Speech to Workplace Savings 'Savings on the Brink’ forum

It’s my pleasure to be here today.

I want to start by taking you back to the situation the Government found itself in when it first came into office in November 2008.

At that time we were all hearing stories of people who had, on the advice of financial advisers, diversified their life savings into a variety of finance companies.

And we all know how those stories ended.

When finance companies began to fall like dominos in 2006 and onwards, some $8.6 billion of investors’ money was put at risk.

Now, we can all point fingers, but as Associate Minister of Commerce I acknowledge that we, the law makers and the regulators, let many mum and dad investors in particular down.

We allowed finance companies to flourish in a lax regulatory environment.

We allowed this to happen at a time when an entire generation, which had been burnt by the 1987 share market crash, were looking for somewhere to put their money other than into banks or bricks and mortar.

The finance industry failures shattered people’s lives, their financial security, and their dreams for managing their retirement.

As a consequence, businesses were starved of the capital they needed to grow, create jobs, and contribute to the wider health of the economy.

Perhaps, then, it’s no surprise that rebuilding mum and dad investor confidence in our financial markets has been the number one priority in the Commerce portfolio over the past three years.
As a starting point, we needed to recognise that we had failed as both a regulator, and as an educator of financial products and services.

We need to encourage people to save more for their retirement, and a key part of that is making it safe for them to return to our capital markets.

I believe that will be helped by the Government’s proposal to allow partial floats of four state-owned enterprises, putting New Zealand investors at the front of the queue for high-quality investment opportunities.

That’s particularly important given the lack of depth and breath in our capital markets as highlighted by the Capital Markets Development Taskforce.

Their final report found that only one third of our top 100 companies are publicly listed, compared to two thirds in Australia. 

The most important thing the Government can do to encourage investors back to our capital markets is to create a sound regulatory framework to ensure we have transparent markets and good governance, and to facilitate investor confidence and protection.

I want to make it clear that I’m not advocating for the government to remove investment risk.

There is, and will always be, an element of risk involved with investing, because with risk comes return.

But I don’t think I’m overstating it when I say the Government has – by necessity – overhauled the regulation of the financial system over the past three years.

Some of that has focused on financial intermediaries – such as the Financial Advisers Act, the Financial Service Providers Act, the Securities Trustees and Statutory Supervisors Act, and the Auditor Regulation Act.

These pieces of legislation deliver formalised frameworks and codes of conduct for their professions, and have introduced standards as well as various forms of licensing and authorisation.
We’ve also enacted the prudential regulation of non-bank deposit takers, which is an important tool for improving the oversight of finance companies, and recently Finance Minister Bill English bolstered this by announcing that the Reserve Bank would also be given the power to remove directors.

However, I believe the most important move the Government made towards giving mum and dad investors’ confidence to begin investing again was to establish the Financial Markets Authority.

What was clear to us after the finance company collapses was that there was an urgent need for a single market regulator to drive a new culture and to proactively monitor and effectively enforce securities law.

It took just over a year to get the FMA up and running, and in its first four months as an independent Crown entity it has certainly made its presence felt.

Of course it helps that the FMA has been given more resources and more powers than its predecessors, including the ability to exercise another person’s right of action against a financial market participant, because too often the costs are too high for most people to fund litigation themselves.

Until now this has resulted in egregious behaviour going unpunished and investors having little means of redress to recover their losses.

The legislation which established the FMA also brought in governance changes to KiwiSaver to ensure legislation accurately reflects the common practice – that in the majority of cases it's the fund manager who instigates and controls the scheme, while the trustee undertakes a supervisory role.

With regard to KiwiSaver, I would like to congratulate you as an industry for taking the initiative and working together to develop best practice guidelines for the processing of claims and transfers.

It’s important that the guidelines are robust enough to allow market participants, commentators, and the 1.7 million members of KiwiSaver to make informed judgments.

As you are aware, the Government is committed to the long- term financial sustainability of KiwiSaver and recent changes in Budget 2011 are evidence of that.

We also signalled in the Budget that we wanted to have a look at auto-enrolment into KiwiSaver because about 1 million people are not in either KiwiSaver or a workplace super scheme.

I’m advised that the Minister of Finance will be releasing a discussion document shortly which will call for submissions on auto-enrolment, and I expect that many of you will be part of that.

As you know we are also looking at making Kiwisaver providers report regularly on their fees and charges, performance and returns, portfolio holdings, conflicts of interest, and fund manager tenure.

The Ministry of Economic Development issued a discussion document on these issues late last year and submissions closed in March.

Officials are now in the process of formulating a response to those submissions.

This will allow investors to better compare schemes against each other, with each fund’s report to be made available on the FMA’s website.

Eventually we intend to extend these periodic reporting requirements to all registered managed investment schemes under our comprehensive review of securities law.

I have no doubt that you have been working your way through the exposure draft of the bill, which was released two weeks ago and I encourage you to share your views on what works and what doesn't in the draft Bill.

This is a once-in-a-lifetime opportunity to get the legislation governing our financial markets right.

There are several elements to the bill.
First, it reclassifies products into four classes – equity, debt, managed investment schemes, and derivatives – along with the FMA’s powers to designate products as securities.

The current exemptions have also been reworked to include employee share schemes and small offers.

This will allow SMEs to raise up to $2 million in capital from a limited number of people once a year instead of having to meet the often prohibitive costs associated with a public listing.

The bill also proposes reconfiguring exchange regulations to provide more of a continuum for companies to access capital through their life cycle – from start-ups to large corporates.

And, probably of most relevance to this audience, all managed investment schemes, including registered superannuation schemes, will be governed by a single regime with a consistent set of functions, duties, and obligations.

Registration requirements will include having a licensed fund manager, an external supervisor, a copy of the governing document for the scheme, and independent custodianship of assets.

The Government is endeavouring to improve the statutory duties between the issuer and investor, because the current contractual relationship between investors and the fund itself have fallen short.

Similarly, there is no agreed set of standards for asset valuation, entry and exit pricing, rules around redemption, constitutional documents, and investor redress – all of which lead to inconsistencies in a financial product that is mainly used by retail investors.

You may have noted already the intention to grandparent existing employer-sponsored workplace savings schemes, while continuing to allow them to admit new members.

These workplace savings schemes continue to be a vehicle for personal savings, as well as for employer contributions.

Because employees forgo part of their salary, they are just as entitled to the same standards of governance and regulatory oversight of their investments as they would find in retail managed funds.

Therefore related-party transactions will be restricted, and the schemes will be required to have a licensed independent trustee or director to ensure they have the full set of skills necessary to invest and manage superannuation funds.

Employer-sponsored workplace savings schemes won’t be required to appoint a corporate trustee but they will need to add an independent and professional voice to the mix at the board table.

Submissions on the draft exposure bill close on 6 September, so it’s not too late to have your say.

From there, the Government intends to introduce the bill to Parliament before the election.

Ladies and Gentlemen, in conclusion I’d like to reflect on just how far we have come over the past three years.
As I’ve outlined there’s been a steady stream, or as some of you might say, torrent, of reform in the commerce portfolio since 2008, but I would remind you that we started from a relatively low base.

I’m confident we’re on the right track towards building a solid regulatory framework on which to build robust, contestable, and vibrant capital markets both for the benefit of businesses looking to raise capital and mum and dad investors.

Thank you.