Speech to Insurance and Savings Ombudsman Function

Since I took on the Commerce portfolio nearly two years ago, many mum and dad investors have told me they're disillusioned with our financial markets.

And I must say recent events with regard to finance companies have underlined the challenges New Zealand faces in this regard. 

So my aim, first and foremost, has been to restore the confidence of investors which has been shattered by the financial crisis and the collapse of finance companies.

To achieve that, the Government has taken a number of steps to address gaps in the regulatory framework of the financial system.

• We have set up prudential oversight of finance companies by the Reserve Bank.
• We have stipulated that moratoria documents must be clearer.
• We are working on a supervision regime for trustees, and
• We are improving auditor regulation.

We have also done a lot of work on another key strand in restoring investor confidence - that of consumer redress.

An essential part of the new financial regulatory system is a disputes resolution process that is low cost, efficient, impartial and robust. 

Market oversight is extremely important, and that's where you come in.

As an authorised provider of dispute resolution services to financial service providers and their customers, the ISO is well-placed to help ensure a high standard is set for insurance and investment advice.

This can only help to encourage public confidence in the financial services sector.

Healthy capital markets are the key to improving the financial wellbeing of all New Zealanders. Capital markets act as a vital source of finance for our businesses to grow and create jobs. They deliver efficiencies that lead to better outcomes for all participants. 

However, the Government also appreciates the need to ensure the finance sector is not over-regulated. We must strike a balance between levels of regulation and the costs of complying with that regulation.

My aim is to improve the competitiveness of the sector while increasing its attractiveness to investors so they can make wise choices about saving and investing for their retirement. I want people to have faith that the regulatory environment for the financial sector is robust.

As well as the steps we have taken to address gaps in the regulatory framework, we are working to improve financial literacy.

I'm working with agencies to better co-ordinate our financial education efforts to target them to where they will have the best effect. I'm sure you'll agree that the importance of financial literacy cannot be underestimated.

Educating people about how investments work and giving them advice they can trust will give them the confidence they need to invest again in our capital markets.  

The need for reliable advice helped give rise to two pieces of work that are crucial if we are to restore that confidence - the Financial Advisers Act and Financial Service Providers Act. These Acts will go a long way to addressing the problems highlighted by the financial crisis and the collapse of finance companies.

Many New Zealanders lost significant sums during the crisis because of poor advice. As you know, these Acts require all financial service providers - including financial advisers - to be on a public register.

And, from December 1, if they provide retail services they must belong to an approved dispute resolution scheme, such as that one operated by the ISO, which has been approved by the Minister of Consumer Affairs.

Access to low-cost dispute resolution services will ensure that investors who have complaints can seek redress. I can't stress how important this is.

The new legislation will also place additional obligations on financial advisers, who will be held to minimum standards of competence and conduct and will be supervised by the Securities Commission.

The regime also recognises the range of products and services in the market, imposing higher standards on advisers who provide comprehensive planning services or deal in complex products such as corporate bonds or shares.

These higher standards include a Code of Professional Conduct which will be overseen by a Disciplinary Committee chaired by the Securities Commission's Commissioner for Financial Advisers.

As you will know, I made a number of changes to both Acts earlier this year. Those changes made the regime more flexible and better suited to the realities of the market while providing a high level of consumer and investor protection.

To this end, the reduction of compliance costs for business went hand-in-hand with increased powers to the Securities Commission to ensure the regime is enforced effectively.

The final point I will make on this regime is that I'm developing a number of regulations that will enable full implementation.

I'm still considering the issues around these and expect Cabinet to make decisions next month.  But I would like to emphasise that the regime will be fully in force by 1 July next year, and I think it will make a real difference to confidence in the markets.

I'll now touch briefly on the Financial Markets Authority - the FMA - which will, without doubt, be the biggest single factor in ensuring confidence is returned to our capital markets.

As you will know, the FMA will be an independent Crown entity combining the regulatory and enforcement functions of the Securities Commission, the Companies Office, the Government Actuary, and NZX. 

Consolidation such as this will give us the opportunity to ensure that the various powers of the current regulators work as they should.

I announced the creation of the FMA earlier this year after it became clear that a single regulator focused on proactively monitoring and enforcing securities law was essential to the success of the new financial regime.

Too often over the past two years, confusion over jurisdictions meant regulatory failures weren't picked up until it was far too late.

I'm determined to make sure problems we saw with products such as Blue Chip - which the Securities Commission was unable to regulate because those products were structured to fall outside the Securities Act provisions - will not be repeated.

I intend to ensure that regulations will be able to be made to override statutory exemptions and allow products to be brought into the authority's scope.

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.

Its functions will include promoting the confident and informed participation of business, investors, and consumers in the financial markets by conducting inquiries, issuing warnings, reports, and guidelines, and providing or facilitating the provision of investment literacy. 

It will also promote awareness that all investment involves risks and that it is not the role of the FMA to remove these risks.

I believe that the significance of this initiative and the need to plug the enforcement gap more than justifies my decision to fast-track this work, even if it does mean new securities law will now probably not be enacted till early 2012.

The market was calling for some time for a new united regulator to be established as a matter of urgency, so that work was fast-tracked ahead of other work and I make no apology for that.

You can rest assured the FMA will bring a culture change to regulation, and that will be evident from the draft FMA bill, which is due to go before the House in a week or so. 

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

This and the securities law review represent a once-in-a-generation opportunity to improve our financial system, and I'm determined to take this opportunity to get it right.

Officials are evaluating close to 100 submissions - and counting - on the securities law discussion paper and should provide advice to me by the end of the year. The Government intends to introduce a new piece of legislation in the middle of next year and, as I said, enact it by early 2012.

In closing, I would like to say again that --the capital markets are the key to improving the financial wellbeing of all New Zealanders and is a vital source of finance to help grow our businesses and create jobs. And for those markets to thrive we must rebuild trust in those markets.

People must understand that investments carry risk - it is not avoidable and nor should it be - but understanding our markets and the choices they offer is vital to making informed decisions.

Markets must be allowed to work and to innovate, but the regulatory framework should be designed to look out for investors in those markets.

I'm committed to making the changes necessary for markets to work well for both investors and business.

I encourage you to play your role in rebuilding investor trust in our financial system.