Rebuilding Confidence

  • Simon Power

My thanks to the board of INFINZ for the invitation to speak tonight.

I'm pleased to be part of an evening that celebrates excellence and achievement in an industry that is hopefully starting to come out of some of the most challenging times for many years.

Ladies and gentlemen, the finance industry is facing some very big challenges.

And if we can't deal with these challenges in an effective and timely way, the only place people will feel comfortable putting their money will be under their mattresses. And that won't be good for them and even worse for our capital markets.

That's why there is urgent need for change across the sector. The challenge is to give the public the confidence to invest while developing the capital markets to allow businesses to grow.


When I spoke at these awards last year, I said the Government would implement a new trustee supervisory regime and that I was considering accelerating this work.

Last month the Government delivered, with the Securities Trustees and Statutory Supervisors Bill unanimously passing its first reading in Parliament and being sent to Select Committee.

This legislation is a vital plank in further protecting investors' interests and enhancing market confidence. I expect it to be in place early next year.

This Government keeps its promises - when we say we will make changes, we do.

But further change to the regulatory framework is needed. If the Government is to restore the confidence of mum and dad investors in our capital markets, it needs to make changes in oversight and enforcement - and it needs to make them soon. I cannot emphasise this enough.

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

The Capital Market Development Taskforce began its final report with a discussion about what investors need from capital markets.

The logic was simple:  if markets don't work for investors then they have absolutely no chance of working for businesses in the long-term, either. I agree with that.

One of my major focuses has been to ensure the Government is putting in place a regulatory framework that will give investors confidence in the markets.

And we have delivered in a number of areas, including:

  • A supervision regime for trustees.
  • Prudential oversight of non-bank deposit-takers.
  • New disclosure requirements for moratoria.
  • The financial adviser regime.
  • The requirement that financial service providers be registered and belong to a consumer dispute resolution scheme, and
  • Auditor oversight.

Though the Government has focused on lots of different sectors in the financial markets, it's important to recognise that we are also thinking about our financial markets as one system. Innovation needs to occur and be beneficial - the Government doesn't want to stop that.

We need to strike a balance.

On one hand the Government must ensure there is an environment that invites innovation, while on the other it needs to make sure it doesn't leave gaps for the unscrupulous to exploit the unwary - and there has been too much of that in recent years. But neither does it want to remove investors' responsibility for their decisions.

The trick is getting that balance right.

With return comes risk, and the Government cannot and will not legislate - or attempt to legislate - to remove risk. Governments aren't in the business of guaranteeing investments - nor does there exist any implied or vicarious guarantor relationship between investors and the Government.

Therefore, it's imperative that financial literacy is improved so mum and dad investors better understand the risks they're taking.

I'm working 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 have already started the process of integrating Government oversight of this important piece of work.

Though the Government has been moving rapidly to improve the regulatory system, more change is needed.

Today I want to focus on the next steps in our programme of reform.


Financial advisers

The services that financial advisers provide to investors are critical to well-functioning markets. If our markets are to work smoothly, investors and investment product providers need to have confidence in the standard of financial advice. 

The Government is working to achieve this through the implementation of the Financial Advisers Act. 

As you know, that Act imposes new conduct and competency requirements on financial advisers. A pre-implementation bill, which is currently being considered by the Commerce Select Committee, will make some necessary adjustments to the regime before it comes into force. 

I'm aware from many people who have contacted me directly, and from those who have taken the time to comment in the media, that there are particular concerns here. They include:

  • The treatment of advice to wholesale clients.
  • What I term "class advice" - that is, generic advice often issued by institutions rather than individuals, and
  • How the regime deals with group corporate structures.

I've been listening very carefully to these concerns and can reassure you the Government is actively considering solutions to the issues raised. I expect to be able to make further announcements on this in the near future. 

In the meantime, I'm looking forward to the Select Committee's recommendations and I'm confident the process will resolve these issues so we will have a regime that operates smoothly from day 1.

Some of you have also discussed with me the timing of the regime, which is due to come into force at the end of the year. I recognise that this regime requires advisers to go through a number of steps - including registration, dispute resolution scheme membership and, in some cases, authorisation. 

Advisers who become authorised will generally need to go through an assessment process, which may require them to undertake further training. 

Companies wishing to apply for qualifying financial entity status will also need to go through a process with the Securities Commission.

I'm tonight announcing the pathway to compliance for the full implementation of the regime.

The registration requirements will come into force on 1 December this year, when all applications for authorisation and qualifying financial entity status must be received. 

However, I have listened to the concerns of the industry about how important it is that there's enough time for both individuals and entities to go through the authorisation and education process. 

I accept that advisers need time to finish any required training and have applications for authorisation and qualifying financial entity status processed by the Securities Commission.

Therefore, I am announcing that the regime will come into force fully on 1 July next year. This timetable gives industry a further six months to ensure that all training and education requirements are completed. Industry has advised me that this will give sufficient time for those elements to be completed.

This regime is essential if we are to have a competent financial adviser sector in which investors can have confidence.

I note with interest media reports that the Investment Savings and Insurance Association has said it plans to voluntarily abolish commissions paid by financial institutions to advisers.

The Government will do its bit with legislation, but business also needs to follow through.


You will be aware that I recently asked officials to speed up advice on ways to improve the KiwiSaver regulatory regime.

It's become clear that the regulatory regime around KiwiSaver leaves much to be desired. That is unacceptable for a product that has well over 1 million New Zealanders investing nearly $5 billion in it.

I can announce tonight that the Government has agreed to speed up two sets of changes for retail KiwiSaver funds.

First, fund managers and trustees will have clear duties and obligations to investors.

The Government will move to a regime where the fund manager becomes the issuer, with primary responsibility for the disclosure documents under the Securities Act, and with a direct duty of care to investors.

Right now, fund managers have few direct duties to investors and it's difficult to hold them to account, despite the fact that they are responsible for the investments of the scheme. We will move to a situation where trustees involved in KiwiSaver will have a duty of care to investors as trustee, and be supervisors of the fund manager.

They will also be subject to the new trustee supervision regime that's before Parliament. The Government is doing this because it's clear to me that the multiple roles currently played by trustees divert them from the supervisory role expected of them.

I note that a senior manager at Trustees Executors was recently reported in the media noting the conflicts involved here and I agree that these need to be addressed. This regime will also ensure that the securities market regulator can monitor trustees under the new trustee supervision regime.

At this stage, the changes will not apply to "non-retail" KiwiSaver schemes - that is employer-based and other vocational-based schemes - or non-KiwiSaver superannuation schemes. 

However, the Government will consider bringing all other superannuation schemes within the trustee supervisory model as part of the wider review of securities law.

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

I 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 then they need to be able to rely on information about fund performance without wondering if the figures have somehow been doctored.

The Government intends to consult industry and then make regulations to specify precisely what information is to be disclosed and how it is to be calculated. And they need to know that regulators can hold both fund managers and trustees to account if there is wrongdoing.

There must be sufficient checks and balances to ensure that KiwiSaver providers act with integrity and honesty when investing on behalf of you and I.

But I remind you that KiwiSaver is not, and will not be, guaranteed by the Government. It's not compulsory, so investors need to take responsibility for their own investment decisions.

These changes I am outlining tonight are designed to plug gaps in regulation, which, quite frankly, should have been addressed when KiwiSaver was set up.


Market regulator

I now turn to an issue that has been the subject of much commentary and speculation in recent months - that of the securities market regulator.

Over the past year, it has become increasingly clear to me that one of the missing pieces in the regulatory landscape is a single regulator focused on proactively monitoring and enforcing securities law.

On too many occasions in finance company collapses we heard of investors' money falling to the floor through the cracks between regulators. This has damaged investor confidence.

Despite the best will in the world, co-ordination between regulators, and the differences in functions and powers between them, means co-ordination has not always been as effective as it could be.

To restore public confidence in our markets we need to do much, much better.

Starting from nothing 30 years ago, the Securities Commission has built up a team of skilled and dedicated staff and made an important contribution to our economic development, and I want to acknowledge that tonight.

But our regulatory system and financial markets have changed considerably since then and we need to recognise that.

Now is the time to redesign our regulators - drawing on the lessons from the financial crisis and finance company failures, to ensure that a new-look regulator has the right culture for what we expect of it today.

So, I'm announcing tonight that the Government has, in recent days, decided to create a new, consolidated regulator for our capital markets.

This will be a new body, built from scratch from its component parts, but with a new focus and a new mandate.

To do this, the new regulator will pick up the powers and functions of the Securities Commission. Those parts of the Companies Office at MED which deal with entities that are financial service providers, including those that investigate and enforce securities laws, will move to the new authority.

So will the functions of the Government Actuary who currently monitors and supervises superannuation and KiwiSaver schemes. Insurance supervision will also move from the Ministry of Economic Development to the new authority, before the Reserve Bank picks this up, as is the intent of legislation currently before Select Committee

Company registration functions will remain with the Companies Office, but they will no longer vet securities offer documents.

The NZX Disciplinary Tribunal will become a rulings panel serviced by the new authority. NZX will continue to be able to set rules, but only with the approval of the authority. Breaches of NZX rules will be investigated and enforced by NZX, but the authority will have the ability to undertake its own surveillance of compliance with the law.

The Government will also create a new regulation-making power to allow exchange rules important for market integrity to be made by regulation and enforced by the authority. This will be similar to the provisions which currently exist for making regulations around continuous disclosure.

I can also announce tonight that auditor oversight, which was intended to have been the responsibility of the reconstituted Accounting Standards Review Board, will now be the responsibility of the new securities market regulator.

The new regulator will be named the Financial Markets Authority - the FMA.

The legislation creating the FMA, and the other changes I am outlining tonight, will proceed in advance of the rest of the review of securities law. This will ensure the FMA is ready to implement the inevitable law changes that will flow from that review.

The consolidation of functions and powers into the new authority will ensure a focus on surveillance and enforcement, which will be key to improving confidence for mum and dad investors in the market. This change is too important to wait until the full review of securities law is completed.

All those entities required to be registered as financial service providers will come within the FMA's scope.

The FMA will have the sole responsibility for enforcing securities, financial reporting and company laws as they apply to financial services and securities markets. It will regulate and oversee trustees, auditors, directors of financial service providers, and financial advisers

What the Government expects of the FMA will be spelled out in legislation. This will include a clear focus on visible, proactive, and timely enforcement.

The consolidation also gives us the opportunity to ensure that the various powers of the current regulators work as they should.

To avoid the sort of problems we saw with products such as those of Blue Chip - which the Securities Commission was unable to regulate because they were structured to be outside the Securities Act provisions - the Government intends to ensure that regulations can be made to override statutory exemptions, allowing products to be brought into the authority's scope.

I know that some commentators have suggested new powers are required, including allowing for public enforcement of directors' duties. But my judgment is that with the changes the Government is proposing, the FMA will largely have the powers needed.

However, we will consult on this as part of the review of securities law and if further powers are required, we will ensure the FMA gets them.

I want to give you an assurance that I'm committed to ensuring that the FMA has the powers it needs and is encouraged to actively use them. Given the importance of these changes, and the need to minimise any period of uncertainty, the Government will be working to have the FMA up and running early next year.

I will be setting up an establishment board to provide advice on the design of the FMA, including its management structure, staffing and budget. It will have a new board and a dedicated CEO. I anticipate that existing staff of the agencies contributing functions to the FMA will be transferred to, or offered positions in the new organisation.

I can also say at this early stage that one of the options I'm considering is moving towards more full-time commissioners.

Closing remarks

Ladies and gentlemen, New Zealand's capital markets are the key to improving the financial wellbeing of all New Zealanders and a vital source of finance for our businesses to grow and create jobs.

It is clear to me that for our capital markets to thrive we must rebuild mum and dad investor trust in those markets.

Risk is not avoidable, and nor should it be.

Markets must be allowed to work and to innovate, but the regulatory framework should be designed to look out for investors in those markets, and I am committed to making the changes necessary for markets to work well for both investors and business.

There is more to come, including a discussion paper on our securities laws that is due to be released in the next few weeks. Watch this space.

If our country is to progress we must promote and showcase finance professionals whose integrity will help rebuild confidence in our markets - from the smallest investor to the biggest.

I believe these awards are a great initiative to recognise the high performers in our finance industry, and I congratulate the winners - ahead of time. I hope to be able to return next year to talk about the success of some of what I have outlined tonight.

Thank you again for the invitation to speak here on your awards evening.