03 February 2021

Rob Everett speech at Financial Services Council Outlook 2021

On 3 February 2021, FMA Chief Executive Rob Everett spoke at the Financial Services Council Outlook 2021 event about a year in review, a look to the year ahead and key learnings from the challenging year that was 2020.

(Notes may differ slightly from speech as delivered)

Good morning. 

Thank you, once again, to Rob [Flannagan] and Richard [Klipin] and the FSC for organising this event. I’m delighted to be here rather than doing this over Zoom. And not just because of the bacon rolls.

Looking back over a very challenging period since this time last year, first up I wanted to thank you, the industry, for your response to the challenges of the pandemic. Financial services entirely justified its designation as an essential service for the wellbeing of New Zealanders.

These are still exceptional times. The pandemic, extreme market volatility and increasing cyber-attacks are forcing us all to rethink how we manage risks and remain resilient.

Amid all this change, one thing remains constant at the FMA – namely: conduct, culture and a relentless focus on the needs of customers and investors.

Looking forward

One year on, COVID and its economic fallout remain top of mind.

Markets have been buoyant, underpinned by a massive growth in new retail investors and a rapid rise in ETFs.

While all of us have been relieved by the way markets have bounced back, current levels are surely unsustainable.

Negative or close-to-zero interest rates have become a feature of many economies, and the current low interest rate environment is expected to continue for some considerable time.

Against this backdrop, we remain concerned that more investors will be venturing into higher-risk territory as they search for yield.

I spent a chunk of my summer hooning around the financial media to see what was going on, what may be coming our way, and how regulators are responding to those issues.

There were a bunch of common themes that align pretty well with where the FMA is looking:

  1. ESG/sustainable finance
  2. Vulnerable customers – think “buy now pay later”
  3. The regulatory perimeter – eg UK mini-bonds and the issue of how to protect investors in unregulated offers
  4. Retail trading – I imagine everyone has seen some commentary on the extraordinary events around GameStop in the US
  5. Cyber-resilience – some of those developments are uncomfortably close to home: you will have seen some of the coverage of our review of NZX’s technology capability, including their set-up around cyber-attacks, and of issues experienced by the RB, ASIC and indeed the US Pentagon.

Extreme though some of these issues are, the areas of FMA focus I am about to summarise are very similar.

Volatile markets

KiwiSaver and the rapid rise of online retail investing platforms mean investing is becoming truly mainstream.

Many of these new investors have enjoyed stellar returns. It’s great they’ve had this upside, but we worry that some may be emboldened and venture into high-risk waters. 

In the US, close to $800bn is invested on margin – borrowed money – way beyond anything ever seen before. A major correction could leave many of these investors in financial ruin.

We’re not seeing this highly leveraged options trading in New Zealand, but we’re watching developments closely.

Within KiwiSaver, we saw a big surge in switching activities at the start of the COVID crisis. I think that the common lines taken by the providers, the regulators and the media undoubtedly calmed that down, and hopefully will have prepared investors for the next downward drop.

Market conduct

There is a need for more work to ensure new investors play by the rules. 

You’ve probably seen recent articles about GameStop where retail investors allegedly deliberately pumped up stocks to take down a couple of hedge funds who had been running short positions. This “weaponised” use of options by retail investors may fundamentally change how US markets operate. The power of the crowd should be making hedge fund managers (and regulators) deeply uncomfortable.

We’ve recently issued more guidance on this area and encouraged the online platforms to remind their customers of their obligations. More work will be necessary from us, from the NZX, and from the providers and advisers in this area to avoid disorderly markets or poorly informed retail investors staring down the barrel of a criminal prosecution.

FMA focus on the regulatory “perimeter”

One of our focus areas for the year will be unregulated offers – such as those offered to wholesale investors. Our concern is that inexperienced investors will be attracted to the impressive returns promised, especially in the property space. It’s crucial that investors are fully informed on the risks associated with these investments, in line with fair dealing rules.

We’ve also consulted on guidance on investment advertisements – advertising offers in the newspapers or online in a way that does not align with the official offer document is another area where we will be trying to drive standards up.

As we’ve seen with the collapse of London Capital & Finance mini-bonds, the UK regulator has moved to restrict access to speculative or “high-risk” products where the risks may not be properly understood by investors – wholesale or not. There’s a crucial difference between high investment risk and poor investment disclosures (though the two often seem to come together). 

Regulators are not here to prevent the offer of investments that carry risk or may be, with hindsight at least, just bad investments. We are here to make sure the risks and returns are properly represented and to caution investors to carefully consider the risks they are taking.  Investors signing away some of their rights by getting themselves categorised as wholesale investors need to think hard about the risks they are taking.

Banking and insurance

An uncertain economic climate means many more customers are, or are about to be in a vulnerable position. We’ve issued guidance encouraging firms to consider the needs of these customers, and this will remain a focus for us.

I have saluted the banking, insurance and advice communities for upping their game during COVID in this respect. It is, however, critical that the lessons learned during the last 11 months are applied in reframing how to understand the evolving needs of customers and how to meet those needs.

Behaviourial science should be applied for the benefit of customers and investors – not just to sell more product. Every time I let myself down by grabbing a chocolate bar at the supermarket checkout, I think of this. I accept that the supermarket is not fully to blame for my poor decision, but they know my weakness and they prey on it.

Clare [Bolingford, FMA Director of Banking and Insurance] will cover our expectations in this area when she’s up next.

Legislative reform

There’s clearly a lot of change afoot on the legislative front, as you’d be keenly aware.

From the FMA’s viewpoint, we are focused on three primary areas, but the Reserve Bank and the Commerce Commission each have their own changing legislative landscapes, and working out how to blend those together to make a coherent regulatory system is a huge challenge.

For us then:

  • The FSLAA legislation covering the new licensing regime for financial advisers
  • The CoFI Bill introducing new conduct licensing for financial services
  • The new climate-related financial disclosure regime.

On FSLAA, 15 March kicks off full licensing for financial advisers, and with that comes new obligations for advisers.

It’s been a huge effort to get to this point. My thanks to all those involved, including the FSC and everyone in the advice industry.

There is still much water to flow under the advice bridge but I’m optimistic that we will get to a sensible place and deliver on our collective goal to maintain and build consumer confidence in the value of financial advice. Just a reminder – if you don’t have a transitional licence by the deadline, you can’t operate as a financial adviser. Unless you have got yourself a full licence.

The CoFI Bill is, sadly, still a Bill, and we await the end of the legislative process. While we didn’t agree with everything aired in the Select Committee, it was a valuable process to consider where the draft legislation had undercooked or overcooked the objectives it was meeting.

The legislation will usher in a much wider remit for the FMA in regulating banks and insurers. We face a major challenge to both retool ourselves as a consumer-focused regulator and to actively supervise a much bigger number of firms.

I know Clare foresees extensive dialogue with the industry and other stakeholders as we prepare for this. I’ll leave her to talk further about this.

New Zealand has moved early to commit to a new regime on climate-related financial disclosures. 

The FMA will be responsible for regulating this area. We’re currently working with XRB (the External Review Board), which will set the standards and rules for the new regime, as well as other Government agencies as we prepare for this.

You can be confident that we will be consulting you as we formulate our thinking. What the Government has announced is ambitious and will be complex to land. It is however only a small piece of the push towards a finance system that delivers sustainable outcomes for the investors and the world we live in. To quote Mark Carney on climate change, the “tragedy of the horizon” seems to be coming at us fast.

Other focus areas for the FMA


We released our report on the NZX technology issues last week.

While there were some specific criticisms of NZX’s preparedness for large-scale attacks, there are important lessons for us all in how to plan and prepare for cyber-attacks.

The Reserve Bank, ASIC and some major organisations across the world have been caught up in the hack of the Accellion file-sharing system. The SolarWinds incursion in Pentagon and other US Government systems is another example of how these threats are increasing. 

As noted in our report, cyber-security has to be at the top of the list of risks for all organisations today, public and private. 

Every Board director should be asking how well prepared their organisation is to withstand these types of attack – and how they will respond if their system is breached. Having a good plan for responding to a successful cyber-attack is as important as trying to keep it out.

ESG/sustainable finance

The FMA continues to support the transition to an integrated financial system that looks beyond financial considerations to also take account of natural, human and social factors.

We are seeing massive growth in demand for financial products with ESG or responsible investment features so it was good to get our guidance out at the end of last year on disclosure requirements around these types of products. 

As I’ve indicated before, we are fully behind the move to a sustainable finance system, and I applaud the great work of the Sustainable Finance Forum in that regard. I will say again, however, we will have little patience for issuers or product providers who try to rebadge their investment products as “green” or “responsible” without actually fundamentally reflecting that in the substance of the product and the rights of the investors.

Other matters in the year ahead

I’ve given a summary of what’s on our radar but there are a couple of other important points to note.

We expect to hear back soon on the international review of our AML/CFT regime. This will inform future actions we need to take to ensure New Zealand does its bit to safeguard against money laundering and financing of terrorism.

KiwiSaver touches most New Zealanders and will remain an important priority for us – Paul Gregory’s appointment as our first Director of Investment Management reflects this.

I’ll leave Paul to talk further about managed funds but I wanted to note that KiwiSaver came through the initial COVID volatility pretty well. This was the first major test for a relatively young scheme.

As KiwiSaver matures, we will continue to ask the hard questions to ensure members are getting the most from the scheme.

Wrap up

In closing, I’d like to reiterate something I’ve been saying for several years – namely, that governance and culture are at the heart of progressing all these initiatives. The approaches we are looking for cannot be add-ons and they cannot be temporary. 

We want to see Boards and management working to establish them in the culture and the DNA of their organisations. I believe we are only a few years into a transition that could easily take 10 years to be fully bedded in to the finance sector.

Like KiwiSaver, the FMA is growing up. Change is inevitable for the FMA as we reflect today’s environment and the future responsibilities we are being tasked with.

Significant work is underway to prepare the FMA for its new remit and whatever else the Government, markets or fate throw our way.

While we’re focused on that future, it’s vital that we continue to do our current job and don’t drop the ball - just as industry cannot afford to drop the ball as it readies for future changes.

This is, again, a period of significant change in the regulation of financial services in New Zealand.

With that comes pressure, at the same time as a major pandemic and deep economic challenges for New Zealand.

We don’t know what will come our way this year, and the economic impact of border restrictions is still uncertain.

Regardless, the need to look after consumers and investors will likely increase, not decline.

Our goal is to ensure trust and confidence in the finance sector and in our markets. And in the regulator.

That goal is, I’m sure, shared by everyone in this room.

Thank you.