Presentation by Sean Hughes to the Australasian Compliance Institute

INTRODUCTION

Thank you for the opportunity to speak to you today.

The last time I addressed the ACI was at the 15th annual conference at the Hilton in Brisbane last October.

The topic back then was: A single market for Australasia -fostering trans-Tasman regulatory collaboration.

How prescient that was: just this month FMA and ASIC demonstrated our mutual desire for a more dynamic single economic market by announcing mutual recognition of arrangements for Australian and New Zealand financial advisers. It is now easier for qualified financial advisers to practice and be licensed in the other jurisdiction. We are working on other trans-Tasman initiatives too.

Today I want to speak to you about how FMA has engaged with the market to set expectations and provide clear guidance to market participants and investors.

I will finish by outlining FMA's key priorities over the next 12 months before welcoming any questions.

FMA's role as a regulator is to help set expectations, assist and monitor compliance and also enforce the law. Our primary purpose is to "promote and facilitate the development of fair, efficient and transparent markets".

To achieve this goal requires:
1. Competent and compliant financial markets
2. Well informed investors who understand financial risk and return;
and
3. Market integrity

Our enabling Act provides us with sharper teeth than our predecessor. We have greater powers of surveillance, regulation and enforcement. We have a wider scope in terms of the people and entities we oversee, ranging from registered securities exchanges, superannuation schemes, issuers and brokers, to financial advisers.

We have a uniquely New Zealand model for twin peaks regulatory oversight, where we sit alongside the Reserve Bank as prudential regulator, while FMA is the market conduct and disclosure regulator. Other agencies including MED, the Commerce Commission, SFO and the Commissioner for Financial Literacy and Retirement Income, perform roles here in relation to financial markets, which in Australia would be conducted by ASIC.

FMA ENGAGEMENT WITH MARKET

Since we came into being, FMA has got to work on the key strategic outcome, as set down in our Statement of Intent, to "Increase confidence and participation in New Zealand's financial markets."

If we're successful in doing this, and we expect we will be, financial market participants and investors stand to gain. Remember, it's not our role to remove risk, nor is it to stifle innovation. Our challenge is to deliver tailored oversight of the markets for financial products and services while encouraging smart innovation.

Regulation needs to redress the asymmetry of information so that investors understand risk and make informed decisions. And it needs to bring back clarity of expectations and raise the bar on the conduct of market participants so that investors can rely on the transparency and integrity of the information they are given.

One of the ways FMA is doing this is by issuing market guidance. FMA recently issued guidance on effective disclosure to provide our views on good practice in preparing disclosure documents. This will particularly benefit directors of issuers and their advisers.

We're also consulting on non-GAAP financial information or alternative performance measures. It seems timely we did so. A Deloitte survey released in the last few weeks discovered a company using nine different measures of profit in its annual report. And of the 100 companies it surveyed, 89 confirmed using profit measures that differ from the standard net-profit-after-tax. More than half use three or more measures of underlying profit.

We're also consulting on KiwiSaver sales and distribution, and have released a guidance note on KiwiSaver performance fees. Issuing guidance is just one of the ways we can be transparent and share our intended approach with the market. Guidance helps market participants be confident they understand our approach and how we interpret, and intend to apply, the law relating to their responsibilities. And we're hopeful that market participants won't just settle on meeting the minimum standard required. Those who go further can assume a competitive advantage. FMA's desire to see "clear, concise and effective" and trustworthy information presented to investors, has obvious benefits to those who successfully implement it.

FMA ENFORCEMENT POLICY

At the enforcement end, FMA's view is that any action should be proportionate and reasonable. We won't pursue cases where there is a disproportionate cost of achieving a likely outcome. Our focus is on conduct that harms or presents the greatest likelihood of harm to the function of open, transparent and efficient capital markets. FMA has the powers to bring both civil and criminal action for misconduct by financial market participants. We will ensure criminal sanctions are used appropriately and do not and do not create undue disincentives to participate in the market for businesses or individuals such as directors.

FMA will also, where necessary, bring test cases that will clarify "grey areas" of the law.

Alongside our power to initiate civil and criminal proceedings (or to take "top of the cliff" enforcement or administrative action) is the power to initiate, take over and control civil actions against financial markets participants where FMA considers it is in the public interest to do so. These might be:
• taking over derivative claims against directors for breach of the companies act
• or claims against trustees or auditors for breach of duty or contract for investors or the company

PERPETUAL EXAMPLE

So let's take an example of a case we've been dealing with -Perpetual Trust Limited. FMA recently confirmed its continued engagement with Perpetual Trust Limited to recover 25 million dollars in related party loans, although it took a Court of Appeal hearing to do so.

It is FMA's view that the loans were not in the best interests of investors and that Perpetual displayed a lack of judgment and a lack of understanding of the role and responsibility of a trustee in making the loans.

The Courts agreed with FMAs contention that details of the case needed to be made public.
The Court of Appeal ruled, "The Financial Markets Authority should be free to make any public comment on the Torchlight issue in accordance with its statutory obligations."

In the High Court, Justice Heath commented that, "As time progresses, the need for transparency becomes greater. In my view, the Authority (that's the FMA) has exercised good judgment in balancing those two competing interests in this case. The responsible way in which it has dealt with the issues raised should engender confidence in the market that is fulfilling its statutory functions and protecting the interests of investors."

Industry itself was welcoming of our intervention with one AFA writing, "The FMA's actions send out a message to other people that this sort of bad behavior will no longer be tolerated in New Zealand and the investing public will benefit from that."

And a Fairfax journalist noted in his opinion piece that, "With the release of court judgments involving Pyne Gould Corporation subsidiary Perpetual Trust, this time we know regulators have acted promptly."

For FMA's "top of the cliff" action to be picked up on so quickly is pleasing indeed.

INVESTOR INFORMATION

If we are to restore investor confidence then early intervention is crucial. The last thing we want to see is a repeat of failed finance companies. Investors, of course, have responsibilities too. They know why they're investing - to be part of the promise of success. But they also need to understand risk.

FMA has a role to play in the investor education field. And FMA works closely with the Commission for Financial Literacy and Retirement Income.

And of course the work FMA is doing around effective disclosure, non-GAAP financial information or alternative performance measures and the licensing and monitoring of financial advisers can only be a good for investors.

STRATEGIC INTELLIGENCE

Another FMA function I want to talk about today is the area of strategic intelligence.

This new function will identify future and current threats, at both a macro and micro level, here and abroad. The aim is to identify any aspects of the legislative and regulatory framework that suspect business models attempt to target.

It will seek to identify where inappropriate behaviour is occurring, be it misconduct, incompetence or fraud.

Questions FMA will be looking to answer include:
• Where the systemic risks of the future lie?
• Where are the equivalent failed finance company models in today's markets?
• What overseas trends - for example, High Frequency Trading, dark pools, and complex structured derivatives - will migrate to New Zealand and impact investors here?

However, the full extent of this work may never be seen or fully understood externally - by its very nature it will be less public and longer term.

But it may mean we stop things happening by timely intervention in a way that is not externally visible.

THE NEXT STEP

The Financial Markets Conduct Bill currently before the Commerce Select Committee is the outcome of a comprehensive review of New Zealand's securities laws. It proposes some significant changes, which include:

• Changes to disclosure - replacing the prospectus and investment statement regime with a single product disclosure statement tailored to retail investors;
• A modified liability framework for securities law breaches including criminal penalties for the first time for reckless and intentional breaches of directors' duties, as well as civil penalties for misleading information in disclosure documents and advertisements;
• Notably the draft Bill also amends the thresholds for civil and criminal liability for directors. It states that only the most serious, deliberate, intentional misconduct will attract criminal liability, while in less serious cases it prescribes civil action to recover compensation; and
• The Bill expands civil liability options.

The FMC Bill is expected to pass this year and come into effect in 2013. Once enacted, FMA looks forward to seeking compliance with, and where necessary, enforcing it.

FIVE GOALS FOR FMA

While the first 12 months has been retrospective in terms of the focus on historic finance company failures, we now need to look to the future. We have a vision that looks forwards and sideways, deals with matters in today's markets and identifies future trends.
We've talked about 5 goals for the next 6-12 months -

1. Using litigation to ensure financial intermediaries deliver on their obligations - but we'll do that proactively and strategically, rather than in a reactive way.
2. Testing FMA's legislative boundaries by taking appropriate legal risks - while we must always be professional, responsive and work within the legal framework, we should not be too conservative in our areas of focus or choice of remedies.
3. We should communicate well, so that the market and investors know what we are and what we are not doing, and why.
4. We have an obligation to speak up when we see the need for law reform or policy enhancements. Our independence and integrity demands that we contribute openly to public policy debates.
5. We must continue to attract the best talent to FMA and build a continuous pipeline of succession for our leaders. I do not want to leave the Board with a talent vacuum for future years.

IN SUMMARY

It is not the role of law or the FMA to remove risk. Rather FMA wants to sharpen and enhance investors' understanding of risk and the asymmetry of information to support the growth of our financial markets.

For investors, that means an increased understanding of their own responsibilities and greater financial comprehension and confidence.

For the market, it means participants who operate with integrity and transparency and who consistently act in the best interests of their investors.

For the FMA as a regulator, this means taking an active approach to assist compliance and provide clear guidance of expectations of market participants. While we will take appropriate enforcement action, our preference is to focus more on the compliance in a market of well-informed participants.

We are hopeful that the new regulatory landscape and approach will bring about a new era of professionalism, good governance and increased confidence to grow our economy. And we look forward to working with the market in an environment of mutual respect to achieve that.

Thank you.