04 June 2014

Presentation by Rob Everett to the Governance, Risk and Compliance Institute 2014

Let me start by stating the obvious – As compliance and risk professionals, you have a major role to play in how our industry conducts itself.

So thank you for coming along today to hear from me.

As a regulator, I realise there are limits on what we can do directly. Much of our work requires us to get someone else to do something or to deliver our message.

And that’s often people in roles like yours.

So, to a considerable extent, systematic outcomes – in financial services and capital markets in New Zealand – are in your hands.

At the Financial Markets Authority (FMA) we often draw a picture which ranges from what we call ‘willing compliance’ on one side to ‘civil or criminal sanctions’ on the other.

We prefer to spend our time at the end of the spectrum, where we enjoy willing compliance and our job is to describe and explain the outcomes we want.

Generally, when we’re living at that end of the spectrum, investors, consumers and firms enjoy an orderly and well-run financial services system.

If we find we are spending a disproportionate amount of time at the other end – in enforcement – then something is going wrong.

I recognise enforcement will always be part of our role.

There will always be another case to take, or a notice to issue to a firm or a professional.

But when enforcement becomes the biggest share of regulation, it’s effectively a regulatory crisis of some sort, or a signal that there is a widespread problem. Things have gone wrong and we are dealing with the mess.

It won’t surprise you that that’s not where we aspire to be.

Let me take a step back and look at the big picture – which is the current regulatory landscape in New Zealand.

The financial services regulatory framework that’s in place in New Zealand – that’s the one that’s applied for the most part by FMA and the Reserve Bank – has three overall goals:

  • Providing quality governance – especially for Boards and senior management teams that have oversight of balance sheets and oversight of culture.
  • Managing risk comprehensively and coherently, both at the systems level, and also for individual firms and groups of professionals dealing with recognising regulatory risk, quantifying it, and ensuring mitigation is in place.
  • Ensuring sustained good conduct – in retail and wholesale markets – among firms and professionals.

Let me back-up briefly and explain how we have arrived at this point in New Zealand, because it reveals why those three goals – among others – have emerged.

The Global Financial Crisis (GFC) and its aftermath brought some major lessons in New Zealand regarding regulation in financial services and capital markets.

But even without the GFC in 2008, there was a growing recognition – at least among regulators in New Zealand – of the need to modernise and reform securities and markets law.

The existing statutory regime dated back to the 1960s and 1970s. It had been amended – over the years – piece-by piece.

There were several shortcomings in it.

It provided an inconsistent set of investors’ rights, which varied depending on the legal form of investment or savings vehicles.

That meant, for example, that investors in unit trusts enjoyed a different set of rights to those in other managed investment schemes, even though those were virtually the same thing, at least for an investor.

The regime employed a few regulatory tools – notably extensive requirements for disclosure on the part of firms and providers – but some other good regulatory systems – like licensing and control over authorisations – were barely used.

The regulators had relatively few powers (and seemed to be discouraged from) intervention.

Modern developments also meant the regime was steadily overtaken by practice.

Ambiguities and gaps appeared.

An example is the so-called finance companies, which largely fell outside the previous framework.

New products had appeared – in retail and wholesale markets – and new distribution channels were being used. But regulation hadn’t kept pace with that.

The major changes we have seen – since 2008 – are:

  • The Reserve Bank has taken on responsibility for prudential regulation of the insurers, the non-bank deposit-takers, and prudential regulation has been deepened for all the intermediaries that the RB regulates.
  • The FMA has been established, with a substantial mandate that covers retail and wholesale markets, and which includes both infrastructure regulation – so, for example, where we have oversight of the public capital market in the form of the NZX – as well as regulation of specific providers and professions – say the financial advisers.
  • Extensive use of licensing and supervision – of firms, markets, and professionals – as a means to set and maintain standards.
  • Regulatory arrangements that cover emerging new services, such as peer-to-peer lending services and crowd funding services.
  • Regulation specifically aimed at making capital-raising easier, provided issuers meet certain requirements. This is in line with the Governmentending services and crowd funding sedollars ($200 billion) to New Zealand’s public capital stock over the next decade.
  • The fair-dealing provision, which is new to the FMA and is in the Financial Markets Conduct Act that’s just taking effect – although this 'conduct' is focused on mis-selling and misrepresentation – it is nonetheless very broadly based.

There are other new regulations – either proposed or before Parliament now – which have an impact on financial services law in New Zealand.

I won’t go into detail on those here.

But one example is the Bill – which last week was in its Third Reading before Parliament – and which amounts to a reform of the law applying to consumer credit contracts.

That will be administered by the Commerce Commission, assuming it becomes law, and there will be some of you here today who will have obligations under it. So, that’s the big picture.

Of course, as compliance and risk professionals, I know you are interested in the micro as much as the macro.

Because the way in which regulation is applied makes a big difference. Including to your daily working lives, and to the way in which the firms you work for operate and organise their business.

That brings me to FMA’s priorities.

I’ll take you through some of the highest medium-term priorities for FMA.

In the immediate-term, as many of you will know, as of April 1st we are licensing for the first time six types of market service providers, namely:

  • Crowd-funding platforms.
  • Peer-to-peer lending intermediaries.
  • Independent trustees.
  • Derivatives issuers.
  • Discretionary investment management service providers (DIMS).
  • Managed investment scheme managers (MIS).

This round of licensing is a substantial undertaking for us and has required a lot of work on our systems, processes and guidance.

All up, we’re currently engaged with more than 400 businesses and individuals active in those spaces… of some sort… that are likely to be licensed.

In granting licenses, our overall aim is to ensure that applicants meet the threshold prescribed standards.

We’ve signaled those standards in plenty of time, by consulting on them and publishing detailed guidance.

These prescribed threshold standards include ensuring:

  • the directors and senior managers are fit and proper for the roles they perform
  • that the applicants are capable of performing the service for which they are applying for a license
  • they have adequate risk management and compliance processes
  • and that they are well-governed, with a culture that promotes client interests.

Further, we want to ensure that these businesses can sustain this over the long-term… helping to ensure they provide sound outcomes for the firms, investors and consumers.

The peer-to-peer lending and crowd-funding service providers are grabbing the attention at the moment, certainly if you read the business media coverage.

I guess that’s because they are the debutants at the ball and it all sounds modern and novel.

Without doubt however, both bring with them a risk profile that requires some careful thought.

Balancing the need for more creative ways of raising capital with the risk that this brings – for unsuspecting or uninformed investors – is a challenge.


There is an equally important population that we regulate – and one that already exists and has done for a long time – the authorised financial advisers (AFAs) and registered financial advisers (RFAs) – who have been in our orbit since the FMA was established, three years ago.

The financial advisers remain a priority for us.

That’s partly because they have considerable influence – over consumers – through their advice.

It’s also because there are a large number of them – a little over 19-hundred (1,900) AFAs at March 2014, and a little more than six-and-a-half thousand (6,500) RFAs.

A revised Code of Professional Conduct (the Code) – for the AFAs – took effect from 1st May.

It’s the second such Code since regulation of the advisers began, in 2008.

The revised Code was the result of extensive consultation with the advisers – by the Code Committee, and subsequently approved by FMA – which demonstrates our commitment to the profession.

The Code starts with the premise that the entire financial services industry needs to start with – that the interests of the customer are paramount.

To a hard-bitten, detail-oriented lot like you – that may sound trite and woolly.

But to us it is crucial and I was very pleased to see the Code Committee put it at the very heart of the new Code.

To another priority:

KiwiSaver – where we have a supervisory role – is a critical for us, because it represents a fast-growing share of private wealth in New Zealand and to many people will be the first experience of investing in the markets.

KiwiSaver funds under management were nearly 19 billion dollars ($19 billion) at March 2014.

But – more importantly – the growth of funds under management is extraordinary.

They’re up 18-fold since 2008.[1]

In asking ourselves where the most harm could be done to the most people by poor conduct in the industry, KiwiSaver has to feature highly.

For this reason, despite its already high profile, we will continue to focus a lot of attention on whether good outcomes are being delivered by good conduct.

Two other systems where we maintain oversight – and where I intend for us to continue to pay attention – are the NZX, and the remaining workplace-based superannuation schemes.

The number of superannuation schemes in New Zealand is falling, down 25 per cent in the year to June 2013.

That reflects, in part, the rise of KiwiSaver which is effectively displacing many of the superannuation schemes.

Nonetheless, about 400 hundred thousand (400,000) New Zealanders remain members of schemes or are drawing from the schemes.

So, we have an on-going regulatory commitment to those people, because they joined the schemes anticipating that the schemes would continue and that they would do so with oversight.[2]


The NZX is a priority for us.

It’s New Zealand’s only registered exchange and as such, it represents the lion’s share of large-company investment in New Zealand.

Further, for many international investors – either private ones or funds – it’s one of the routes into direct investment in New Zealand businesses.

So, it’s at least one front door into the New Zealand market.

The NZX provides its own frontline day-to-day regulation.

But the FMA has oversight of all the NZX’s regulatory functions.

We publish a comprehensive annual assessment of NZX’s performance against its statutory obligations, including its ability to enforce compliance with its market rules and ensure that its markets are fair, orderly and transparent.

Our 2014 report on the NZX’s regulatory obligations – we call it the General Obligations Review - is close to being published.

As well as direct oversight of NZX, our role includes responding to allegations or evidence of market manipulation and insider trading, where that is referred to us by the NZX, or where we discover it – or receive evidence – via other routes

In order to perform our various functions relevant to NZX, we maintain close operational connections with the NZX.

As a general observation, I would say that we – and that includes FMA – need to ensure our standards on the NZX keep pace with the growth of the market.

The New Zealand public capital market is growing quickly – both in the value and volume of trade, and the number of firms that want to list.

Trade by volume is up 31 per cent (31%) over the last 12 months.

Trade by value is up 48 per cent (48%).

The IPOs – currently planned – are a 10-year record.[3]

An increase in business like that serves to underline the need for all of us – the regulator, the market operator, and everyone who is trading on it – to aspire to high standards.

You can expect to continue to hear this mantra from FMA.

I also want to mention as a regulatory priority – the materials provided to investors on which they are supposed to make investment decisions.

MBIE has just released its Exposure Draft for disclosure requirements for the offer of financial products

There are some critical policy decisions yet to be made but we are building on the well-received progress made on the Genesis IPO – where the company and its advisors deserve credit for responding to our urging for clearer, shorter and better organised offer documents.

This is an area where we have had to resort to some heavy-handed 'influence' – in pushing for hard page limits to be included in the policy settings – we were reflecting the difficulties the industry was and is having to make the quantum shift we believe is required.

I would lay down this challenge:

  • we know that a lot of potential investors are put off by the length and complexity of offer documents and that a lot of those who are prepared to read then do not find them useful
  • that position is surely untenable
  • there’s no point producing investor materials (and that is what they are – not legal defense documents or director risk management documents) if investors don’t use them to make their investment decisions
  • it could add to the perception out there – that you have to be an insider or some sort of expert to actually understand the investment case and the investment risks of offers of securities.

I wanted to close with some remarks on style.

And that doesn’t mean I am going to talk about wearing purple shirts and flowery ties to the office.

I am talking about the style or tone that a regulator takes in applying the rules.

Style is an under-rated area of regulation and having spent the last 20 years on the other side of the fence – your side of the fence – I believe passionately that how a regulator delivers its message makes a massive difference.

It’s possible for an agency to apply regulation in a pedantic and demanding way, so that it becomes a labour for everyone – something to be endured and chipped away at by the industry rather than something to be welcomed and enhanced.

But it’s possible to take other approaches that maintain the spirit and intent of regulation, without making it unduly onerous.

It’s the latter approach that I will be applying at FMA.

I don’t intend for us to demand things that aren’t material, or for us to be unrelentingly pedantic.

We intend to act where we believe there are sound reasons to do so and to do so in a manner proportionate to the risk we perceive.

That’s sound regulatory reasons that would be recognised by a firm, an investor, a consumer, or the Government acting in the interests of the country.

That’s a good summary of the approach I am describing.

It’s sometimes also called a harms-based approach to regulation.

It means regulation is geared to the actual or potential harm that might arise from a practice, behaviour, governance.

Or the lack of a practice, or governance.

Practically it means if we have asked you for something, or we are making inquiries, then there is a good reason to do so – a harm to be avoided or mitigated or an outcome for customers, investors or the market that can be improved.

I am confident that we’ll reflect that sentiment in the way we act.

And I hope you will accept that we are acting in good faith and for good reason.

Further, I want to reassure you that, where firms or individuals are a few degrees off the mark, we’d prefer to help you get it 100% right, provided you are genuinely trying to meet your obligations.

If you are making genuine good faith attempts to reach good outcomes for markets and customers, we will be supportive and pragmatic.

But we do expect you to play it straight – those who put their own interests first, who shrug in the face of harm to the market. or who decide not to co-operate with us (or to co-operate grudgingly and defensively) will see a very different face of the FMA.

I recognise that we’re ushering in a comprehensive, new regulatory regime in New Zealand and in an environment where we all want to move on into a new positive era and leave behind the damage done by the finance company crisis, Ross Asset Management and the mis-selling scandals seen across the globe.

So, I think a grown-up and facilitative approach – like this – is right for us at this point and I expect the industry will feel the same.

Thank you.

I’m happy to take any questions now.

[1] Chris Douglas, Morningstar KiwiSaver Quarterly Report, March 2014, Morningstar New Zealand.

[2] Financial Markets Authority, Superannuation Schemes Report to 30 June 2013, Financial Markets Authority, Auckland, New Zealand.

[3] NZX Annual Meeting, Report of the Chairman and the CEO, Auckland, 16 May 2014.