companies Office, and the NZX. It will promote fair, efficient, and transparent financial markets.

It will be proactive, identifying new market developments early, and taking strong and decisive action to oversee and enforce appropriately. It will have responsibility for the regulation of issuers throughout the lifespan of the securities they are offering. 

It will be able to regulate the behaviour of issuers once securities have been allotted, rather than just focusing primarily on the issuer's point of sale disclosure, as is currently the case. It will have responsibility for the regulation of all key financial market participants, including registered exchanges, financial advisers, trustees, and auditors.

Perhaps above all, it will also have significant new powers, including the ability to enforce duties of issuers, directors, auditors, trustees and others involved in financial markets, when it's in the public interest to do so.

I can report that just five-and-a-half months after my announcement, the FMA Establishment Board is well advanced in its work on the operational settings, the regulator's strategic direction, statement of intent, organisational structure, and work plan.

The process of choosing a chief executive is also well advanced, and you may have seen that we recently advertised for the crucial position of Chair.

You can see from all this that we have achieved a lot in a very short time - most of it within months of signalling it. I'm proud of that - but there is more to come.

Much of the work I have outlined came out of the recommendations by the Capital Market Development Taskforce, which reported back under a year ago.

Many other of the taskforce's 60 recommendations are being progressed through the ongoing review of securities laws, and that's where we will be focused next.

There are many other issues we will be looking at, including:

• Which financial products are to be regulated and how.
• Tailoring of disclosure requirements to better suit a retail investor audience.
• Improving governance of managed funds, which are a key product for retail investors.
• Possible additional powers for the Financial Markets Authority.

As you will know we released a discussion document in late June on these issues.

I am informed by officials that nearly 100 submissions were received on the discussion document - including one from Kensington Swan which weighed in at a healthy 52 pages. Officials are summarising the submissions and are intending to report to me by the end of the year on this crucial piece of the regulatory jigsaw.

I am also intending to work with agencies to make sure the Government's financial literacy efforts are better co-ordinated and targeted to where they will have the best effect. This is one area where we can do much better, and as the Minister leading this approach I hope to make significant progress in this area over the next year or so.

Ladies and gentlemen, if we are to develop the vibrant capital markets needed to lift New Zealand's economic performance, help our businesses grow and create jobs, and lift the financial wellbeing of every New Zealander, it's essential we rebuild confidence in those markets.

Investment will always carry risk, and the Government cannot and will not try and change that.

But what the Government can do - and is doing, as I believe I have demonstrated - is to build the right regulatory environment which balances allowing markets to work and innovate, while providing appropriate supervision and enforcement.

We are well on the way.