Presentation by Liam Mason to the Asia-Pacific investors’ forum

Welcome to New Zealand, and thank you for your interest in our market.

You’re hearing from other speakers about our broader economy and economic environment, as well as on specific aspects of investment in New Zealand.

The opportunity I have is to provide a bit of context around NZ’s regulatory framework, how this has been strengthened in recent times, and how it has responded to the lessons of the financial crisis and also challenges in our own market.

The overall theme I have is that the landscape today is very different from that we would have seen ten, or even five years ago.  So I’d like to spend a little time talking about:

  • The drivers of change in our regulatory framework – how we got where we are today
  • The institutional changes that we’ve made to strengthen regulation in New Zealand
  • The recent overhaul of our financial markets legislation, which has created a landscape that will look much more familiar to an international investor than what you might have seen five years ago.

The crisis as we experienced it.

So, while every country in the developed world felt the GFC or its fallout - it had its own special characteristics here in New Zealand.

It’s notable what didn’t happen here. And these things made a difference to the way we responded to the GFC, and the regulation we have now.

  • There were no large bank collapses or near-collapses.
  • We didn’t experience the direct fallout of firms with large exposures to complex and mis-priced derivatives – with the exception of a small number of unfortunate experiences with credit default swap offerings.
  • We did, along with the rest of the world, feel the after-effects that put pressure on our real economy.

The particular New Zealand experience that has driven the changes we have seen in our regulatory framework was manifested largely through a series of collapses in what we call finance companies – non-bank deposit takers that issued debentures and bonds to retail investors, backed largely by exposure to a commercial and residential property markets. 

Many of the business models of these firms depended on a belief that property prices would rise, unchecked, for ever.

When this didn’t happen, beginning in around 2007, liquidity problems quickly became solvency problems, and a large number of these companies collapsed, losing several billion dollars of retail investors’ money.

This downturn started slightly before the GFC hit in earnest, but was exacerbated as world confidence and world markets began to reel in the fallout of events in the US and Europe.

So importantly, the GFC was one contributor to the reform of regulation in New Zealand.

By the mid-2000s, many businesspeople in New Zealand - and senior political figures – had recognised that New Zealand’s capital markets regulation – and financial services regulation generally – was falling behind comparable countries.

Even before the GFC, many people were anticipating an overhaul of regulation.

Much of the existing regulation dated back to the 1970s and 1980s, with almost sole reliance on disclosure as the tool of choice. In very few areas did we in fact look at the conduct of financial market participants.

Many of the financial services professions – such as financial advisers, supervisors, and fund managers – were effectively unregulated.

And the regulatory arrangements were complex - with multiple agencies having responsibility for aspects of market regulation – a fact that had been remarked on by the IMF when it carried out an assessment of our securities regulation in 2004.

So, in 2008 the New Zealand Government established the Capital Markets Development Taskforce, led by an independent Chairman, Rob Cameron, to develop a blueprint for New Zealand’s capital markets. 

This taskforce undertook a systematic review of the state of the markets and our regulation of them, with input from market participants, investors, and Government.

In 2009 this group delivered a series of recommendations aimed at helping our capital markets to contribute to the health of NZ’s economy. 

The report recognised that although market ‘failures’ had severely dented public trust and confidence in our markets, NZ had an opportunity, if it was nimble, to restore that confidence, both to strengthen the role that capital markets play in our economy and to attract investment into those markets.

This blueprint formed the basis for the changes we have seen since in our regulatory framework.

After the deluge

I won’t go into the close detail of the new regulatory landscape.

But I’d like to highlight three key features that will interest you, as Asia-Pacific investors.

The first, which was underway even before the taskforce undertook its review, was prudential reforms in the non-bank and insurance sectors.

NZ's banks had come through the GFC in good shape.  But lessons learnt in NZ from the finance company failures led to a re-examination of the need to introduce prudential regulation for non-bank lenders and insurance companies.

These first reforms established our central bank, the Reserve Bank, as the prudential regulator of these sectors, and gave it the tools to set prudential standards and to oversee the implementation of these with frontline supervisors.

The second feature, a direct result of the work of the taskforce, was an overhaul of our regulatory institutions.

A new conduct regulator was established – the FMA, replacing the former Securities Commission and taking on roles formerly shared between that regulator, the Government Actuary, the Registrar of Companies, and the National Enforcement Unit. 

The new regulator was better funded, with a broader range of regulatory tools, and a new and clear mandate - to promote and facilitate the development of fair, efficient, and transparent capital markets in New Zealand - a mandate that I want to come back to a little later.

Thirdly, and I do want to spend a few minutes talking about this, the Government undertook what has been described as a ‘once in a generation’ review of our financial markets legislation.

The former law, passed in 1978 and much amended and patched in the time between, was thrown out. 

The new law, called the Financial Markets Conduct Act, modernises and streamlines our regulation, and sets consistent standards across investment sectors.

This legislation aims to bring our regulatory framework in line with what an investor would expect to see in comparable jurisdictions around the world.

We are fortunate to have a strong and stable legal framework on which to build, and companies and takeovers legislation that champion shareholder rights. 

The new financial markets legislation builds on this, producing clear and consistent standards for those in our markets.

The new law came into force last year, with firms having a two-year transition to the new environment.

The main thing to say about this new law is that I hope it will look more familiar to you as international investors - in terms of the outcomes it produces.

Features of the new law

The first thing I would note is that the new law, as the name says, looks to regulate all aspects of conduct in our markets, not just disclosure.

This means we have opted for licensing of market participants as one of the foundations.

Retail funds managers, portfolio managers, and derivatives issuers now need to obtain a licence from the FMA to operate in our markets.

We use licensing as a means of ensuring firms have the capability and capacity to provide the services they wish to, and to form the basis for our ongoing supervisory relationship with these firms.

This is backed up by clear and consistent duties on funds managers and others, including to act in the best interests of investors, and consistent standards for trust deeds and other governing documents.

Secondly, the new law overhauled our disclosure rules, focusing on providing clear, concise, and effective disclosure for retail investors backed by detailed financial and other information on an online Government register that allows investors, their advisers, and analysts to access the information they need about regulated offers.

The new law increases the focus on ongoing disclosure – by funds and other investments.  For listed companies, continuous disclosure remains a cornerstone to ensure the markets is kept informed, with new provisions that allow listed companies who have complied with their continuous disclosure obligations to access the markets with very little additional disclosure or costs when raising additional capital.

Thirdly, the new law sets out flexible and proportionate enforcement options for the regulator, ranging from administrative orders and infringement notices to civil pecuniary penalties and criminal sanctions – this last reserved for cases where those responsible can be shown to have acted recklessly or knowingly in breach of the law.

This flexible range of regulatory tools gives the FMA ready ability to intervene in a way that is more timely and more proportionate, and allows us to give clear deterrence messages about our expectations of market conduct. 

It is coupled with broad ranging exemption powers, and also with a novel power to ‘call-in’ products, including those on the regulatory periphery, where we see that this is needed in order to serve the objectives of the legislation – fair, efficient, and transparent financial markets.

An easier road

The last four or five years have seen financial services regulation reformed around the world. 

Both the US and Europe have undergone major change, following the GFC.

Our own lessons - from reform - reflect the nature of New Zealand policy-making generally.

We have seized the opportunity, offered by the Capital Markets Development Taskforce, to undertake a thoughtful and rational review of our financial markets legislation. 

This was greatly helped by the fact that these reforms have enjoyed widespread political and business support – largely because of the work of the taskforce – and that’s making implementation much easier.

We believe that the result is not a kneejerk reaction to a crisis, but a coherent and balanced regime that will meet international expectations and is also right-sized for the New Zealand market.

One feature of the new law that demonstrates this is the greatly increased opportunities for small business in particular to raise early-stage capital from investors with minimal compliance costs – such as through crowd-funding and peer-to-peer lending platforms, through small offers, and to eligible investors.

We believe these initiatives are providing easier access to capital – especially for the smaller firms that characterise the New Zealand economy – and capital aimed at firms that will export goods or services.

The next message is that we now have a stable and sustainable framework and the immediate task ahead of the FMA is to ensure the new arrangements work to their maximum, and resist the temptation to make further changes in the medium term.  

To do so would run a real risk of change fatigue.

I’ll note that we are in the early stages of a review of our financial adviser laws, which were implemented in 2010, but any changes that come from this are not likely directly to affect capital raising rules.

Regulatory priorities

One of the features of the new regulatory framework is that it asks the regulator to focus on promoting and facilitating fair, efficient, and transparent financial markets.  It invites us to take a look across our markets and to identify and focus on the harms that we see most affecting this outcome.

Last year the FMA published its first Strategic Risk Outlook, identifying seven strategic priorities, and areas of focus within these that will guide our work over the next 3-4 years.

Central among these is a focus on governance and culture, particularly the governance standards in financial services firms we regulate.

For our purposes, we say good governance is the systems that a board and senior management run to ensure they have the high standards of conduct – as experienced by investors and customers.

And systems which allow the board to measure the effect of the standards, and adjust conduct where necessary.

For example, we expect to see high-quality information - on investor and customer outcomes - provided to the board, and the means by which the board can act on that information if necessary, confident that results will follow in turn.

The attention we are paying to governance reflects two things, mainly.

Looking back, shortcomings in governance were one of the key causes of collapses of firms here during the late 2000s – so, empirically, we know it’s a vulnerability.

Further, as a small regulator, with about 170 people, we have to find the ways we can apply the most leverage, to get a big result.

Starting in boardrooms and executive suites – where major decisions are made – is one of those places.

We’ve published a set of corporate governance principles, and we’re engaged in a relationship model with boards of our significant market players.

Capital markets growth and integrity

Another strategic priority for the FMA is capital markets growth and integrity.

That means focusing on using the tools we have to alleviate unnecessary compliance burdens and to encourage participation in our markets.

An example is class relief the FMA has granted to make it easier to debt issuers, based here or overseas, to undertake wholesale bond offers with the security that they will not run foul of the law.

Market integrity also means we will have a strong focus on market conduct.

You’re hearing from Tim Bennett today on some of the initiatives that the NZX has underway.

So I won’t speak at length about the NZX, other than to mention briefly our regulatory relationship.

NZX is New Zealand’s only registered exchange for debt, equity and other tradable securities, so it enjoys plenty of attention from us – the regulator – from big firms, and from the business media.

NZX provides immediate frontline regulation of listed issuers and of its participant firms.

NZX reports to the FMA on its ability to provide that regulation. And the FMA formally reviews NZX annually, to ensure the regulation meets the statutory obligations.

We publish our report on that review – the most recent report was published earlier this month, and concludes that the NZX is now fully meeting its obligations as a market operator.

In practice, NZX and the FMA work co-operatively – it’s certainly not a distant relationship - and earlier this year we signed a new MOU that sets out key principles of how we will continue to work together to ensure that we maintain high standards of conduct on the listed market.

Both organisations are committed to making the relationship work.

The FMA has obligations, under statute, in regulating disclosure and conduct on the public market, and that includes taking enforcement action where we think necessary.

Indeed, these are priorities for us.

There has been an example recently, where we reached a settlement with Pacific Edge – a listed firm – to pay $500,000 to investors for a failure in continuous disclosure, and issued a warning to the firm.

We have also signalled a focus on market misconduct, including market manipulation and insider trading – and last year secured the first win in a market manipulation case in New Zealand, with an individual admitting six breaches of our market manipulation laws and being ordered by the High Court to pay a pecuniary penalty.

Conclusion

Let me close today by thanking you for your interest in the New Zealand market.

If there is one theme I’d like to take away about the New Zealand regulatory framework it is that we have taken the opportunity of recent events to undertake a thorough and coherent reform of how we regulate financial markets. 

The result will look much more familiar to international investors than what was here before, but without the extreme reaction to crisis that have been observed in some jurisdictions.

As Asia-Pacific experts, you will recognise many of the key qualities, including an emphasis on improving on-market conduct, and the quality of disclosure for offers.

You will also recognise the application of licensing, and the use of enforcement both as a means of addressing misconduct, and providing deterrence to others.

We are in the early phase of implementation – and there is much work ahead for us bedding-down the new law, but early results and commentary from the market and investors, tell us that we are on the right track.