Speech to Australasian Compliance Institute Annual Conference
CommerceThank you for inviting me to speak today at your 14th Annual Conference.
It's always a pleasure to visit Australia. I'm lucky enough to visit probably six times a year, and when I do I always gain valuable insights which inform the work I have under way in New Zealand as both Minister of Commerce and Minister of Justice.
I last visited last month and met with some Ministers in the new Australian government, as well as a number of Australian businesses and regulators.
The New Zealand Government attaches a great deal of importance to fostering the trans-Tasman relationship as both countries work towards achieving a truly single economic market.
But I'm here today to talk about regulation and the part New Zealand's Super Regulator will play in that, so let me begin by saying that issues around corporate governance are crucial to financial regulation.
New Zealand's financial sector has been through some challenging times in recent years.
It's been tough for businesses and communities, but New Zealand has not been alone in feeling the impact of the world-wide financial crisis. Australia has felt many of the same challenges, albeit to a lesser extent.
There is no doubt that the global crisis has shown us what can go wrong with financial markets, and I'm positive we can learn from this.
My overriding focus in the Commerce portfolio has been to restore mum and dad investor confidence in New Zealand's capital markets after the global financial crisis and the collapse of finance companies.
As many of you know, New Zealand has traditionally had a number of second-tier financial institutions that take public deposits and lend on second or third mortgages, consumer credit, business finance, and property development.
This sector became over extended, particularly with related-party lending for property development. When property prices began to decline, the sector was in trouble.
Approximately 60 finance industry companies have collapsed or have arranged moratoria since 2006, which has put at risk around $8.5 billion of investors' money.
As a result, regulators have been investigating allegations of false and misleading statements and have laid charges against a number of directors of finance companies.
These events have severely damaged confidence in New Zealand's financial sector and there is now an urgent need for change across the sector.
My challenge is to give the public the confidence to invest while developing the capital markets to allow businesses to grow.
Directors of companies issuing securities, financial institutions, and others involved in supporting capital markets, such as auditors, all play a crucial role in ensuring effective governance.
Finance companies are now being regulated differently than in the past. The Reserve Bank of New Zealand has been given the responsibility for prudential regulation of finance companies, building societies and credit unions.
Finance companies still have a valuable role to play in New Zealand's economy, providing much of the funding for consumer credit, small and medium enterprises, and development projects.
These are areas of vital importance which registered banks are often unwilling or unsuited to service.
More broadly, if we want to develop the kind of vibrant capital markets that are required to lift New Zealand's economic performance, it's essential that the financial sector is subject to clear rules which investors can be confident will be enforced actively and consistently.
Investors need to have confidence in key financial market participants like auditors, trustees, and financial advisers.
Ultimately, though, the Government and its agencies cannot make investment decisions for its citizens, nor can it remove the risk from investment decisions.
It can only level the playing field a little by ensuring investors are supported with relevant and accessible information, and ensure that market participants adhere to the rules.
The fallout from the collapsed finance companies has clearly highlighted the need for a more integrated approach to regulating the financial sector, and enabling a more active enforcement role for regulatory agencies.
Achieving both of those objectives, however, has been impeded by too many regulators being responsible for different functions. Consolidating these activities became fundamental to ensuring the success of the new financial regime.
The establishment of the new ‘super-regulator', the Financial Markets Authority, will be critical in creating the right regulatory environment and rebuilding investor confidence in the financial markets.
This move is at the centre of the Government's drive to restore the confidence of mum and dad investors.
It was very clear that we needed to make changes as soon as possible, which was why the legislation establishing the Financial Markets Authority, or FMA, has been fast-tracked ahead of work we are doing on the wider review of New Zealand's securities laws.
Fast-tracking allows the FMA to be up and running in time to help implement subsequent changes to securities law once the full review is completed.
It might not surprise you to hear that we are currently implementing a twin peaks model similar to the Australian ASIC/APRA design. It's a good design which I believe will work well for New Zealand, with a tweak here and there.
In our design, our Reserve Bank will continue to be the prudential regulator while the FMA will be a separate single-market conduct regulator.
The FMA will consolidate functions fragmented across the Securities Commission, the Ministry of Economic Development, and NZX - our share market operator.
The FMA will have an enhanced role in overseeing registered securities exchanges, and will take on responsibility for the regulation of financial advisers, financial service providers, trustees, and auditors.
It will also have sole responsibility for enforcing securities, financial reporting, and company laws as they apply to financial services and securities markets.
As with all regulatory change, there are a number of challenges to overcome in establishing the FMA.
First, we want to get it right. To help us achieve this, it's our intention to move to a new financial regulation regime which is very much principle-based, as I understand the Australian regime currently is.
Currently it could be argued that New Zealand has a mixed regime with prescribed content for prospectus and investment statements supplemented by more general principles.
A principles-based approach will provide a more flexible framework of regulation which is capable of adapting to changes in the financial system which can, as we have seen, evolve fairly rapidly.
The FMA's main objective is to promote fair, efficient, and transparent markets.
Including fairness in its objective gives it scope to better consider interests of investors.
In order for the FMA to achieve its objective of promoting fair, efficient and transparent markets, it is very important that it has both the powers it needs and that it is encouraged to actively use them. This will maintain confidence in our public securities markets.
It will also bring the regulatory regime closer to the Australian model. The general obligations of regulated exchanges are modeled on the Australian legislation, and the Government's ability to make ‘market integrity regulations' corresponds with similar changes in the Australian regime.
The FMA will be responsible for approving exchange conduct rules, and there will be a new independent statutory body - the Securities Market Ruling Panel - to adjudicate on matters relating to the registered exchange. The panel will take over the role from the Disciplinary Tribunal within NZX.
As I speak, the FMA Establishment Board, which consists of recognised leaders in the financial markets industry, is well into its work of setting the FMA's strategic direction, and developing a statement of intent, organisational structure, and a work plan.
Just this week the board appointed a chief executive-designate to lead the FMA.
And he's someone you may well be familiar with, as he's currently the Senior Executive Leader, Corporations, for ASIC - Sean Hughes.
I had a chat with him the other day and believe that his background in enforcement, litigation and management, combined with his knowledge and understanding of financial markets makes him the ideal candidate for this job.
The process for recruiting a chair is under way, with applications closing later this month.
The FMA will be operational by early next year as an independent crown entity.
Its board is likely to have between five and nine part-time non-executive members with a full-time non-executive chair. Up to five associate members will also be able to be appointed. This is different from the structure of the ASIC board, but it is similar to regulators in a number of other countries, and I think it suits our markets.
The FMA will have the Securities Commission's current powers to enforce securities law but, as I have said, it will be backed by a principles-based approach to regulation.
Similar to ASIC's section 50 power, I have proposed that the FMA also be able to seek civil remedies against a financial market participant where it considers this to be in the public interest. It is intended to partly address public frustration at the Securities Commission's limited statutory ability to effectively enforce and supervise New Zealand's financial markets.
It will also take account of the fact that individual investors often lack the incentives or the resources to bring civil cases due to the costs and risks involved in litigation.
There is a concern that this new power will result in risk-averse behaviour by financial market participants, and will impair the incentives on businesses to innovate and invest. It's a fair point, but it's important to note that the duties of financial market participants do not change. It simply provides for a more effective enforcement of those existing duties. I see that as a good thing.
This will be a significant new power for New Zealand's financial sector regulator, although I should note that when I visited Australia last month and discussed this issue, among others, with Australian securities lawyers, a number of them suggested this power was a useful tool for the regulator but suggested - in true Aussie style - that there was scope for New Zealand to be even bolder!
Another power the FMA will have that the Securities Commission does not is the power to enter and search premises to obtain evidence.
The FMA will also have more powers to demand that warnings about financial products and providers be included in offer documents and published by those involved.
Another key factor in encouraging confidence in New Zealand's financial markets is ensuring that investors have confidence in financial advisers. To this end, new legislation is being implemented to regulate investment planners and other providers of financial advice.
Under this regime, the FMA will be charged with licensing and supervising advisers and with enforcement of new competence and conduct requirements.
This will provide the steps needed to ensure people are fully informed about their investment choices, and investors and investment product providers will be able to have confidence in the standard of financial advice they receive.
Furthermore, because audit failure also played a part in finance company collapses, the FMA will have another new role - that of auditor oversight.
Another issue I'm very interested in is financial literacy, something I don't believe can be overestimated.
Getting investors to feel more confident about putting their savings into the capital markets comes by way of giving them the basics of investment and providing advice they can trust in order to make informed choices.
Currently, the Retirement Commission is the main agency responsible for financial literacy work in New Zealand, and they have done a remarkable job.
We are now considering how to better co-ordinate our financial education efforts.
We have noticed with interest that ASIC took over responsibility from the Finance Literacy Foundation.
Among other initiatives to aid the comparability of different offers of securities, the establishment of a Register of Securities will provide better public access to relevant disclosures and information relating to offers of securities.
This register will be a centralised public website for disclosure documents where investors and financial advisers can access information about securities offers and disclosures published by issuers.
Having information that is readily accessible and easily comparable is essential if consumers are to be able to assess financial products.
The FMA will also be responsible for the substantive examination of prospectuses.
This will be based on the ‘notice and pause' system from the Australian model for prospectus review and registration.
As with the Australian regime, no allotment may be made in the five-day period immediately after registration, giving the FMA time to review documents. It will need to prioritise and assess which types of documents need to be reviewed in detail.
A key difference between the Australian and New Zealand regimes is that ASIC is also responsible for company registrations, whereas in New Zealand, the Registrar of Companies will continue to do this as well as supervising corporate governance obligations for non-financial service providers.
I also note that ASIC now has an enforcement role in relation to consumer credit contracts. We are looking at similar issues.
To conclude, as I said earlier, if New Zealand wants to develop the vibrant capital markets that will lift our economic performance then the financial sector must be subject to clear rules. And those rules must be enforced.
Investors have the right to make choices based on true, accurate, and decipherable information. As well, issuers have the right to raise money from investors in a process that does not burden them with excessive costs and compliance.
The New Zealand Government has chosen a comprehensive reform package to ensure those goals are met so we can strengthen investor confidence and participation in out financial markets.
I'm more than confident that we can tailor a regulatory regime that will fit well with New Zealand's financial environment. And, in the interests of continuing cordial trans-Tasman relations, I'm more than happy to acknowledge the guidance we have taken from Australian legislation and regulators.
Thank you for the opportunity to speak to you and I wish you well for the remainder of the conference.