Presentation by Sean Hughes to the 10th Annual Corporate Insolvency Conference
4 March 2011Thank you for inviting me to speak today at your 10th annual conference.
It is a great pleasure to be here with you all.
This is, in fact, my first official speaking engagement as Chief Executive-Designate of what will be New Zealand's new Financial Markets Authority.
At first glance, this forum might seem a strange choice for my public debut. In these difficult times for our country and our economy, I am mindful of stretching analogies too far. But, as corporate insolvency practitioners, your role can be likened to the ambulance at the bottom of the cliff, giving first aid to companies that have toppled over the edge. At the FMA, we will be focused on keeping as many companies as possible steady on track at the top of cliff. So it could be argued that the better we do our job, the less business for you!
But the reality is that the path along the cliff top is risky. And not everyone is a careful driver. Companies do fail, and investors do get burnt. That's the nature of capital markets. Through good market regulation and oversight, we might be able to reduce the chances of this happening, but we can't prevent it. That is not the role of a regulator, and nor should it be. There will always be an element of risk in securities market participation and this will never change despite all the regulation or supervision in the world.
I am not however an advocate for the efficient markets theory of minimalist regulation. When a company plummets over that cliff because its directors and management have been asleep at the wheel - or worse, because they've bailed out the door and let their investors take the plunge alone - then we will look to see whether we can take action. And we will value your assistance and perspective in sorting through the wreckage.
As a new Crown agency, FMA will consolidate functions currently fragmented across the Securities Commission (which will cease to exist) and the Ministry of Economic Development. It will not assume any functions of the NZX.
Our establishment legislation is the Financial Markets (Regulators and KiwiSaver) Bill, which sets up the FMA as a new financial sector 'super regulator', with enhanced powers of regulation and enforcement including important changes to the governance of KiwiSaver schemes.
The Commerce select committee which has been considering the Bill published its report earlier this week and all going well with the legislation's passage through the House, FMA will be up and running later next month.
As part of a "twin peaks" regulatory model, the FMA will sit alongside the Reserve Bank. The Reserve Bank has had its prudential supervisory powers over the banking sector extended to cover the likes of finance companies and credit unions.
In recent years - and here I'm quoting the Minister of Commerce, The Honourable Simon Power, who is overseeing passage of the Bill through Parliament - confidence in the financial sector has been sorely tested by the Global Financial Crisis and further damaged in New Zealand by a number of serious corporate collapses.
In particular, around 60 finance industry companies have gone under or arranged moratoria in the last five years, putting at risk $8.5 billion of investors' money. In the wake of these events, investigations into allegations of false and misleading statements are ongoing, and charges have been laid against a number of directors of finance companies.
Jane Diplock, current chairman of the New Zealand Securities Commission, has suggested these finance company collapses occurred in "a regulatory desert". Given the dictates of its founding Act, the Commission's role was - and is - limited to ensuring risks were properly disclosed in prospectuses, investment statements and so on, allowing investors to make their own judgements as to whether the returns being offered were worth those risks.
Regulators can do no more than operate within their legal boundaries and, if these are too limited, ask for more powers. The Government has heeded this call with the formation of the FMA.
The Government's key focus now is to restore investor confidence in New Zealand's capital markets. Investor confidence is seen as crucial if New Zealand is to develop the kinds of vibrant capital markets needed to lift our country's economic performance. We also need to be mindful of New Zealand's international reputation as an efficient capital market, and our regulatory structure must reflect that.
The fallout from the GFC, and finance company collapses together with the recommendations of the Capital Development Taskforce delivered in late 2009, made clear the need for a more integrated approach to regulating the financial sector, and strengthening key regulatory agencies' enforcement powers.
Market participants need to be subject to clear rules so that investors can be confident that those rules will be actively and consistently enforced.
Investors also need to be able to easily access relevant information about investing wisely and well.
So you can tell there are high hopes for FMA. There has been almost unanimous support for the creation of FMA through the parliamentary process.
The legislation concerning its establishment has been fast-tracked through the House (since September last year) ahead of the Government's work on the wider review of New Zealand's securities laws.
Fast-tracking will (hopefully) allow FMA to be up and running in time to help implement changes to securities law once the review is completed.
As a New Zealander who has been resident in Australia for much of the past 20 years where I have worked in financial markets enforcement, litigation and management, and most recently for ASIC, the Australian securities regulator, it is pleasing to me that New Zealand is implementing a 'twin peaks' model similar to the Australian ASIC/APRA design.
FMA's main objective is to promote and facilitate fair, efficient and transparent markets.
FMA will have the Securities Commission's current powers to enforce securities law but it will be backed by a principles-based approach to regulation. It will have an enhanced role in overseeing registered securities exchanges, and be responsible for the regulation of financial advisers, financial service providers, trustees and auditors.
Over the next few weeks, we will be finalising our Statement of Intent and that will be the first opportunity for the new FMA Board to express to Parliament and to all of New Zealand what we propose to do and how we propose to do it.
What I can share with you at this stage are my personal aspirations for FMA.
The first is seamless delivery of services for all stakeholders on and from Day 1.
If you are a customer of FMA or you interact with us on Day 1, you will immediately see a new name and logo. But this cosmetic change will be reflective of a much deeper organisational and cultural change that will follow in the coming months.
I am not here to dictate how to run New Zealand's capital markets. I will listen, I'll inquire, I'll compare and I'll seek feedback as to the right model and regime that best suits the needs of all New Zealanders: issuers, participants - intermediaries like financial advisors and the NZX - and investors.
While change in the regulatory structure is inevitable and desirable, we must not throw away those parts of the previous model that worked well.
Efficient capital markets are a marriage of well-performing and mature product issuers and advisers, and informed, confident, risk-savvy investors. FMA's objective is to promote both - and you should constantly measure us against that yardstick.
I'm not a believer in regulation for regulation's sake but I'm passionate about effective and proactive regulation.
In order to be effective and proactive, FMA will be outward-looking and reliant on information from the market about where the greatest risks to that marriage between product issuers and investors are.
We need you to be our eyes and ears so we can deploy our resources and our arsenal of enforcement tools to best effect.
I want you to be whistleblowers. I need your support.
While one of the core new functions of the FMA will, we hope, be a properly resourced, strategic market intelligence function, we're not an island. We cannot always predict mishaps, nor be on every cliff top.
We will need your input to help us best target our activities. I see insolvency practitioners as being at the forefront of that relationship. You, more than any other professional, know when the tide has turned, when the company is struggling and when the risks to investors, creditors and other stakeholders are greatest. Your responsibilities and duties are aligned closely with those of the FMA.
My relationship with you is integral to our success.
Finally, while New Zealand is part of the global economy and is increasingly influenced by events, cycles and innovations in our larger trading partners, I will not lose sight of New Zealand's own unique identity.
I have no intention of imposing a foreign model on a reluctant New Zealand economy. Many of you may wonder whether I've been appointed as some advance Australian mole to surreptitiously prepare you for an Australian takeover.
Clearly, we have to be alive to and aware of developments in our closest trading partner, and our regulatory structures must operate effectively together with seamless information-sharing. However, New Zealand's market is very different and our regulatory structure, I believe, must reflect those differences.
Over the coming months, I encourage you to reach out and interact directly with the FMA Board and my chairman Simon Allen, with me, and with my new senior executive team to deepen existing relationships, create new opportunities for sharing ideas and intelligence, and to build the trust that we each need to do our jobs well. This will be a partnership we can all be proud of.
I look forward to that journey with you.