This is a risky engagement for me.
I’m an Englishmen in a room which is mostly Aussies and New Zealanders.
And as a former lawyer who ran off to become a banker I have two questionable professional choices to my name.
So, I can’t afford too many wise-cracks about the professions.
Or sport, especially with the Ashes hopefully still a sore point for some of you, but with the Rugby World Cup only two weeks away and England and Australia in the group of death.
Nonetheless, I am going to provide a match report today, on post-GFC regulation in New Zealand.
Hopefully, my observations will provide an opportunity for some debate for those interested in regulatory philosophy and the legislative tools enabling it.
I am going to break it down into three chunks:
But first a couple of opening remarks.
GFC still. Just less of a crisis
I mentioned there – in passing – the phrase ‘post-GFC’.
You see that phrase used in the financial press all the time.
I don’t claim to be an economist and I’m not a macro-prudential regulator.
But I think that the GFC is far from over.
Yes, the immediate short-term liquidity crunch which led to free-falling asset prices, recapitalisation or bail-out of banks, insurers and sovereign states is largely behind us.
Although if you look at the state of the banking system and sovereign economies in Europe - and I’m talking about France and Spain, never mind Greece - you might question even that assertion.
The boom over the last five years in asset prices is driven by massive cash injections by central banks and rock-bottom interest rates.
So, the crisis is still with us. It’s just in a less acute phase.
A halt in QE, or major rise in interest rates, may prompt a sharp and significant correction to asset prices that turns the gaze of investors and politicians very firmly on markets regulators, like the FMA.
Part 1 - drivers of change
I want to look back, briefly, to the genesis of the change in New Zealand, which has seen us switch from a securities regulation model, to conduct regulation.
If you wind back the clock - say a decade, to 2005 - and look at the regulation that prevailed in New Zealand then, you can already see the pressures for change building.
By that time, the existing regulation – which boiled down to two main statutes – was already 30 years old.
The regulator of the time – the Securities Commission – was hampered by narrow powers, little opportunity for engagement with business in the sectors it regulated, and limited means of enforcement.
Many people in the professions, and in business, recognised by the mid-2000s that New Zealand regulation was falling behind.
The Financial Intermediaries Task Force was set up in 2004, and reported in 2005. This was partially prompted by the IMF FSAP assessment of New Zealand, in 2004, and accompanied a growing awareness that the securities legislation as a whole needed an overhaul.
The deluge arrives
The pressure for change accelerated from around 2007/2008. The global economy turned sour, dragging the shortcomings of the regime out into stark daylight.
Suddenly, problems that were recognised by lawyers and directors were catapulted into the mainstream discourse. I’ll summarise a few of them:
Finance companies – failures of: governance, risk management, and common sense
Patchy regulatory framework
Ross Asset Management
Local conditions, globally familiar response
So what was the New Zealand response?
For the most part, the new regime was designed by the Capital Market Development Taskforce, under Rob Cameron, which reported in 2009, with a brief to address the particular problems New Zealand faced.
One of these - that I have not mentioned above - is the proliferation of small companies, and the extreme difficulty these firms had in raising sufficient capital in New Zealand.
Beyond the main board, there was little prospect of securing investment and similarly few opportunities for people to invest.
Part 2 - what we’ve achieved
The centre of the regime is the Financial Markets Conduct Act, which has been coming into effect over the last two years or so. The biggest features of the Act are:
A mid-game assessment
A report on early-match progress in New Zealand on implementation.
FMA up and running
Enforcement is an area we have had to look in two directions simultaneously, as we have implemented the Act.
Both forwards – to what the new regime looks like - and backwards, to what came before.
Specifically, we’ve continued to put considerable expenditure and work hours into enforcement in a series of cases dating from the former regime, the majority of them in the finance companies.
Indeed, only in July this year, an enforcement result for us - in a notable finance company case - topped the evening TV news and made front pages. Even though the company first got into trouble around 2007.
But we recognise that the credibility of the new regime – and our credibility as a new regulator – hangs partly on our ability to look backwards, and clean-up the past.
Change on the scale I have described produces growing pains.
I’ll outline three of the tension points we’re seeing, and something on how we are responding to them.
In short, regulatory conduct amounts to the institutional choices made by a firm, a fund, or a profession.
For example, a financial services firm that sets up a sales system and gives staff incentives that may cause them to mislead clients in order to meet sales targets is demonstrating poor conduct.
In New Zealand, we are seeing only the early stages of a response in addressing systems in order to provide on-going and guaranteed quality conduct.
One of our most notable cases to date – Milford Asset Management – provides an example, both in the way firms are adjusting, and in what we see publicly.
The absence of court proceedings – at least against the company, setting aside for a moment, the civil proceedings that we have since initiated against a trader – surprised and disappointed some people.
So did the fact that we accepted a payment from the firm in lieu of a court-awarded pecuniary penalty.
However – as many of you will know – penalties, without proceedings, are common in instances of systems’ shortcomings in other parts of the world.
In fact in the UK or the US they are the norm and court proceedings against regulated firms are very much the exception.
New Zealand, however, still equates regulatory action with court proceedings.
Non-court sanctions will be more prevalent in New Zealand in the future.
Mostly, C-suite managers are generalists. They have good management practices, but rarely do they have detailed understanding of the law or regulation.
That’s a big difference – in the worldview, in the sense of urgency, and in the understanding of consequences for non-compliance – relative to a group of lawyers.
So, much of my time, and the time of other senior FMA staff, is spent in boardrooms, and in C-Suites, with CEOs and their managers.
More often than not, I am discussing organisational culture, or aspects of it. Rarely do I discuss the law directly.
As a result, we play a hybrid ‘regulator-come-facilitator’ role, both applying regulation but also familiarising it, with firms, finance professionals, and legal and audit advisors.
A single number will serve to underline our commitment in this area. In the last 12 months, we undertook nearly 100 substantive sector events, either ones that we ran for firms, or ones we attended as a main speaker.
A big total when you realise our senior regulatory staff – who undertake public and industry events – numbers 10 to 15 people max.
But we recognise this commitment is necessary, and on-going - if we are to assist firms to make the cultural shift as well as the statutory one.
Part 3 – What’s to come
Five years of adjustment
Overall, I anticipate the trajectory of change in New Zealand – the entire duration of adjustment – could easily be five years.
That’s how long it will take before we see the full depth and range of benefits of the new regime, for the economy, and for firms, professionals, and investors.
‘Conduct’ is an idea under construction in New Zealand, with key parts in the design phase.
I’m confident that there will be widespread agreement on what it means – eventually - although it will have specific characteristics unique to the New Zealand setting.
For the FMA, we have to concentrate on deepening understanding of the practical meaning of conduct, in regulation, to ensure the transition continues apace.
Sometimes I do wonder whether the speed and range of change in New Zealand in the last two years has been too much, too quickly.
Indeed, the vast majority of the change I have described today has become a reality only since 2014.
Much as it was discussed, consulted upon and known in advance, the actual change in practices, processes, systems and behaviour is only now underway.
Most of the change has been phased-in over two stages – the first in April last year and the second in December - with various transition periods for certain parts.
However, on balance:
The old regime imposed disproportionate costs. But it also contributed to slowing progress in business unnecessarily.
Among other things, it wasn’t keeping up with the emergence of online business, it failed to recognise the demands of modern investors and consumers, and it did little to deepen the quality of boardrooms and governance.
As I noted earlier, it will be around five years before the adjustment in New Zealand is complete. We’re about a year into that transition.
That brings me to the ‘work in progress’ list - the areas where we are starting.
Inside our mandate: FMA’s own effectiveness
Areas where we are developing our own practices and systems are:
Addressing the whole of a firm or profession, rather than components of it:
Using intelligence to identify emerging risks, and also to assist in enforcement:
Integrating supervision with enforcement:
Outside: the regulatory domain
Outside - in our regulatory domain - there are some emerging issues. They include the following.
Defining the perimeter. The Act brings the vast majority of financial services businesses under our mandate, some of them shared with the Reserve Bank as the prudential regulator.
Paradoxically it’s proving hard for us to define the perimeter, the line where our mandate stops.
Notably, we’re seeing a sharp uptick in firms using New Zealand as a ‘jurisdiction of convenience’, offering services offshore or locally, and using the New Zealand financial services provider register to give the impression we regulate them, when, in many instances we don’t.
The financial services provider register - known in New Zealand as the FSPR - is the subject of a periodic review that’s just getting underway.
We are hoping for clarity – from the review - on the purpose of the register, and what firms can claim about their status on it.
New capital markets in the form of NXT, where investors will be taking on a very different type of risk relative to that on the main board.
Firms on NXT will be smaller, fast-emerging, and pose higher risks than – say – a listed blue chip.
A task for the NZX, which runs the main board – and which is also running NXT - is to ensure investors understand fully what NXT is intended to do.
The task for us is to calibrate regulation to a type of capital market that’s new to New Zealand.
And other forms of capital-raising in the shape of equity crowd-funding:
Building understanding on the demand-side, namely among capital markets and financial services investors. Our Act requires us to raise education among investors in New Zealand, where they are investing in regulated products or markets.
Unlike ASIC, we don’t have a mandate in general financial literacy. A separate agency, the Commission for Financial Capability, has that job.
Nonetheless, we are facing a task bringing in several hundred thousand investors, at least, and around 2.5 million if you accept that everyone in KiwiSaver, the national workplace savings scheme, is effectively an indirect capital markets investor.
In July we launched our statement that identifies the demographics of investors we are targeting. But, we recognise that it’s challenging to systematically raise investor capability through general public programmes.
An early decision we made was to focus on co-ordination – among government agencies that are working in the same area.
And to concentrate our work closer to the supply side – mostly urging product providers and distributors to do more - rather than attempting to provide comprehensive information and education in our own right.
Defining medium-term risks
Late last year we brought together all of the aspects I’ve mentioned – and others – when we published our first strategic risk statement, where we summed up the medium-term risks in the New Zealand regulated market.
There were six risks – some of which I have mentioned today, in passing – plus we made our own effectiveness a seventh risk.
Given we are a new regulator we can’t claim we are 100 per cent proven yet.
Our risk statement – and the analysis that led to it – is one our best pieces of strategic work to date.
For the first time since establishment in 2011, it let the FMA rise above the immediate, the specific, and the detailed.
We spelt-out the areas where we must focus our regulatory efforts and what we say will happen if we don’t.
Given that the second phase of the FMC Act had become effective only days earlier and that licensing requirements were not even in place for many of the new sectors, it was a brave but necessary move by us.
And one that I think signalled our emerging maturity as a regulator.
But a move that is paying off in the discipline it is bringing in the way we apply our time and money, and in how we organise ourselves.
We also know that our strategic risk outlook provides the minister responsible for the portfolio, the parliament that provides funding, and the businesses that we regulate, with a means to hold us accountable for our priorities.
We never forget that we operate our new regime on behalf of the New Zealand taxpayer – a fact that’s hard to escape in a small democracy, where the boss of the regulatory agency gets recognised in the supermarket and on the touchline.
A bigger risk always looms
Like many of you here today, we are conscious of one external factor that none of us can influence. That is a sustained and significant economic downturn – whether sector-specific, local, or global.
Exactly the point I made at the beginning of this speech.
New Zealand has enjoyed a period of strong growth – famously dubbed the ‘rock star economy’ by HSBC’s Paul Bloxham – which brought with it a steady flow of IPOs.
There were 12 main board IPOs last year, the largest number in a decade. The economic momentum is slowing now.
The test for the new regulatory regime and the confidence of the New Zealand public in it will be its ability to withstand a sustained slowdown - or a sharp and dramatic crisis - whether a macro one, or a sector one.
In regulation, confidence is apparent under duress.
My hope is that the New Zealand system will emerge - from any crisis - without the need for another major overhaul…. and hopefully without the need for a new regulator.
And with businesses recognising that regulation mitigates and moderates the harm in a crisis, and that it allows for recovery – for firms and investors - where that’s possible.
But it can and should not remove risk entirely.
Without risk, there is no growth and without growth our economies die. Getting the balance right between allowing people and businesses the opportunity to take risk, and protecting them from the risk of unnecessary and undisclosed harm, is what we are all about.