11 July 2011
Thank you for inviting me to speak today.
It's a great pleasure to be here with you all as Chief Executive
of New Zealand's new Financial Markets Authority.
FMA's establishment on 1 May marked what I believe is a quantum
leap forward in the regulation of New Zealand's financial markets.
Our establishment is a significant milestone, and one I am
confident has marked the start of a new era.
FMA enjoys greatly enhanced powers of regulation and enforcement
over a broader range of financial markets entities. Our powers
include important changes to the governance of KiwiSaver and
superannuation schemes. We also oversee registered securities
exchanges and we're responsible for the regulation of financial
advisers and financial service providers. We will add trustees and
statutory supervisors to that list on 1 October, and auditors,
including overseas auditors, from 1 July next year.
One thing that distinguishes FMA from other regulators is that we
have twin statutory objectives: to promote and facilitate fair,
efficient and transparent markets, and to grow New Zealand's
capital base. Several weeks ago I attended a number of VIP meetings
in Sydney, and it was this dual aspect to our mandate that
fascinated the people I met.
It positions FMA not just as a regulator but as an economic
ambassador for New Zealand, charged with enabling growth and
capital development.
Under New Zealand's twin peaks regulatory model, FMA sits
alongside the Reserve Bank - whose powers have also been extended
to cover finance companies, building societies, credit unions, and
the insurance industry. The Reserve Bank and we are determined to
ensure the success of this new model.
Of course, FMA's establishment is by no means the end of the
Government's reform agenda. The current review of New Zealand's
securities laws is evidence of that, and while we're on the
subject, I'd like to take a moment to comment on the new director
liability regime approved by Cabinet in May.
Under current law, there are significant criminal penalties - up
to five years in jail - for misstatements in offer documents,
regardless of whether the company directors were intentionally
dishonest or merely careless. [No doubt, we're all aware of this
level of penalty because of the outcome of the Nathans trial
announced on Friday; it's very likely the three directors found
guilty face jail time.]
The proposed new regime as part of the securities law review will
mean a more tiered, and sophisticated, approach to directors'
liability, making far greater use of civil remedies including
compensation and civil penalties enforceable by FMA. It also
reserves criminal liability for really egregious conduct such as
the issuing of intentionally misleading disclosure documents.
By reserving criminal penalties for truly reprehensible breaches,
the new regime should be more fair and proportionate. And with
effective enforcement by FMA, the range of available civil remedies
will ensure there are adequate incentives for good corporate
government by directors - and greater protection for
investors.
Over the past 20 years, while working in financial markets risk
management, enforcement, and litigation, most recently for ASIC,
the Australian securities regulator, I've heard of lots of
analogies for the role of regulators. They've been likened to an
ambulance at the top of the cliff - and an ambulance at the bottom
of the cliff. They've also been likened to an air traffic
controller and to a sheriff…
But I like to describe our role as that of a sports coach and
referee. We help the players understand the rules so they know how
to play the game safely, and we check to see they're playing by the
rules. When there is foul play, we put up the red flag and send the
player off the field. If their conduct is so out-of-line, we'll
advocate for a season ban. We're constantly analysing the play, and
we advise the national body on how the rules might be changed in
order to improve the way the game is played.
Our focus is to ensure there is a level playing field and that the
risks are obvious to all who enter the arena.
The reality is that capital markets are risky. And not everyone is
careful. Companies do fail and investors do get hurt. Creditors are
left unpaid. Employees are exposed and vulnerable. 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 cannot prevent it nor will we. That is not the
role of a regulator in a developed market economy and nor should it
be. It is not our job to provide a capital guarantee for failed
investment outcomes or flawed investor decisions.
There will always be an element of risk in securities market
participation and this will never change despite all the
regulation, close supervision and resources in the world.
Risk-taking, in the right circumstances and with the right
resources and controls, is appropriate and I encourage it as an
enabler of capital growth and innovation. Apple, Microsoft, Google
were once all high-risk companies.
That said, I am not an advocate of the efficient markets theory of
minimalist regulator. When a company hits the wall 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 impact - then we will see what action FMA can take. We will and
are taking action.
Rebuilding confidence in our capital markets will be a significant
challenge for FMA - particularly with retail investors. As we all
know, investor confidence has been shattered by the Global
Financial Crisis and, in New Zealand, by the collapse of so many
finance companies, affecting $8.5 billion of investors'
money.
I read recently that just before the 1987 sharemarket crash, 26
percent of household assets were directly invested in New Zealand's
equity markets. As at the end of 2010, this share had plummeted to
7 percent.
This is an extremely concerning state of affairs and a situation
we need to turn around. There is still plenty of evidence to
suggest New Zealanders' love affair with property and bank term
deposits remains unchanged. Let's stop the decay now. Let this year
mark the baseline from which New Zealand's flight from the capital
markets halts, and begins a long, steady, permanent and sustainable
improvement.
Investor confidence, and understanding of the importance of asset
class diversity, is absolutely critical if New Zealand is to
develop the kinds of vibrant capital markets needed to attract
investment in our productive industries, and to lift the country's
economic performance.
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 access
relevant information about investing wisely and well.
Neverthless, there are questions in my mind about the value of a
disclosure regime aimed particularly at retail investors. What is
the role of the regulator in relation to retail investor
participation? Does it conflict with our objective to promote
market growth? Are all investors equally competent to understand
what issuers tell them? Are all products suitable for the retail
market? Should investors enter a market without a basic
comprehension of what they are acquiring? Should regulators leave
the wholesale or institutional markets alone?
There's been a debate in the international regulatory community in
recent years about how far you go in regulating offers to the
public. At one extreme, some jurisdictions argue that the most
complex and sophisticated products should be banned from offer to
the public. In New Zealand, we are not following this radical
banning of products to the retail public - but should we be
thinking about it?
It's clear that FMA faces some very significant challenges and I
do not underestimate the scale of the task ahead. Only in March, a
Morningstar global study of investor experience in 22 countries
rated New Zealand last with a D-minus. The report said New Zealand
scored worst because of its low rating in disclosure as well as
regulation and taxation.
Morningstar did acknowledge that New Zealand was moving to improve
its performance with the creation of FMA and the securities law
review. But what this demonstrates is that the eyes and
expectations of the global investment community are on New Zealand
and FMA's work. And we not only have the major task of restoring
investor confidence among New Zealand investors but internationally
as well!
We are certainly mindful of the high expectations held both by
Government and of the market for our success going forward. I
welcome that challenge, and I'd like to talk now about some of the
work we have underway.
FMA is little more than two months old. And even though we're very
new, we've had an exceptionally busy time, with a great deal of
media interest in both our establishment and in the early use of
our powers.
As of today, we are bedding in a new organizational structure that
covers our broader responsibilities and powers, and an expected
growth in size from around 80 staff to about 120, split between
Wellington and Auckland. I am in the final stages of interviewing a
range of candidates, culled from 250 applicants, from New Zealand
and abroad, for the seven key positions that will make up my
leadership team.
On our very first day of business we used our new powers to take
action against Bernard Whimp, putting a stop to the misleading
offers to shareholders he had made. Since then we have warned
investors to be wary of the unacceptable behaviour of a Mr Patrick
Diack, a sales agent in Wellington - and warned SuperLife, the
company whose KiwiSaver products he sells, about the need to
overhaul its sales practices. At one point last month, we issued an
interim stop order against GFNZ Group, formerly Geneva Finance, to
prevent it from issuing securities while it was in breach of its
banking covenant.
We worked closely with the Serious Fraud Office on investigations
into Aorangi Securities Limited, and announced the decision for the
SFO to pursue charges under the Crimes Act - and for FMA to
withdraw on the basis that a separate prosecution by us would incur
an unnecessary doubling of public expense.
Little more than a week ago, on 1 July, important protections for
retail investors went live with the start of the new financial
adviser regime. Up until last week, anybody could hang out a
shingle saying they were a financial adviser. Not any more.
All advisers are now regulated, and FMA licenses and monitors
three levels of financial advisers - Authorised Financial Advisers,
Registered Financial Advisers, and advisers working for Qualifying
Financial Entities. Under the new rules, advisers must only
recommend investments and products that suit their clients'
situation and needs. They have a duty of care for their clients'
interests.
The new regime is designed to weed out poor performers and to lift
the professional standards of the advisory profession. As our ad
says, cowboys belong in the movies - not the financial markets. We
want the cowboys gone.
And on Friday, we welcomed the guilty verdict in the Nathans trial
for which my staff led the prosecution. We believe this outcome
sends a strong message around New Zealand's boardrooms of
directors' responsibility to ensure investors are given accurate,
truthful and complete information. It makes clear that directors
have a personal duty to ensure disclosure document do not mislead
or deceive, and that's a duty they cannot delegate to others.
Directors need to form their own opinions.
One of the top priorities for FMA's Board has been determining an
effective approach to enforcement. A great deal of work is going on
in establishing how we want to proceed. We are hopeful that our
enforcement strategy will be finalized and ready to be shared
publicly in the next few weeks. In the meantime, I can give you
some insight into the principles that underpin our approach.
The first point to make is that for the first time New Zealand has
a fully-fledged financial services law enforcement body operating
in the capital markets. This means no disrespect to our predecessor
bodies at the Ministry of Economic Development or more especially
the Securities Commission, which started off life as a
policy-making and exemptions-type organization with limited
enforcement and investigatory powers. Added to that, we've been
given some very powerful new tools of which the most significant
and controversial is s34.
So this is new for everybody, not least for FMA staff.
First, FMA will focus its energy not across every act of
misbehaviour or insignificant breach but primarily on those areas
where the failings are deliberate or reckless, and where the
perpetrator set out to deliberately mislead or deceive
investors.
Our enforcement approach must be guided by our mandate to grow New
Zealand's capital base. So the sort of conduct likely to attract
our attention is conduct that would undermine that objective.
That's why we took early action against Mr Whimp, Mr Diack and
SuperLife, and GFNZ Group etc.
Under our enforcement policy, we will make full use of the range
of tools available to us. Public attention tends to focus on our
legal tools - criminal or civil court proceedings or settlements.
But there are a range of administrative tools available to us too,
such as fines, forced disclosures, enforceable undertakings,
blocking issues or granting exemptions. We can also make strategic
use of communications by using the media and other outlets to draw
the public's attention to our warnings or to suspicious activities
we are concerned about.
Second, FMA has inherited a number of finance company cases and
investigations from the Securities Commission and our MED
predecessors. We have, as a matter of urgency, applied a
robust "triaging" process to these cases as a way of prioritising
our workload.
Obviously, cases already before the courts must be pursued and we
will meet court deadlines, and prosecute those matters to the best
of our ability - as we did in the Nathans trial. Where possible, we
will add additional resources to enhance our prospects of
success.
For matters not yet before the courts, we are near the end of a
detailed forensic analysis of each case, assessing how it meets our
new strategic priorities.
Among the questions we are asking are: What is the current state
of the investigation? How many people are affected and to what
degree? What additional evidence needs to be gathered in order to
bring those matters to trial? Are there any alternative remedies
including new civil remedies we previously did not have? Are there
other agencies that have an interest in the case and who might also
pursue matters to achieve similar or even better outcomes? Is it in
the public interest to pursue this case, and what chance is there
of recovering a sizeable or significant proportion of lost
funds?
In some matters, the outcome of this process means that we will
progress things more aggressively, more quickly and in a more
targeted fashion than perhaps in the past. And that's a good
thing.
Inevitably, however, there will be some matters that will not be
progressed at all either because there are other avenues of redress
for those who have lost funds, the impact does not meet our
strategic objective, or where other regulators or agencies are
better placed to take a lead role.
We have already announced our decision to withdraw from two cases
- the Insured Group civil proceedings, and the Aorangi Securities
investigation, believing the SFO was the better agency to lead the
criminal charges there. And we hope to be able to publish soon how
we intend to proceed on the remaining 24 finance company cases on
our books.
The fact of the matter is: we cannot run every case, nor pursue
every breach. To do so would jeopardise any prospect of us
achieving our forward-looking agenda. We also need to be
responsible in our use of public resources, and we will not pursue
matters where there would be a disproportionate cost versus the
likely outcome.
That said, we will retain our discretion to step outside our own
guidelines on the odd occasion. There will be times when it is
important for us to take a stand, to test the law, and to use
particular cases to check that our analysis or interpretation of
the law is correct.
It is our intention to be bold. There must always be cases we are
prepared to lose, provided there is a cogent reason and lesson to
be extracted that benefits the whole market.
Any litigation is by its nature risky, and we cannot predict the
outcome of matters that will be determined appropriately by an
independent judicial body. This means that where it's possible for
us to resolve matters without redress to court, we will apply
commercial common sense and seek tailored remedies that match the
severity of the breach.
Some have said that we've had an easy start by inheriting a large
number of existing cases and investigations from Securities
Commission. I disagree.
What we have inherited is a large number of matters that relate to
events that occurred some years ago and are yet to be resolved.
That's an unfortunate byproduct of the number of finance companies
that collapsed. It would be far better to have fewer of those
matters and therefore to have more time, energy and resources to
devote to new investigations that better fit our strategic
objectives.
Our targets for surveillance will follow a similar path. We will
focus our compliance monitoring on both newly licensed entities,
and on existing regulated entities to ensure they are meeting their
obligations and that investors are receiving the services and
disclosure they are entitled to receive.
Newly regulated entities such as financial advisers can expect
that we will pursue a measured approach to surveillance. This will
give them an opportunity to understand, and reach full compliance
with, their obligations before we take a tougher enforcement
approach.
For entities that have been under regulatory supervision for some
time, we will be much less lenient.
Most importantly, we will never be soft on conduct that is
deliberate or reckless or that is intended to deceive or defraud
innocent third parties of their funds.
An important new aspect of our work is the establishment of a
strategic market intelligence function. We need to build this from
scratch yet we are determined to have it fully operative by the end
of winter.
Our aim is to bring together a range of different information
sources from across the market, and from within FMA and other
government agencies, to start to build a picture of where the most
risky behaviours are occurring.
It's critical that we develop strong information-sharing
arrangements with the Serious Fraud Office, the Police, and other
investigatory bodies. In part, this will allow us to identify which
is the most appropriate agency to lead an investigation. Other
important sources of intelligence about fraud and illegal activity
are our fellow regulators overseas, especially ASIC in
Australia.
We want our intelligence function to apply an economic and
financial lens to analysing potential risks to New Zealand's
financial markets, as well as a legal and compliance view. And we
want it to keep us informed of global best practice on financial
markets regulation.
This is new ground for us and there are obvious challenges. To
what extent will market participants be willing to openly discuss
borderline practices with us given our regulatory role? How can we
quickly identify regulatory gaps being exploited by "periphery
riders" before damage is done?
Stakeholder research we've carried out has made clear to us some
of the emerging risks we need to put on our radar. The practices of
some KiwiSaver providers and financial advisers, property bubbles,
speculative trading, technology-driven products and products with
unclear custody ownership are on the list.
Deepening our organisational capabilities, so we have the skills
to do this enforcement and monitoring work, is a priority for us.
We want FMA to be known as an organisation that understands the
industry it regulates, and can talk in the same language as market
participants. We want it to be respected for its competence and
professionalism. We want to increase our familiarity with the
markets and products on offer so we can ask the right questions and
hold a more effective conversation with stakeholders and
investors.
To do this, we need to lift our internal capability and as I've
mentioned we are in the middle of recruiting additional expertise
right now. It will also be important that we work with external
service providers, such as law firms and forensic accountancy
firms.
There may be other ways we can bring in new talent. Perhaps there
are successful private sector people out there in the later stages
of their careers who might want to "give something back" by working
for a public agency? Perhaps there are industry participants
interested in public sector secondments?
Obviously, we must be mindful of conflicts of interest, and there
will be occasions when it is inappropriate for someone from a
private firm or other agency to be carrying out work on behalf of
FMA. However, we will take a balanced approach to using our
resources, and where it is appropriate for us to bring in
specialist expertise we will do so.
By virtue of our greatly expanded responsibilities and powers, and
the greater lineup of laws we enforce, the nature of the
relationship between regulator and the market is changing. It's
becoming much closer.
The Financial Advisers Act, the Securities Trustees and Statutory
Supervisors Act, the auditor regulation legislation and changes to
the Securities Markets Act in relation to markets and exchanges -
these all signal a closer supervisory relationship between FMA and
the market. And the securities law review is only going to take
this further with Cabinet having now agreed to the licensing of
funds managers and derivatives issuers.
Fundamentally, what it means is that people in the market can
expect to have regular and ongoing contact with FMA. They can
expect to see more of us. In the past, when it was the Securities
Commission, if you heard from us something had gone wrong. Now
people can expect an ongoing relationship with us. We want that and
we welcome it.
And what can you expect of us? You can expect more guidance and
more communication. An early priority is guidance on our
expectations for prospectuses and disclosure documents.
And you can expect more timely action. When our market
intelligence function is up and running, be assured that we will be
quicker to act - we will not hesitate to take enforcement action
where it's needed. We will test our new powers.
In conclusion, I want to emphasise that in this work, we're
reliant on you - all of you in this audience today, and your
friends and colleagues - to help us, and to point us in the right
direction.
FMA is not an island. We cannot be everywhere in the market. We
will be a team of 100-or-so people in a market of thousands. We
need your input to help us best target our activities and to tell
us what's really going on.
We're all in this together. For those of you in the legal,
financial markets policy-making and broader corporate governance
areas, this is a wonderful time to be in New Zealand.
You have an active engaged regulator, a committed government, an
impatient and exasperated populace, and a new set of laws that we
are keen to use.
It's a great moment in history for all of us to be part of the
journey to lifting the standard in our market, and encouraging
investors to come back in.
END