FMA Chair Craig Stobo delivered presentations to the Institute of Directors and the New Zealand Initiative.
Thank you for having me here today. I want this to be a conversation, so please do ask questions throughout my presentation.
I have been FMA Chair for nearly 10 months now. Now that the training wheels are off, I wanted to provide some insight into what the FMA does, and what it’s like to be the chair of a regulator.
First, some background. The FMA was established in 2011 to restore investor confidence following the collapse of a large number of finance companies during the Global Financial Crisis. The collapse of these companies cost everyday investors, as well as the Government, billions of dollars.
Our statutory objective is to promote and facilitate the development of fair, efficient and transparent financial markets, and to promote the confident and informed participation of businesses, investors and consumer in financial markets.
Our statutory form is that of an Independent Crown Entity. That means that the FMA is governed by a Board that is appointed by the Governor General, on the advice of the Minister of Commerce and Consumer Affairs.
As Board members, there are collective and individual duties that we must abide by, which are specified in the Crown Entities Act 2004. This includes duties such as acting consistently with the entity’s objectives, functions, statements of intent and current statement of performance expectations. We are also required to be politically impartial, to enable us to act under current and future governments.
The Minister cannot direct us with respect to our statutory functions, such as our enforcement activity relating to individuals and firms. However, under section 20 of the FMA Act, the Minister may request that the FMA inquire into, and report on, any matter relating to financial markets, financial markets participants, or other persons engaged in conduct relating to those markets. This to my knowledge has only been used one, by Simon Power in 2011.
Triangular relationship between the Minister, MBIE and the FMA
What makes the governance of a Crown Entity particularly unique, is the relationship between us, the Minister and their monitoring department.
There is a triangular relationship between the FMA, the Minister and the Ministry of Business, Innovation and Employment (MBIE).
While the Minister cannot direct the FMA, he has the power to advise on the appointment of our Board, and to outline his priorities and expectations to us via an annual Letter of Expectations.
Day-to-day, MBIE supports the Minister in monitoring our performance, and administers our legislation and appropriations.
What does this mean on a day to day basis? The Board Chair and the Chief Executive meet the Minister to an agreed schedule, generally once every two months.
The Business of the FMA Board
Now, a bit about the FMA Board itself. We are a Board of nine members. Under legislation, all powers and functions of the FMA rest with the Board. We, of course, delegate the majority of these powers and functions to the Chief Executive, who in turn can sub-delegate these powers to FMA staff, subject to appropriate controls and processes being in place.
While this is the case, the Board does not delegate any of the FMA’s powers to bring proceedings under Financial Markets legislation, other than issuing infringement notices. In other words, the Board has not delegated its powers in relation to Court actions.
The Board exercises these powers through divisions of the Board. We have robust conflict of interest processes in place so that if a Board member has an interest in an enforcement matter, they will not be appointed to sit on a division.
To give the Board increased assurance over the power it has delegated, I have also recently led the establishment of a new Board advisory committee, the Regulatory Oversight Committee.
This Committee helps provide oversight of and guidance to the FMA’s core regulatory work and regulatory planning. It also has a role in scrutinising regulatory impact, performance and service by the FMA.
The Board has two other sub-committees that won’t be of any surprise to you: the Audit and Risk Committee, and the People, Performance and Remuneration Committee.
The Board’s Risk Appetite
The FMA’s risk appetite is set by the FMA Board and provides direction from the Board on its expectations on risk posture and on the willingness of the Board to accept degrees of risk in key areas, in order to enable the FMA to achieve its statutory objectives. Risks should be managed consistently with the Board’s risk appetite. Risk appetite sets the boundaries within which risk-based decisions can be made. The underlying principle of risk appetite is to provide “freedom within boundaries”. The Board’s risk appetite statement influences and guides decision making, clarifies strategic intent and helps to ensure choices align with the capacities and capabilities of the FMA.
The FMA has a nil risk appetite for illegal or unethical conduct, or conduct that is inconsistent with the State Services Code of Conduct and the Code of Conduct for Crown Entity Board members. The FMA also has an averse risk appetite for events that may harm the wellbeing of its staff and risks that expose the FMA to breach of its material legal obligations, including acting in breach of its obligations of fairness and independence.
The Business of Regulating
The FMA has around 370 staff. For a government organisation, we are relatively unique in having the majority (around two-thirds) of staff based in Auckland, where a large number of our market participants are.
We’re funded through government appropriations. Industry levies make up around 84 percent of our appropriation, with the remaining 16 percent direct Crown funding. The FMA must consult on any changes to its funding structure, and this has happened twice in recent years, in 2020, and again in 2021/22, reflecting the significant expansion in the FMA’s remit.
The FMA also receives $5 million in Crown funding to fund litigation activity or defend ourselves from litigation. Any unspent funds are returned to the Crown at the end of the year.
Any penalties paid in civil cases are returned to the Crown, after the FMA has deducted its actual costs in bringing the case.
As a Crown Entity, we are held accountable for our spending by Parliament, and are required to provide responses as part of the Annual Review, and as part of the Government’s Budget process.
So, what do FMA staff do all day?
The FMA is headed operationally by the Chief Executive, who is appointed by the Board and serves a five-year term. Samantha Barrass is the current Chief Executive, and has served in the role since 2022.
We have five enterprise groups that sit under each of the Executive Directors in the Executive Leadership Team. I will explain how the people working in each of these Enterprise Groups play their part in the regulatory cycle.
Here you will see how different functions at the FMA roughly fit within the regulatory cycle.
There will of course be crossover of staff working across the regulatory cycle. For example, our legal team (which sits in the Evaluation and Oversight group) do work on exemptions. Their activities also span across the Supervision and Response parts of the cycle. Our External Communications team (sitting in the Strategy and Design group) supports the use of communications as a regulatory tool, through things like public warnings and notifying the market of litigation.
Supervision and monitoring
The FMA’s supervision activities include licensing, monitoring, and market engagement.
Licensing involves assessing applications from market participants who want to carry out certain activities, such as providing financial advice, or operating as an insurer or deposit taker.
A more targeted form of engagement is the monitoring we undertake on key aspects of compliance and risk. This involves reviewing and assessing the compliance, competency and conduct of financial market participants. This is done with an intelligence-led, risk-based approach, which means we focus our activity where we have the greatest opportunity of reducing harm to investors and consumers. This means we actively focus on only a portion of our regulated population in any given year.
Market engagement is about maintaining close relationships with market participants. This includes one-on-one engagement, but also includes speeches at sector conferences, and industry roundtables on themes such as the use of artificial intelligence in financial services, or consumer and industry perceptions of fairness in anticipation of our conduct regime coming into force next year.
Response and enforcement
The FMA has a range of enforcement tools available to respond to misconduct or potential harm with more flexibility than just litigation. This includes taking regulatory action (such as public warnings, direction orders and stop orders) in relation to non-compliance.
For example, in 2022 the FMA issued a direction order to Managed Investment Scheme and KiwiSaver provider Simplicity in relation to concerns about its advertising.
In 2023, the FMA issued a temporary stop order against Validus because of concerns about investor harm. This stop order prevented Validus from making offers to the public. Following a failed legal challenge by Validus in the High Court, this stop order was made permanent.
Should an issue escalate to litigation, both civil or criminal proceedings also remain options under our legislation.
It’s important to emphasise here that our action will be proportionate to the misconduct to achieve an appropriate market outcome or change in behaviour. In the event of market misconduct, we may intervene on an informal basis or at a low level. However, we will also take strong action and hold individuals and entities accountable when they break the law and fail to meet the standards that are expected of them.
Who we regulate
I’d like to give you a sense of the size of the FMA’s regulated population. Currently, we have:
- 1,567 Financial Advice Providers
- 87 Managed Investment Scheme Managers
- 170 Climate Reporting Entities
- 133 domestic licensed auditors, and 1,230 FMC audits
- 1,023 AML/CFT reporting entities
The size of our regulated population will increase once the Conduct of Financial Institutions regime comes into effect at the end of this month. This regime is designed to ensure that financial institutions (comprising banks, insurers and non-bank deposit takers) treat consumers fairly. It extends the FMA’s remit to cover core retail banking and insurance products.
From 31 March 2025 approximately 78 financial institutions will be licensed by the FMA to provide banking and insurance services to consumers. The sector includes systemically important institutions that are large and complex, as well as small and mid-size firms.
Our remit will increase further once legislation is passed to transfer responsibility for the Credit Contracts and Consumer Finance Act (or CCCFA) from the Commerce Commission to the FMA. Once the transfer takes place, we will add approximately 450 firms to our regulated population.
This is part of the Government’s reforms, which streamlines and aligns financial markets conduct regulation under one regulator. This is known as the Twin Peaks model of regulation, where there is a single prudential regulator (in the Reserve Bank), and a single conduct regulator in the FMA.
Treating credit consistently with all other financial services positions the FMA to deliver efficiencies for the sector, improve credit markets, and support better outcomes for consumers. It also means that a few hundred credit firms will come under our remit once legislation is introduced, passed and takes effect.
Our perimeter
The FMA is also concerned about conduct that sits on the perimeter, that has the potential to cause significant harm and erode trust and confidence in New Zealand’s financial markets.
Conduct ‘on’ the perimeter includes providers and products subject to more general or broad regulatory standards. For providers, the baseline requirements are needing to be registered on the Financial Service Providers Register (FSPR) and ‘fair dealing’ requirements. The FMA’s ability to formally intervene is generally limited to using direction orders and stop orders in this area. The inner perimeter includes providers or products who are not complying with the law. For example, have not obtained a required licence, have failed to register on the FSPR, or are making offers that are misleading or deceptive.
‘Outside’ the perimeter are providers and products that are not regulated by financial markets law. Some providers and products may appear to be in the outer perimeter. However, in some circumstances, FMA can act on scams, potential scams, and suspicious investment opportunities where that has (or gives the impression it has) a connection to a financial product or service.
Size of the sector under the FMA’s remit
I want to give you a sense of the size of the financial services sector that is within the FMA’s remit.
At the very top is KiwiSaver. This is always going to be a focus for the FMA given the number of New Zealanders involved, and the level of consumer awareness. KiwiSaver funds under management surpassed $100 billion for the first time last year which is a significant milestone.
The NZX market capitalisation figure is another important one. We have been working with the NZX, Government and officials on adjustments to some capital market settings to make it easier to publicly list, which I will speak about later on.
The other figure I want to call out is the $215 million returned by banks and insurers.
We have taken nine civil proceedings against well-known banks and insurers for breaches of the fair dealing provisions of the Financial Markets Conduct Act. The fair dealing provisions restrict misleading or deceptive conduct.
The cases follow the Conduct and Culture reviews of banks and insurers in 2018. The cases arose from system and process issues within the institutions and were all self-reported.
Removing red tape and supporting growth
We aim to be a pragmatic regulator, where we focus on what is important, but look to remove unnecessary regulatory burden and any real or perceived barriers to innovation.
One way we do this is through exemptions when we feel it is reasonable to do so. A good example of this is the JP Morgan exemption from the climate-related disclosures regime.
This exemption made sense when we weighed up the costs of compliance against the benefits of the very few customers that JP Morgan have domiciled in New Zealand.
We also took a common sense approach, in acknowledging that JP Morgan’s parent company is voluntarily preparing climate-related disclosure statements. Although not directly comparable to other climate reporting entities in New Zealand, we determined that JP Morgan’s primary users will be able to obtain certain information from its parent company’s global statements in respect of the management of climate risks and governance at a group level.
We know the fintech sector continues to evolve rapidly. We want to ensure that the New Zealand regulatory system facilitates innovation that improves outcomes for customers and increases the efficiency and competitiveness of the financial system.
That’s why late last year we announced a pilot fintech sandbox.
Sandboxes allows us to partner with firms to test innovative products, services or business models. Sandboxes can help spur and incubate innovation by allowing both startups and established firms to test new products and services in a controlled environment.
Taking a pilot approach gives us the chance to gain greater insights into the benefits and risks of financial innovation and new technologies. By testing a product or service in a regulatory sandbox, we should be able to better assess the viability of innovative products and services and gain insights into the innovation’s potential impact on investors and consumers.
We have also supported the Government’s wider policy agenda, engaging in ministerial roundtables with industry on a range of issues that are considered barriers to growth.
The results of these discussions are proposals by the Government to make it easier for companies to list on New Zealand’s stock exchange, enabling further KiwiSaver investment in unlisted assets, and adjusting the thresholds for the climate disclosure regime.
As a regulator, we have been willing participants in these discussions, and welcome the changes proposed by the Government.
What does an effective regulator look like?
Early on in my term as Board Chair, I had the opportunity to engage with some of the FMA’s international counterparts in Hong Kong, Singapore and Malaysia.
The operation of financial markets, and provision of financial services is increasingly global in nature, with the rise of cross-border trends such as crypto-assets, online share trading platforms, cyber attacks, and a global fintech sector.
While I am pleased we are pressing on with things like the fintech sandbox pilot, I know there are always things we can improve on.
In my opinion, the Monetary Authority of Singapore and the Malaysian Securities Commission possess many features of an effective regulator:
- They support innovation
- They maintain strong support from the market, with firms proactively reaching out to the regulator
- They are globally connected, where global firms (such as Islamic Finance for the Malaysian SC) spanning across jurisdictions are part of their regulated population.
These are my thoughts, but I am interested in yours. What do you think an effective regulator looks like?
I also want to hear your views about what best practice regulation looks like. On the screen are some examples, but I am interested in your perspectives on what you see as best practice regulation.
Outcomes focused regulation
I’d like to end with some concluding observations about how we should be regulating. I strongly believe we cannot regulate for the sake of regulating. There needs to be a reason for why we are regulating. The FMA wants to focus on the things that matter. That is, thinking about the end result we want to achieve and ensuring the work we do reflects that.
While this has already been our approach to some sectors over the past year, in 2025 the FMA will be stepping up this approach in a way where firms should see a tangible difference.
So, what are the things that matter?
- As a financial conduct regulator, we are of course focused on making sure that consumers and investors are rightly confident that firms will treat them fairly.
- Closely intertwined with this is our overarching statutory objective of fair, efficient, and transparent financial markets.
- We also want to ensure our regulation is consistent with growing the economy and enabling innovation. New Zealanders should have access to the leading edge financial services and products that will enhance their lives.
An example of how we are doing this is in the Financial Advice sector. While we have been encouraged by the progress made since the introduction of the new regime, a key theme in our insights report last year was the distinction between a tick-box versus purposeful approach?
- We offered examples of how good practices were not always about meeting regulatory requirements to the letter of the law, but also about shifting the dial on how regulation positively impacts the value of advice and the level of consumer trust and confidence in seeking financial advice.
- Our monitoring of financial advice providers has continued to evolve, focusing on what compliance is actually achieving. We have seen some providers take what seems to us to be overly conservative approaches to meeting their regulatory obligations. We will want to understand the reasons for this, particularly to check that business models are not being skewed by an unnecessarily cautious approach to compliance thereby creating friction and restricting the availability of advice.
- In these cases, our feedback isn’t focused on ‘doing more compliance’ but working with firms to understand the roadblocks and to rethink how they are approaching their decisions for achieving the overall purpose of the financial advice regime.
We will be releasing a document on outcomes focused regulation on 20 March.
The introduction of the Conduct of Financial Institutions regime, as well as the transfer of the CCCFA to the FMA brings us more in lien with international norms in financial regulation by giving the FM the tools it needs to be a modern conduct regulator. With that in mind, we are excited to introduce a new publication this year, called the Financial Conduct Report.
In some ways, this Report will be to the FMA what the Financial Stability Report is to Reserve Bank. It provides an opportunity to consider risks to consumers, investors and markets posed by conduct in the sectors we regulate.
We will be releasing this publication by the end of June.
ENDS
