Paul Gregory, FMA Executive Director, Regulatory Response, speaks at the Financial Services Council Outlook 2023 on January 25.
(Notes may differ slightly from speech as delivered)
Ka Tangi te tītī, ka tangi te kākā, ka tangi hoki ko-ahau, Tihei Mauri Ora.
E noho ana au ki Tamaki Makaurau
Ko tenei taku mihi ki nga tangata whenua o te rohe nei
Ka mihi hoki au ki nga tohu o te rohe nei
Ko Paul Gregory taku ingoa
He kaiwhakahaere au Ko Te Mana Tātai Hokohoko taku tari
No reira, tena koutou, tena koutou, tena TATOU katoa
Thanks Clare. I’d like to develop a little further what Sam said about how enforcement and regulatory responses in general fit in with being outcomes-focussed. As part of that, I’ll talk about what’s not changing and what will be different about our response and enforcement approach.
First, what won’t change is enforcement and other regulatory tools are part and parcel of an outcomes focus. Holding firms and individuals to account for what they do and how they do it, deters misconduct; clarifies the law; supports investor and consumer confidence in markets, services, products and firms; prompts improvement and investment in systems, processes and capability; and helps level the playing field between those playing fair, and those playing the whistle.
These are outcomes. We know industry understands this; the level playing field effect especially, not least because it explicitly underpins most of the complaints we get from you about your competitors.
And what we understand is: a demonstrable will and ability to respond with regulatory tools is what we as a regulator bring to the table. It is why industry pays attention to us. Regulatory response is the ‘or what’ of good conduct. The stick, its shadow, the sights and sounds of an intentionally object lesson being applied elsewhere: these are key ingredients of credible deterrence.
The second thing which won’t change is the other key ingredient of a credible deterrent: Balance. Proportion. Precision. Timeliness. We’re clear it cannot always be hammer time. Lodging at the hard end of the regulatory pendulum risks consistently imposing unnecessary delay, burden, and cost, undermining trust and confidence in the FMA and ultimately our effectiveness.
So we will continue to ask ourselves: how well will our selected response address the issue? Including: what is the actual or potential harm? Is this a sector used to regulation, or is it new? What is the track record and attitude to good conduct of the firm? Is public interest a relevant consideration? Is market confidence an issue?
Sometimes, even often, a response is a well-placed conversation. As Clare has said, influence is a potent, versatile regulatory tool when used well.
But ‘stop it or I’ll tell you to stop it again’ is not an effective, and by definition not a sustainable, regulatory approach. So adept targeting of regulatory tools will sometimes also require doing something stronger than anticipated by the market. Not from lack of imagination or zealotry, but from a judgement that the harm we’ve seen merits a response the whole market can see and hear clearly.
Self-reporting is a good example of this need for balance. We have talked about this before, but it seems appropriate to give a reminder of our approach. Which is, that promptly and completely answering FMA requests for information is compliant and likely good conduct, but it’s not self-reporting.
Actual self-reporting, is firms letting us know something has gone wrong – especially if there has been harm to their customers – how it went wrong, and what’s being done to fix it; without us asking first. This proactivity is, unquestionably, a good signal of organisational leadership taking compliance and conduct seriously.
I say ‘signal’, because on closer inspection or investigation, which we can and have done in such cases, the snow-white proactive reporting may be the tip of a somewhat grimier iceberg. Self-reporting can reveal significant carelessness and misconduct which has been going undetected, or detected but unchecked, for a long time prior to the reporting. So, while the firm has done the right thing by self-reporting, that comes – to paraphrase the quote about Americans usually attributed to Churchill – only after exploring the alternatives. That speaks to conduct, it speaks to culture, and it drives the attitude and action we have taken and will continue to take to self-reporting.
So – what is going to change? Sam has introduced it: our new structure is designed to ensure we identify and assess risks and then intervene – or choose not to – more effectively and efficiently, where consumers, investors, our markets and our financial system get most bang for the buck.
In my area, this also means thinking more broadly about what success looks like. Including at the pointiest end of the stick – enforcement. Most observers in media and elsewhere have a binary view– it’s win or lose.
We intend to evolve this mindset. We will still be thorough and rigorous. But we will also be prepared to be challenged on a regulatory action if the outcomes are either that we win, or we – and others – learn or benefit in other ways. Because even if we don’t win, a case can help clarify the law and provide certainty for the market and consumers. The issue and its discussion can have ripple-effect benefits – changes in consumer expectations and behaviour; changes in industry practice; changes in public dialogue about how things should be done. There is also value to industry, fellow regulators and consumers and investors from what we do – education, guidance, public engagement – after we get an enforcement decision.
Finally, it's worth taking a step back to acknowledge the FMA exists to change behaviour, backed by the laws which are our best available proxy for what New Zealanders need and want.
Which means, as Malcolm Sparrow says, that even when we do our job well, especially if we have reinforced our credible deterrent, not everyone will say thank you. Our role inevitably involves tension with industry, because to achieve the purpose we have been given and the vision we have chosen, we impose on private firms. Mostly, on their latitude to pursue short-term economic interests. But sometimes the imposition is, and must be, more limiting, more serious, more profound. After all, if any regulatory matter does not involve tension with industry to satisfactorily resolve, it probably didn’t require regulation in the first place.