A new dawn
On Thursday 7 April the Financial Markets Authority Act passed into law, reportedly in a rare unanimous vote in Parliament.
The New Zealand Shareholders Association was a strong advocate for this new super regulator long before it became fashionable. For years, gaps and fragmentation in the regulatory setup have been exploited by the unscrupulous for their own enrichment. Chief amongst these have been more than 50 privately owned finance companies. The unfortunate reality is that the collapse of these shonky, poorly managed enterprises has seriously damaged confidence in the publically listed equity and debt markets. The majority of people and in particular the media draw no distinction between public and private companies. Yet they have been worlds apart in their governance and oversight.
What has not helped is that the recently departed securities Commissioner Jane Diplock repeatedly claimed to have no powers to act. Even a cursory examination of the legislation shows that to be untrue in most instances. It is sadly ironic that the flurry of activity in her last months in office proves once and for all that it was a lack of will rather than anything else that kept the ambulance planted firmly at the bottom of the cliff.
However, now is the time to be looking forward rather than dwelling too much in the past. This is essential if the FMA is to discharge one of its primary objectives, that of bringing confidence back to the capital markets. One problem is the Kiwi mentality that “the government should do something” every time people make poor investment decisions. A second is the problem of our appalling financial literacy. Many of the so-called investors in finance companies were nothing of the sort, and neither for that matter were many “advisors”. They were simply chasing the highest interest or commission, and ignored even the most basic analysis of the risk.
No government can save people from their own poor decisions, and neither should it. What it can do however is to put in place a sound regulatory environment ensuring that information, disclosure and transparency are adequate to make informed choices; and the people offering advice are acting in the clients interest rather than their own. Where enforcement is required, this should be both timely and effective.
This has become even more critical with the huge uptake in KiwiSaver. Based on the Australian superannuation experience, it will not be long before people discover that KiwiSaver is rapidly becoming their second most valuable asset. At that point they will take a great deal more interest in how their money is invested. As KiwiSaver is not government guaranteed, we can expect the blowtorch of public scrutiny will increasing fall on the performance and behaviour of all participants in the capital markets.
To his great credit, Commerce Minister Simon Power has been exceptionally active and has already had the Financial Advisors Act and now the FMA Act passed in short order. A full overhaul of the Securities Act is currently underway. Long overdue changes to audit and accountancy regulators are also in train which will remove the cosy relationship between the professions and their regulators that has given rise to perceptions that “they look after their own”. Whether or not this is true, the fact is that in the public mind, the perception is the reality.
Despite the compressed time frames, the NZSA have been impressed at the level of consultation that has been taking place to make the new legislation both robust and workable. We have been an integral part of this process. While it has strained our limited resources we have been able to ensure that the buy side of the market has, perhaps for the first time, had its voice heard at the highest levels. In a number of areas we have effected worthwhile changes and additional protections for individual retail investors who by and large do not have the financial resources to pursue actions on their own.
The FMA Act introduces a number of new tools into the regulatory arsenal. Given the principle based nature of its provisions, there should be no problem bringing any new schemes under its jurisdiction in the future. In effect, the gaps have been closed.
Much will depend on the skill of new FMA CEO elect Sean Hughes in changing the mindset of staff he has inherited and re-directing them to a more holistic approach. Already we are seeing much emphasis being placed on market intelligence and merit based decisions – things that have been sadly ignored in the past. While the new board is yet to demonstrate its strategic direction, we are also encouraged that Chairman Simon Allen appears to share many of the values and aspirations that Sean brings to the job. This is the first chance in two generations to effect real change. That responsibility should weigh heavily on the FMA and inform its direction for the future.
NZSA National Chairman