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New Zealand Securities Commission |
Last Updated: 15 November 2014
Report on the Effectiveness of
New Zealand’s Securities
Commission
Michel Prada
Neil Walter
September 2009
Contents
1
|
Introduction and acknowledgements
|
3
|
2
|
Executive summary
|
4
|
2.1
|
Effectiveness of the Securities Commission
|
4
|
2.2
|
New Zealand’s regulatory system
|
5
|
2.3
|
Governance arrangements
|
5
|
2.4
|
Capability issues
|
5
|
2.5
|
Stakeholder relationships and communication
|
6
|
2.6
|
International comparisons
|
6
|
3
|
List of recommendations and suggestions
|
7
|
4
|
Background
|
10
|
5
|
Effectiveness of securities regulation in New Zealand
|
12
|
5.1
|
Legislation
|
12
|
5.2
|
Commission’s powers
|
13
|
5.3
|
Fragmented regulatory framework
|
18
|
5.4
|
NZX relationship
|
19
|
5.5
|
International involvement
|
20
|
6
|
Governance arrangements
|
22
|
6.1
|
Introduction
|
22
|
6.2
|
Governance arrangements
|
22
|
6.3
|
Observations
|
23
|
6.4
|
Chair of the Commission
|
24
|
6.5
|
Skill sets
|
25
|
6.6
|
“Future Watch” role
|
26
|
6.7
|
Audit and Risk Review Committee
|
26
|
6.8
|
Designation of the Securities Commission
|
27
|
7
|
Capability issues
|
28
|
7.1
|
Introduction
|
28
|
7.2
|
Observations
|
28
|
7.3
|
Resourcing
|
29
|
7.4
|
Auckland office
|
30
|
7.5
|
Staffing issues
|
31
|
7.6
|
Operating procedures
|
32
|
8
|
Stakeholder relationships and communication
|
33
|
8.1
|
Introduction
|
33
|
8.2
|
General
|
33
|
8.3
|
The negative....
|
34
|
8.4
|
And the positive
|
34
|
8.5
|
Conclusions and suggestions
|
35
|
8.6
|
Public education
|
35
|
8.7
|
Collapse of finance companies
|
35
|
8.8
|
Members’ role in stakeholder engagement
|
36
|
8.9
|
A communication strategy
|
36
|
9
|
International comparisons
|
39
|
9.1
|
Introduction
|
39
|
9.2
|
Rule making powers
|
39
|
9.3
|
Disclosure or merit based regulation
|
40
|
9.4
|
Powers of administrative sanction
|
40
|
9.5
|
Separation of functions
|
41
|
9.6
|
Operating style of the regulator
|
42
|
9.7
|
Level of staffing and other resources
|
43
|
A
|
Annex A – terms of reference
|
44
|
B
|
Annex B – list of stakeholders interviewed
|
45
|
C
|
Annex C – list of key documents
|
47
|
D
|
Annex D – overview of the market
|
49
|
E
|
Annex E – Commission member profiles
|
53
|
F
|
Annex F – overview of current Commission and agency
|
|
|
functions and structure
|
55
|
G
|
Annex G – history of Commission’s actions regarding
finance
|
|
|
companies
|
56
|
H
|
Annex H – comparison table with overseas regulators
|
58
|
1 Introduction and acknowledgements
In June 2009 the Securities Commission established an independent panel to
assess its overall effectiveness in achieving its regulatory
objectives. Such a
review had been recommended in a baseline funding review carried out by KPMG for
the Ministry of Economic Development
earlier in the year. Michel Prada,
formerly Chair of France’s Securities Commission and of IOSCO’s
Executive and Technical
Committees and Neil Walter, a former Secretary of
Foreign Affairs and Trade and former Chair of New Zealand’s
Environmental
Risk Management Agency, were appointed to the panel. KPMG was
contracted to provide administrative and secretarial support for
the panel,
including assistance with research and the preparation of the report.
The panel’s terms of reference are attached at Annex A. In summary,
they required the panel to evaluate the effectiveness
of the
Commission’s securities regulatory work, its governance structure and
practices and its relationships with key stakeholders.
The review was conducted over the period 15 June to 31 August 2009. During
that time the panel held meetings with a wide range of
external stakeholders,
Commission members and senior staff members (some 65 individuals in total). It
reviewed a large number of
documents and papers and attended two meetings of the
Commission and its Divisions as observer. It also conducted desk studies on
market regulation in selected overseas jurisdictions. Lists of people
interviewed and key documents are attached at Annexes
B and C. A
summary of the approaches taken to market regulation in other countries is
contained in Annex H.
It is worth noting that this review has taken place at a time of
considerable change and uncertainty for the Securities Commission
and New
Zealand’s securities market more generally. The global economic crisis has
had a major impact on capital markets around
the world. The situation facing
New Zealand’s capital market is currently under review by a Capital Market
Development Taskforce.
Recent and planned changes in the legislation and
architecture of market regulation in New Zealand are also driving significant
changes in the regulatory landscape.
We wish to record our thanks to all interviewees for giving so freely of
their time and views. Without exception, we were accorded
full cooperation by
all with whom we met. We take this as strong testimony to the shared
interest of market participants
and regulators alike in promoting
confidence in the integrity and efficiency of New Zealand’s capital market
and in protecting
the interests of investors.
We owe a special debt of gratitude to Mark Hodson and his colleagues at KPMG
for their unstinting help throughout the review. We are
also appreciative of the
work done by staff of the Securities Commission to facilitate our task.
Michel Prada Neil
Walter
Paris, FRANCE Wellington, NEW
ZEALAND.
2 Executive summary
2.1 Effectiveness of the Securities Commission
Our brief was to evaluate the overall effectiveness of the Securities
Commission. Our finding is that, within the limitations of its
powers and
resources, the Securities Commission discharges its responsibilities efficiently
and to a high professional standard.
The current Chair provides strong
leadership. She is supported by a high-calibre Commission and a small but
well- performed
team of professional staff. A comparison with counterpart
agencies in other jurisdictions confirms that New Zealand's Securities
Commission delivers good value for money.
This is not to say that the Commission is seen by all stakeholders as fully
effective. We heard a number of complaints and suggestions
for improvement in
the way New Zealand’s markets are currently regulated. This is partly
explained by the inevitable tension
between market regulators and market
participants. Moreover the full range and complexity of the Commission's work is
visible to
only a very small number of market participants and few, if any,
members of the public. Nevertheless there are some important lessons
to be taken
from our meetings with stakeholders. At the risk of oversimplification,
investors want better protection while issuers
and other market participants
want less red tape and greater clarity and certainty about how the market should
operate.
Having analysed the concerns raised with us, we conclude that the main
constraints on the Commission’s effectiveness lie outside
its direct
control. They stem from weaknesses in the current legislation; the
Commission’s narrow mandate and lack of powers;
the proliferation of
regulatory bodies; inadequate resourcing; and bottlenecks in the judicial
process. Equally, there are some
changes that could be made by the Commission
to improve its effectiveness, primarily through exploring ways of using its
existing
powers more proactively but also in its communication with the market,
the media and the public. A comprehensive overhaul of New
Zealand’s
system of market regulation is however required if the Commission is to play the
role expected of it.
We do not advocate a move away from the current “twin peaks”
approach to market regulation whereby prudential and conduct
matters are dealt
with separately, neither do we recommend either a shift away from a
disclosure-based regime or a more heavy-handed
approach to regulation. It
remains the case that the majority of market participants willingly comply with
the accepted norms of
behaviour. Thus, much of the regulatory system’s
focus should continue to be on education, advice and persuasion. At the
same
time, it is important to provide for effective deterrence: abuse and fraud must
be punished and be seen to be punished.
The Commission’s responsibilities have increased markedly in recent
years. Additional duties are now being placed on it in such
areas as financial
adviser regulation and the prevention of money laundering. It will struggle to
maintain its current level of
performance, let alone cope with these new
responsibilities, unless action is taken on a number of fronts. If the package
of recommendations
set out in this report is accepted - and we
emphasise that a piecemeal approach is in our view unlikely to be fully
effective
(for example, there is little point in increasing the
Commission’s powers if it lacks the resources to apply them) - then the
next 18 months will see wide-ranging changes in the way New Zealand’s
securities market is regulated.
Our principal findings relating to the Commission’s overall
effectiveness follow.
2.2 New Zealand’s regulatory system
Much of the current securities market legislation is uneven in its coverage,
heavily prescriptive and in many areas badly out of date.
It should be replaced
by higher-level, principles-based legislation which sets out clearly and
more succinctly the key
principles, objectives and coverage of New
Zealand’s securities market regulation.
The Securities Commission currently lacks the teeth to give full effect to
the legislation and regulations. It must be given more
extensive powers,
including the power to issue rulings, stronger investigative and enforcement
powers throughout the life cycle of
a security, the ability to monitor the
conduct of financial intermediaries such as trustees, asset managers and
auditors, a closer
supervisory role over directors’ activities and
responsibility for monitoring the overall effectiveness of the system for
regulating
market conduct.
There are too many agencies involved in the supervision of securities market
conduct, including investigation and enforcement. The
same problem exists in
the area of public education in financial literacy. Roles and responsibilities
need to be consolidated and
rationalised. Where this is not possible,
boundaries should be clarified and coordination improved.
2.3 Governance arrangements
The Securities Commission processes a high volume of complex work efficiently
and well. Its governance arrangements and management
structure meet current
good practice standards for Crown entities and seem generally well suited to its
purposes. We recommend however
that the time has come to make the position of
Chair non-executive and to appoint a Chief Executive Officer responsible for the
day-to-day
management of the agency. We also offer some suggestions concerning
the role of the Commission.
2.4 Capability issues
The March 2009 baseline funding review initiated by the Ministry of Economic
Development covered the Commission’s resourcing
requirements in detail.
The KPMG report found that the agency was generally performing its tasks to a
high professional standard.
We agree with this but see some scope for a more
risk-based approach in some areas.
If our recommendations on legislative reform and the future role of
the Commission are accepted, consideration will need
to be given to the
level of funding required for the Commission in the coming years. In our
view, it needs to be better
resourced to play its full part in market
regulation, including the establishment of an office in Auckland, investment in
IT systems
and the funding of its projected operating deficit. Some additional
funding should become available from elsewhere in the system
as existing
regulatory arrangements are consolidated and streamlined. Moreover a review
is underway of the fees levied for the
Commission’s work in such areas
as exemptions and authorisations. It seems
inevitable
however that the government will also need to raise its present level of
funding: there is only minimal scope for a shifting of focus
within the
Commission.
2.5 Stakeholder relationships and communication
The Commission should give high priority to the resourcing and implementation
of its new communication strategy in order to get its
messages across more
clearly to both the market and the public. We offer some suggestions as to how
the Commission might improve
its engagement with business and the media. The
establishment of an office in Auckland and making more extensive use of
Commission
members in support of the Chair’s public outreach activities
will help.
2.6 International comparisons
Although no precise comparisons are possible, we have drawn on our desk
studies of selected overseas jurisdictions both for general
benchmarking
purposes and to suggest some alternative approaches to current New Zealand
practice. Perhaps the most important findings
in this section are that: New
Zealand’s regulatory system is now generally in line with international
best practice and IOSCO
standards: all jurisdictions face ongoing problems in
dealing with fraud and abuse in their financial markets: the global recession
is
compounding the difficulties facing market regulators around the world; and,
even allowing for the small size of New Zealand’s
market, resourcing
levels here are very light by comparison with overseas
countries.
3 List of recommendations and suggestions
Recommendations:
1. That the review of New Zealand’s securities law be aimed at
moving legislation to a higher level, principles-based model
which sets out
clearly and succinctly the key objectives, principles and coverage of market
regulation.
2. That in framing this new legislation, careful attention be paid to
New Zealand’s close economic ties with Australia and
the importance of
maintaining and strengthening regulatory alignment within the trans-Tasman
relationship.
3. That the review of New Zealand’s securities law give the
Securities Commission more extensive powers, including: the power
to issue
rulings (binding in law but subject to appeal to the Courts); stronger
investigative and enforcement powers throughout the
life cycle of a security;
the ability to supervise trustees, asset managers and auditors; and a closer
monitoring role over directors’
activities.
4. That, as its powers expand, the Commission establish
mechanisms to ensure appropriate separation between its supervisory
and
investigation/enforcement roles.
5. That the Commission be given statutory responsibility for monitoring,
and advising government on, the overall effectiveness of
the regulatory system
as it pertains to market conduct and the state of New Zealand’s capital
market. This “future watch”
role will require the establishment of a
small market intelligence unit working to the Commission.
6. That the roles of the various conduct regulatory bodies be reviewed
with a view to consolidating functions. This covers supervision,
investigation and enforcement. Where consolidation and streamlining is not
possible, roles and responsibilities should be clarified
and coordination
strengthened.
7. That consideration be given to ways of speeding up the judicial
process as it applies to criminal actions in the securities market,
including
the possibility of establishing a separate Court to deal specifically with these
matters.
8. That the governance and management functions of the Commission be
separated by the re-designation of the Chair position as non-executive
and the
appointment of a Chief Executive Officer with day-to-day responsibility for
management of the agency.
9. That an inter-agency task force (involving inter alia the
Ministry of Economic Development, the Treasury and the Securities Commission) be
established with some urgency to assess and report
on the Commission’s
funding and staffing requirements for the coming two or three years.
10. That priority be given to the establishment of an Auckland office of
the Securities Commission with a broader representational
role as well as
functional responsibility for the implementation of the Financial Advisers
Act.
Suggestions:
1. That the Commission consider how it can play a more proactive role in
keeping the media, the markets and the public informed
about investigations and
other actions taken against market abuse, taking into account the need
to balance desired regulatory
and market outcomes against the principles of
natural justice and due process.
2. That the Commission take a more proactive approach in deeming whether
particular offers are within its remit and be prepared
to test the boundaries of
legislation in cases of doubt.
3. That the Securities Commission and NZX continue their efforts to
develop a more constructive and positive working relationship
under the
co-regulatory regime.
4. That the Commission work towards securing real time access to full
trading data.
5. That consideration be given to filling the currently vacant position
on the Commission and when selecting new members particular
emphasis be placed
on recent or current commercial and technical securities market experience in
such areas as capital raising and
the issuing of securities.
6. That, if the recommendation to give the Commission a formal
monitoring and “future watch” role over the securities
market is
accepted, consideration be given to the establishment of a small market
intelligence unit to support the Commission and
to cross membership between the
Commission and the Reserve Bank Board.
7. That the Commission consider appointing a suitably-qualified
independent person to its Audit and Risk Review Committee.
8. That consideration be given to changing the Commission’s
designation to emphasise the importance of its role in protecting
investors and
to mark the changes envisaged in its role and mandate.
9. That a dedicated working group be established to work with the relevant Division on planning and preparations for the structural and other changes facing the Commission in the next 18 months to 2 years. This could include consideration of how the current financial management system might best be adapted to the Commission’s new role and responsibilities.
10. That the Commission be given the power of pre-vetting offer documents
in order to assess whether risks are appropriately disclosed.
We note that this
power would need to be exercised carefully and that any findings would need to
be communicated in such a way as
to avoid moral hazard. The staff concerned
would need to have commercial experience and knowledge to discharge this
function, either
through bringing in staff
with recent securities market experience and/or arranging training
attachments for existing staff in key sectors of the securities
market.
11. That the Commission’s operating procedures and instructions be
brought together in a consolidated manual.
12. That the Commission’s communication section be equipped to take
responsibility, under the relevant Division, for implementing
the
Commission’s communication strategy and monitoring progress in the
strengthening of the Commission’s relationships
with businesses,
investors, the media and other important stakeholders.
13. That priority be given to putting the Commission’s relationships
with the news media on a better footing and to making more
use of press
briefings, if necessary on an off- the-record basis, on matters before the
Commission which are of concern to investors
when this would serve the public
interest.
14. That, where an activity is judged to be inappropriate but is beyond
the Commission’s powers to act, press releases go beyond
a matter of fact
interpretation of the law to state an opinion. It is also important that press
releases should be worded in such
a way as to have the desired impact on target
audiences.
15. That all staff be reminded of the importance of maintaining a strong
client focus and observing a high standard of communication
with the
business world and other stakeholders, with senior managers to be responsible
for enforcing this requirement. This
would include responding as helpfully as
possible to requests for guidance on the interpretation of securities law,
timely acknowledgement
of complaints or requests, keeping an eye on the tone of
correspondence and keeping people regularly informed of progress.
16. That a programme of public speaking and attendance at
relevant meetings by Commission members and senior staff members
be developed
to support the outreach work being done by the Chair. This would both help make
the Commission and its work better
known to investors, businesses and the
media and give Commission members and senior staff opportunities to listen to
the
market.
17. That the section in earlier Securities Commission annual
reports describing the securities market, including recent
trends and
developments, be reinstated.
18. That formal responsibility for coordinating financial literacy
education by publicly funded bodies be vested in one agency, with
the Securities
Commission continuing to have a major input in order to ensure that full use is
made of its actions and activities
to support public education goals. A close
relationship should be encouraged with other privately funded groups involved in
financial
literacy education.
19. That the Commission be given a greater measure of independence in
making the case for legislative or regulatory improvements
and, once changes
are in prospect, be responsible for formulating and making public a defined law
reform process that includes appropriate
consultation with market
participants.
4 Background
The Securities Commission is established under the Securities Act 1978 and now has the following functions and powers under the Securities Act 1978, the Securities Regulations 1983, the Securities Markets Act 1988 and the Financial Advisers Act 2008:
• Market surveillance (including financial reporting)
• Enforcement (including investigation and prosecution)
• Oversight of the New Zealand stock exchange (NZX)
• Exemptions and authorisation
• Law reform
• International cooperation and recognition
• Public understanding
These functions and powers have evolved over the time since the
Commission’s establishment in 1978. It started as a small,
independent agency monitoring compliance with securities legislation and
commenting on securities markets practices. Since then,
through a number of
regulatory and legislative changes, the Commission has become a broad financial
markets regulator with extensive
powers of investigation and prosecution. As
new functions have progressively been loaded on to the Commission, additional
staff
members have been recruited and infrastructure developed or adapted to
support the new activity. However, the organisation and its
powers had never
been comprehensively reviewed until this year.
The Commission currently expresses its intended outcomes in the exercise of these powers as:
• High standards of conduct are expected in the markets and the law is complied with
• The regulatory environment is relevant and effective
• Securities law regimes are tailored to the needs of the market
• New Zealand’s markets and regulatory environment are respected internationally
• People understand the law and practice relating to
securities
In late 2003 an independent review of New Zealand’s securities
regulation was carried out, against IOSCO standards, as part
of a broader review
of New Zealand’s financial system by the International Monetary Fund.
This review identified a number
of deficiencies in the Commission’s
powers, in particular those relating to securities exchanges, the regulation of
market
intermediaries and the enforcement of securities law. These
deficiencies have now largely been addressed by a range of amendments
to
securities legislation and regulations.
The following table summarises the responsibilities of other regulatory
agencies.
Table 1 – summary of regulatory or investor protection bodies
Entity
|
Roles
|
Reserve Bank
|
• Prudential supervision of banks and, now, non-bank
deposit
takers
|
Ministry of Economic
Development
|
• Policy advice and overall monitoring of the
regulatory
system
|
Registrar of Companies
|
• Registration and review of prospectuses (compliance
review,
not substantive)
• Powers to ban directors of issuers
|
Exchanges (NZX)
|
• Administration of its listing rules
• Supervision of member broker firms
• Review of trading and other data and sharing information
on
potential breaches of insider trading, market manipulation or
continuous disclosure rules with Securities Commission
|
Trustee corporations
|
• Monitoring the financial position and investment practices
of
issuers on behalf of holders of debt and collective investment
scheme securities, in accordance with a published trust deed
|
NZ Institute of Chartered
Accountants
|
• Self-regulatory body for auditors and accountants
preparing
financial statements for issuers
|
Commerce Commission
|
• Enforcement powers in relation to misleading advertising
in
offers of securities
|
Serious Fraud Office
|
• Enforcement powers in relation to fraudulent offers of
major
securities
|
Takeovers Panel
|
• Administration of the Takeovers Code and sharing
of
information with Securities Commission.
|
Ministry of Consumer
Affairs
|
• Provision of consumer information, education and
policy
advice.
• Warning the public about scams
|
Commerce Commission
|
• Investigation of anti competitive behaviour and misleading
or
deceptive conduct, including in the offer of securities
|
Banking ombudsman
|
• Dealing with complaints about banks
|
Source: review team research
Enforcement and prosecution responsibilities are spread around the Securities
Commission, the Serious Fraud Office, the Commerce Commission,
the Ministry of
Justice (and the judicial system more generally), the New Zealand Police, Crown
Law and the Registrar of Companies.
Responsibility for raising New Zealanders’ level of financial literacy
(i.e. investor education) is shared among the Securities
Commission, the
Retirement Commission, the Ministry of Education and the New Zealand
Qualifications Authority. A number of
non-governmental bodies such as Young
Enterprise Trust, Grey Power and the Shareholders Association do valuable work
in this field.
5 Effectiveness of securities regulation in New Zealand
5.1 Legislation
A comprehensive overhaul of securities law is currently underway within government. This is timely, as inadequacies in the present legislation are putting a significant brake on regulatory effectiveness. Legislation relevant to the Securities Commission’s role includes the Securities Act 1978, Securities Regulations 1983, the Securities Markets Act 1988, the Companies Act
1993, the Financial Reporting Act 1993 and the Financial Advisers Act 2008.
An anti-money laundering Bill is currently before Parliament.
These Acts cover
the powers of the Commission as well as the roles and powers of other agencies
where the Securities Commission acts
as referral agency. A more detailed
description of this legislation is contained in Annex D.
Most jurisdictions accept the need for prudential supervision of financial
intermediaries of all kinds as well as market supervision
addressing the conduct
of, and relationships among, market participants. In some cases the two kinds
of supervision are housed in
one body, in others they are conducted by separate
agencies. New Zealand has traditionally favoured the “twin peaks”
system whereby prudential supervision is the responsibility of the Reserve Bank
and market supervision is the remit of the Securities
Commission.
Securities regulation in New Zealand is based on the disclosure of
information relevant to an investment decision, either through
an offer of
securities to the public or through secondary markets. An offer of securities
has to meet “black letter”
(i.e. highly prescriptive) requirements
concerning the prospectus or investment statement. Secondary markets
are governed
by detailed rules requiring continuous disclosure and prohibiting
insider trading and market manipulation.
The review of legislation should consider a move to a high-level,
principles-based framework which would give the regulator the power
to issue
rules in quick response to developments in the market. This was the virtually
unanimous view of all stakeholders with whom
we met. This would also mean that
the legislation would not date so quickly: a frequent criticism of the present
legislation was
that it is way behind the times. The “reasonable
person” test should replace prescription in areas such as the definition
of a security or offer, material information and timely disclosure. The
regulator should be given the power to vet offers and issues
on this basis,
subject to appeal to the courts. Issuers should be required to make information
relevant to an investment decision
(under the “reasonable person”
principle) on a continuous basis, in the manner that listed issuers already have
to do.
This would involve far less – but far better - information than
is contained in today’s prospectuses and investment
statements. An
approach along these lines has recently been enacted, although it is not yet in
force, in at least one Canadian jurisdiction.
In today’s world the present requirements for prospectuses and investment statements are both cumbersome and anachronistic. We live in the age of real-time information and yet insist on an expensive process that produces vast quantities of information much of which is out of date and of limited relevance to the current market - let alone to an investor’s informed decision about the offer. In May 2009 Morningstar published a report on mutual fund investor experience in
16 jurisdictions. New Zealand was ranked last with an overall rating of
“D-”. It scored particularly badly for the
transparency of
prospectuses and shareholder reports. A number of
people we interviewed gave high priority to dismantling this “gravy
train for law firms” which, in their words, produced
documents that are
“not worth the paper they are written on” and tell an investor
“everything yet nothing”.
In the words of one person we met,
prospectuses need to be “shorter, crisper and clearer”. There may
be other areas
where compliance costs and processes can be similarly reduced: we
received a number of complaints of “creeping regulation”.
The
Capital Market Development Taskforce has also made a number of suggestions in
this area.
Further, some high risk investment schemes have managed to bypass securities
regulation through being cleverly designed not to meet
the black letter
definition of a security. (We recommend below that the Securities Commission be
empowered to decide whether or not
a new product or offer is a security). The
types of information that would be required to be clear and prominent include:
all significant
aspects of the underlying investment; any significant risks to
the issuer and investor; track record information about directors,
officers and
promoters (including any previous company failures and/or fraud
convictions); current and planned business
with related parties, and most
recent audited financial statements (which would need to be reasonably recent).
Again, the “reasonable
person” approach to interpretation is
preferable to black letter prescription.
As a footnote, many people underlined the importance of staying aligned with
Australia’s approach to market regulation when
revising legislation and
regulations. The trans-Tasman links between New Zealand’s and
Australia’s banking systems
and capital markets are significant. While
it is necessary to develop approaches which are appropriate to New
Zealand’s
situation and needs, it is also important to maintain alignment
within the trans- Tasman regulatory framework wherever possible.
Recommendations:
• That the review of New Zealand’s securities law be aimed at
moving legislation to a higher level, principles-based model which
sets out
clearly and succinctly the key objectives, principles and coverage of market
regulation.
• That in framing this new legislation, careful attention be paid
to New Zealand’s close economic ties with Australia and the
importance of
maintaining and strengthening regulatory alignment within the trans-Tasman
relationship.
5.2 Commission’s powers
5.2.1 The Commission’s powers throughout the lifecycle of a
security
The Commission’s powers in relation to primary markets are concentrated
in the period during which an offer is open. While
the offer is open the
Commission has the power to require offer documents to be amended or withdrawn
and to ban advertising if disclosures
are not adequate in terms of legal
requirements or financial reporting standards. In practice, these powers are
usually exercised
following a complaint, as the Commission does not routinely
review new offers. Down the track (and well after the allotment of securities)
the issuer may suffer financial loss leading to losses to investors. In such
cases the Commission has the power to investigate
the adequacy of disclosures made during the offer period and, if appropriate,
prosecute issuers and directors. These powers apply
to all types of
securities.
The Commission’s powers post-allotment are stronger in relation to
listed securities than to other types. Issuers of listed
equities are subject to
the Commission’s surveillance functions and its powers of investigation,
enforcement and prosecution
in relation to continuous disclosure, market
manipulation and insider trading. It also has powers over redemptions or
additional
issues of equity securities to help ensure all shareholders are
impacted fairly. By comparison, the Commission has relatively weak
powers in
relation to unlisted debt securities. Once the securities have been allotted
the investors’ interests are the responsibility
of the trustee, and the
trustees’ powers can be relatively weak – essentially to monitor
whether the issuer remains in
compliance with its trust deed (and there are
minimal regulatory requirements about what a trust deed should contain).
Some issuers of unlisted debt securities are continuous issuers (typically
non bank deposit takers, including finance companies).
Therefore the
Commission has continuous powers in relation to legally required disclosures,
including powers of investigation.
During the period leading up to the collapse
of numerous finance companies the Commission exercised these powers a number of
times
(refer Annex G). During this period non bank deposit takers were not
however subject to prudential supervision. This is now a function
of the
Reserve Bank of New Zealand. A significant remaining gap in the investor
protection framework is that the only legal recourse
in relation to
directors’ conduct is via a complaint from an individual shareholder,
which is inadequate in the case of a privately
controlled issuer of debt
securities to the public. We recommend below that this loophole be
closed.
5.2.2 Commission’s interpretation of its existing powers
In talking with stakeholders we heard a number of comments to the effect that the
Commission’s approach to the exercise of its present powers is too conservative and risk-averse
– for example, it does not normally release information about cases
under investigation. The Commission takes seriously the
requirements of natural
justice and due process. Many stakeholders believe however that this emphasis
is overdone to the detriment
of the Commission’s credibility and
effectiveness. There is a general interest in seeing the Commission
interpret
its powers less conservatively and start commenting more bluntly about
specific cases or trends in the marketplace – “if
the police can
give details of cases under criminal investigation, why can’t the
Securities Commission?” We have some
sympathy for this concern and have
recommended elsewhere in this report that the Commission consider taking a more
aggressive approach
to the exercise of its deeming powers including, as
appropriate, testing the boundaries of securities law – while still
retaining an appropriate commitment to natural justice and due process. We
understand that the ISA in Israel – whose powers
are not dissimilar to New
Zealand’s Securities Commission’s - regards one of its most
effective enforcement tools to
be “reprimand firms and individuals through
public statements”. A related issue has to do with the way in which
signals
are given and warnings issued: in some quarters the Commission’s
press releases and other public pronouncements are seen as
too bland and
legalistic to have the desired impact among potential investors.
Many interviewees saw the recent expansion of the Commission’s powers
in respect of civil and criminal prosecutions as a major
improvement but were
concerned at the seemingly long delays
involved in securing action against abuse and fraud. (Some of the
delays of course are attributable to Court backlogs.)
We were told
that the publicity given to high-profile handcuffed suspects in the USA had
considerable deterrent effect.
To some observers it appears odd that the Commission can devote significant
effort to determining whether a specific product meets
the legal definition of a
security, only to conclude that a potentially risky investment is not legally
a security. Most people
would like the Commission to be able to apply the
“if it barks it’s probably a dog” principle and determine what
products should be covered by the provisions of securities legislation - even if
this means testing legal boundaries on occasions.
Another complaint we heard from interviewees was that the Commission is
reluctant to offer opinions or advice, in particular during
the period leading
up to an offer and in relation to possible breaches. Some issuers claimed that
the message given to them and
their advisers was along the lines of "do it, and
if it’s wrong we will take action". On the other hand, a number of people
we met with went out of their way to praise individual staff members for their
readiness to provide informal advice and guidance
on questions of interpretation
of the regulations. Our conclusion after meeting with stakeholders and
discussing this matter with
staff members is that the reluctance to offer a
definitive view stems mainly from a concern not to give false comfort. Investors
are able to take action in Court that could lead to the voiding of allotments
and judicial deference would not necessarily be given
to an opinion from the
Securities Commission.
Suggestions:
• That the Commission consider how it can play a more proactive
role in keeping the media, the markets and the public informed about
investigations and other actions taken against market abuse, taking into account
the need to balance desired regulatory and market
outcomes against the
principles of natural justice and due process.
• That the Commission take a more proactive approach in deeming
whether particular offers are within its remit and be prepared to test
the
boundaries of legislation in cases of doubt.
5.2.3 Improvements to the Commission’s current powers
A number of options exist with regard to the functions and powers of an
independent securities commission. It seems to the panel that
the present
situation in New Zealand calls for significant improvement, bearing in mind
developments internationally. The European
experience is of interest in this
area, as the EU has recently engaged in a process to harmonise its 27
systems.
First, as mentioned above the legislation should define clear objectives and
principles along the lines of those developed by IOSCO.
This would provide a
basis to justify intervention by the Commission even when detailed rules do not
explicitly cover a specific
situation. Second, the definition of the persons
(either legal or natural), operations and products subject to regulation and
supervision
must be comprehensive so that the system does not provide
opportunities to escape supervision - which is detrimental from the point
of
view of both fair competition and the protection of investors. Third, there
must be a clear definition of the powers and responsibilities
of the
Commission.
In the panel’s opinion, the Commission should be empowered to:
• Issue a “rulebook” defining the Commission’s
approach to applying the legislation and regulations, including
a process
wherein market participants are able to give their views. This ruling capacity
is beneficial from the point of view of
flexibility and adaptation to the
evolution of the market. From a constitutional point of view, this power may
need to be accompanied
by a right of appeal to the Courts.
• Issue, on an ongoing basis, individual decisions on such matters as
offer documentation (prior to registration), registration
of entities and
licensing of individuals for specific activities. This power would need to
be supported by an IT bulletin
board system containing comprehensive information
about issuers, intermediaries, offers and individuals.
• Conduct investigations and apply controls through reporting by
market players, surveillance of market activities and participants,
and on site
visits.
• Impose administrative or disciplinary sanctions (subject, again, to the right of appeal to the
Courts).
The Commission needs more comprehensive powers in order to give effect to a
policy based on up to date and shared information on entities,
operations and
products. Concerning issuers, the Commission should be in charge of the
whole chain of financial information
- periodic reporting, approval of
offer documentation and continuous disclosure. For example, in relation to debt
securities and
collective investment schemes, the Commission should have powers
of supervision over trustees and asset managers. This would include
clarifying
the expectations of trustees and the ability to place minimum requirements
on the provisions of trust deeds.
Auditors, who are not currently subject to
regulatory supervision, should be supervised by a public interest body, possibly
the Securities
Commission. The Commission should also be given powers of
supervision and enforcement over the activities and conduct of directors,
including the power to ban directors who are deemed not to be fit and proper
persons.
The Commission currently has some enforcement capacities, although it
does not have a sanctioning power of its own. It can
investigate, or ask
other bodies to investigate on its behalf. It has the capacity to settle and to
trigger penal or disciplinary
procedures which are dealt with by other
organisations. The way these functions are organised requires better clarity in
order to
establish a clear division of remits.
The Commission should have a capacity of ruling. This would reverse the
present situation, where an important part of the Commission’s
activity is
to deliver exemptions. Ever increasing numbers of exemptions may in fact be
detrimental to a widespread understanding
of the regulatory regime. Many
securities regulators today have this capacity of ruling, which provides
a good opportunity
to bridge the gap with market participants, and build
confidence through technical debate and responsiveness to the market. The
question of the areas in which rulings may be issued will however require
careful thought: it will be important to avoid a situation
whereby binding
rulings are automatically sought before each and every transaction.
We believe consideration should be given to strengthening the enforcement role of the
Commission in two respects. First, the Commission should have full capacity
to control or
investigate the relevant activities of the entities submitted to its
monitoring, not just those related to the initial offering of
securities.
Second, the Commission should have the ability to impose fines and disciplinary
sanctions (obviously subject to an appeal
procedure open to the parties) in
cases of both market abuse (misleading information, market manipulation, insider
trading) and professional
wrongdoings. If such a power is given to the
Commission, it should be organised properly so that investigation, prosecution
and
judgement are appropriately separated in accordance with the principles of
an impartial tribunal.
This would increase the Commission’s credibility and improve
efficiency, as administrative decisions are more speedily taken
than judicial
ones. It is somewhat paradoxical that the Commission has a capacity to settle
(which is an excellent thing) and no
capacity to sanction. We believe the ideal
situation is to have both capacities, as is the case in the US and in the
UK.
Concerning intermediaries, the Commission should have full capacity to
license entities according to a clear set of requirements (fitness
and propriety
of the managers, organisational requirements for operational resilience,
capacity to deal with the issues raised by
the business model, checking that
directors are “fit and proper persons” to avoid the situation
described to us whereby
“known crooks” are still appointed as
directors, conduct of business rules, etc). It should also have the capacity to
authorise the commercialisation of financial instruments.
In terms of broader market supervision, more than one person told us that
there are future vulnerabilities around some specific areas
and that the
Commission should be more on the front foot in these potential emerging issues.
Two examples given were proportionate
property ownership schemes and
brokers’ custodian services. We note that, in a recent quarterly bulletin,
the Commission expressed
clearly its concerns about specific risks to investors
in relation to the first of these two matters. In this connection, it seems
to
the panel that it would make sense for the Commission to be given a formal
oversight and reporting role over the effectiveness
of the overall regulatory
system and the functioning of capital market more generally. This is
particularly important
given the current fragmented state of New Zealand’s
regulatory architecture and the number of sophisticated products entering
the
market.
Recommendations:
• That the review of New Zealand’s securities law give the
Securities Commission more extensive powers, including: the power to
issue
rulings (binding in law but subject to appeal to the Courts); stronger
investigative and enforcement powers throughout the
life cycle of a security;
the ability to supervise trustees, asset managers and auditors; and a closer
monitoring role over directors’
activities.
• That, as its powers expand, the Commission establish
mechanisms to ensure appropriate separation between its supervisory
and
investigation/enforcement roles.
• That the Commission be given statutory responsibility for
monitoring, and advising government on, the overall effectiveness of the
regulatory system as it pertains to market conduct and the state of New
Zealand’s capital market. This “future watch”
role will
require the establishment of a small market intelligence unit working to the
Commission.
• That consideration be given to ways of speeding up the judicial process as it applies to
criminal actions in the securities market, including the possibility of establishing a
separate Court to deal specifically with these
matters.
5.3 Fragmented regulatory framework
There are many regulatory bodies involved in the regulation of New
Zealand’s securities market. The situation has variously
been described
as “a mishmash” and “a whole panoply of regulators”.
Certainly it appears to owe more to
history than to logic or functionality.
The major regulatory bodies are listed in Table 1 on page 12.
Interviewees criticised the current structure as excessively fragmented,
inconsistent, containing overlaps, opening loopholes, causing
confusion and
imposing additional and unjustified costs. They saw this fragmentation as having
an adverse effect on the work of the
Commission. The main examples of overlap
or confusion raised with us were:
• The Registrar of Companies should retain a legal role of
formal registration but its supervisory function would
be better located in
the Securities Commission
• That in spite of the potential synergies between the
Securities Commission and the Takeovers Panel, these two
bodies are organised
and run quite separately. (This question provoked split views, with some market
participants arguing strongly
for a continuation of the current arrangement on
the grounds that the Takeovers Panel was a specialised body performing its role
efficiently and well.)
• Listing authority is split between the Commission and NZX
• The supervision of financial disclosure is split between the Registrar of Companies, the
Commission and the NZX
• The role of auditors is not clear and their relationship with the Commission is seen as
"asymmetric" and ambiguous (this kind of difficulty is not specific to New
Zealand)
• The supervision of the asset management industry is
inadequate
• Not all intermediaries have to be registered
• The role of trustees and the use of trust deeds as a regulatory
mechanism are weaknesses in the system (the Commission can
neither rely on them
nor control them)
• The division of remits between the Commission and NZX is not clear
and gives rise to possible inconsistencies (the licensing
of options
and futures broker-dealers was mentioned). Also, the Financial Advisers
Act gives the Commission supervisory
responsibilities for a sector that has
overlaps with brokers, who are subject to supervision by
NZX.
From the panel’s discussions the architecture of the financial
supervision system in New Zealand requires consolidation
and clarification.
New Zealand is of course not unique in this regard. The financial crisis that
has been destabilising the world
economy for two years has triggered, in many
countries, lively discussions on the restructuring of the framework of
financial
regulation. The present circumstances in New Zealand provide a unique
opportunity to address these issues.
The fragmentation of responsibility for public education is dealt with in
section 8.6 below.
Recommendation:
• That the roles of the various conduct regulatory bodies be
reviewed with a view to consolidating functions. This covers supervision,
investigation and enforcement. Where consolidation and streamlining is not
possible, roles and responsibilities should be clarified
and coordination
strengthened.
5.4 NZX relationship
Secondary markets are regulated under a co-regulatory model whereby NZX is
responsible for regulating the conduct of its member broker
firms (with
oversight from the Commission), has co-regulatory responsibility with the
Commission for continuous disclosure and is
subject to the Commission’s
oversight as an exchange operator. The Commission has
regulatory responsibility
for insider trading and market
manipulation and relies on effective communication of potential issues
from NZX,
which holds the underlying trading data. A relationship such as this
carries inherent tensions and we understand that in the past
it has not been
particularly harmonious. From our discussions however it appears that at
working level the relationship is becoming
more constructive and both parties
are investing considerable effort in it.
NZX cooperates with the Commission’s wide ranging requests for
information under its annual review programme, and we understand
there is timely
transfer of information from the NZX about trading data that may require follow
up by the Commission’s surveillance
team. Real time access to full
trading data is not however available at present, and this is a weakness in the
system that is being
worked on at present.
A number of people see the current co-regulatory model as inherently flawed,
pointing to the potential conflict of interests in having
a profit-seeking
company which participates in the market also carrying out a supervisory role.
On the other hand, no recent cases
were drawn to our attention where the NZX had
failed in its regulatory duties, and a number of people commented that the NZX
was
both well in tune with the market and good to deal with. We do note however
that in other markets competition between exchanges
has compromised regulatory
effectiveness and that this situation can develop rapidly. A discussion paper
issued by NZX in late August
in the context of the Capital Market Development
Taskforce review raises a number of possibilities for changes in the division of
responsibility between the co-regulators.
Suggestions:
• That the Commission work towards securing real time access to
full trading data.
5.5 International involvement
We are told that just a few years ago New Zealand was seen as badly out of step with international market regulators because of a failure to observe generally accepted and IOSCO standards. Reports of the IMF and the Financial Action Task Force slated New Zealand for its poor performance. This was damaging to New Zealand’s general reputation as well as to investor confidence in its securities market. The Securities Commission – and in particular the current Chair – are to be congratulated for the improvement in New Zealand’s performance and standing that has been brought about in this area in the past few years.
Not only have the reforms to the regulatory regime since 2000 brought New Zealand into line with international practice, but the Chair and the Commission have played a strong leadership role in IOSCO (with the Chair having been re-elected Chair of the Executive Committee in
2008 for an unprecedented third term) and in the Financial Crisis Advisory
Group set up by the International Accounting Standards
Advisory Board and the
United States Financial Accounting Standards Board. IOSCO represents some 95%
of global securities markets
and is the acknowledged international standard
setter for market regulation. It is also the primary forum for facilitating
cross-border
cooperation to combat international fraud under the mechanism of
its Multilateral Memorandum of Understanding. The Commission contributes
to
IOSCO’s work – and benefits from it – at both a regional and
an international level.
The Commission has made extensive use of its position and contacts in IOSCO
to promote New Zealand to a wide and influential international
audience. It
works closely with New Zealand Trade and Enterprise and the Ministry of Foreign
Affairs and Trade to identify opportunities
to raise awareness of New
Zealand’s strengthening securities regulation among international
investors. NZTE has seconded
an officer to work with the Chair of the Commission
in this area. This activity seems to the review team to be of particular
importance
at a time of turbulence in the global economy – and of the
systemic failure of New Zealand’s non-banking financial institutions
-
when New Zealand needs to maintain its international visibility and reputation
as a reliable business partner and worthwhile investment
destination.
The Commission is also playing an important role in the development of closer
economic relations with Australia. The two governments
have an agreement to
remove unnecessary regulation and costs for securities offered in both markets.
A regime for the mutual recognition
of securities offerings is now in force.
This enables issuers of securities to use one prospectus on both sides of the
Tasman Sea,
subject to certain conditions. The Commission keeps in close touch
with its Australian counterpart, the Australian Securities and
Investments
Commission (ASIC).
While many of the people we met regarded the Commission’s international
work as important to New Zealand - and were very positive
about the role being
played by the current Chair - some were critical of the time being spent on
overseas linkages at a time when
the New Zealand capital market was coming under
real pressure and the regulatory system was undergoing significant change. The
view
was put to us that the effort made by the Commission over the past few
years to lift New Zealand’s game internationally and
promote a better
understanding of the regulatory framework had largely achieved its objectives
and could now be phased down. The
review team considers that the Commission has
done an outstanding job in restoring and strengthening New Zealand’s
image
and reputation internationally and that the Chair’s
leadership role in IOSCO has been beneficial to the New Zealand
economy in a
variety of ways. This view was clearly shared by Parliament’s Commerce
Committee when it reviewed the Commission’s
performance for the 2007/08
year. With the Chair’s third term as Chair of IOSCO’s Executive
Committee due to end next
year however there will inevitably be a phasing down
of the Commission’s international work. Apart from noting the
importance
of the Commission’s maintaining an appropriate profile and
continuing to pay attention to trans- Tasman, wider Asia/Pacific
and
international interests in the period following the end of the Chair’s
IOSCO assignment, we do not consider it necessary
to make any specific
suggestions on this aspect of the Commission’s
work.
6 Governance arrangements
6.1 Introduction
Our terms of reference required us to evaluate the Commission’s
governance structures and practices.
The review team had access to a comprehensive report prepared by KPMG earlier this year on the Commission’s baseline funding requirements for the three years from July 2009 to June
2012. In addition we:
• reviewed a number of papers and documents
• solicited the views of a wide range of stakeholders
• interviewed members of the Commission and senior Commission staff
• attended two Commission meetings as observers
6.2 Governance arrangements
A useful definition of governance is “the processes by which
organisations are directed, controlled and held to account”.
A generally
accepted aim of public sector governance is to ensure that an organisation
achieves its overall outcomes in such a way
as to enhance public and stakeholder
confidence in the organisation. The two key measures of good governance are the
effectiveness
with which the organisation delivers its services (performance)
and the extent to which it meets the requirements of its legislation
and the
public’s expectations of probity and accountability
(conformance).
6.2.1 Current situation
The Securities Commission consists of nine Commission members under an
Executive Chair. This is one below the maximum number of Commission
members
provided for in the Securities Act.
The Commission has two main roles: to give effect to the provisions of the
Securities Act and other relevant legislation and regulations;
and to provide a
governance framework for the agency.
Commission members are appointed by the Governor General on the
recommendation of the Minister of Commerce. The nomination process
is handled
by the Ministry of Economic Development, which advertises widely when vacancies
occur. Members hold office for an initial
term of five years and may be
reappointed. Their roles and responsibilities are defined by the Securities Act.
They are selected
for their knowledge of, or experience in, industry,
commerce, economics, law, accountancy, public administration or securities.
The current membership is drawn primarily from the legal and accounting
professions but includes three members with current or
recent market
experience.
The Commission meets in full at approximately monthly intervals. It held 11 such meetings in the 2008/09 year. Most specific issues are dealt with by Divisions - smaller groups of members chosen for their particular experience and availability (and taking into account any potential conflict of interests). Divisions have delegated to them the full powers of the Commission. 75
Division meetings were held in 2008/09.
The Commission’s meetings are serviced by the 40-person agency. Senior
agency managers are responsible for the preparation of
papers and formulation of
recommendations. They attend all Commission and Division meetings apart from
“Commission only”
sessions.
6.3 Observations
The review team was impressed by the calibre of Commission members and the
way in which they approached their duties. Comments we
heard from stakeholders
confirm that they are respected for their integrity and independence.
They are well qualified
in terms of the experience and knowledge they
bring to the table in their respective fields. They are obviously highly
motivated
and convey a strong sense of professionalism.
We found the Commission meetings to be well prepared and efficiently run. The
Chair provides a high standard of leadership. The papers
were of a high
standard. Discussion was robust and open. Conflicts of interest were dealt
with systematically and well. The
atmosphere was positive and members showed
respect for one another as well as a good sense of teamwork. Interaction with
staff attending
the meetings was excellent.
We were told that an annual planning session is held at which the Commission
steps back from day-to-day work in order to conduct an
environmental scan,
assess its performance against its strategic plan and determine its
objectives and priorities for the
coming period. The prioritisation of
effort is thereafter kept under constant review in terms of desired regulatory
outcomes.
Members are involved in the preparation of the Commission’s
three-year Strategic Plan and Statement of Intent as well as Annual
Reports.
The Commission conducts an annual self-evaluation based inter alia on the
Institute of Directors’ template. It also includes in its Annual Report
an assessment of its performance in
the year under review against key
governance principles.
The Commission has a four-person Audit and Risk Review Committee chaired by a
member who is a chartered accountant. It is charged
with assisting the
Commission to ensure the soundness and integrity of the financial statements and
with overseeing the relationship
with external auditors. It is also responsible
for monitoring the Commission’s risk management and legislative compliance
frameworks. In the 2008/09 year the Committee met five times.
At each meeting Commission members receive a compilation of papers and
reports of both general and particular interest. Regular
financial reports are
tabled before the Commission, normally through the Audit and Risk Review
Committee. The Commission’s
views are periodically sought on the
performance of the agency and its senior managers. The Commission is to be
commended for having
commissioned an independent review of its overall
effectiveness earlier this year. The review team was particularly struck by the
interest shown by members at the two meetings we observed in identifying
“lessons learned” from the Commission’s
recent decisions and
actions.
From time to time individual members of the Commission participate in
conferences or workshops relevant to their work. The
Chair normally
acts as spokesperson for the Commission, although press statements are
issued in the name of the full Commission.
The Commission’s formal
stakeholder policy is set out on its website. The potential for Commission
members to play a greater
role in stakeholder relationship management is dealt
with more fully below.
We were told that the Commission’s workload is carefully monitored and
that it is currently manageable. Some members indicated
that they would be
prepared to spend more time on Commission business than is the case at
present.
The Commission has its own Code of Ethics (available on its website) which
sets out its values and specifies the procedures to be
followed in dealing with
such matters as conflicts of interest. It adheres to the relevant provisions of
the Crown Entities Act and
the State Services Commission’s Code of
Conduct.
Commission members’ remuneration is set by the Remuneration Authority and disclosed in its
Annual Report.
Recommendations and Suggestions
As indicated above, the Commission seems to us to perform its
governance functions efficiently and well. We do however
have one major
recommendation and some minor suggestions to make concerning current governance
arrangements.
6.4 Chair of the Commission
A feature of the present governance structure is that the Commission is
headed by an Executive Chair - who effectively doubles as
the Chair of the
Commission and Chief Executive Officer of the agency. While this arrangement
may have been appropriate at the time
the position was established in 2002
– when the agency had just 22 staff – it seems to the review team
that there is
now a strong case for separating the two roles.
The main factor is that staff numbers currently stand at 40 and are likely to
rise by a further 30 or so full-time staff as a result
of the passing into law
of the Financial Advisers Act 2008. Our understanding is that just half-a-dozen
of the 84 statutory Crown
Entities use the executive chair governance model
– and four of those are corporations sole. Thus the separation of the
governance
role of the Chair from the management role of the Chief Executive
Officer would bring the Securities Commission into line with what
is now the
standard arrangement for all but the smallest of Crown Entities. It is also of
course the model usually recommended
for corporate New Zealand.
In advancing this suggestion, we acknowledge that the Securities Commission
has many unique features and that practice varies widely
among counterpart
bodies in other jurisdictions. Nevertheless, a large volume of research suggests
that the basic principles of corporate
governance – including a split of
governance and management functions - are likely to be of benefit to all
organisations. Our
conclusion is that the split model would best meet the needs
of
today’s Commission - particularly as it positions itself to take on the
additional responsibilities now envisaged for it.
The review team also sees advantages in separating the two roles in terms of
the checks and balances that accompany a split between
governance and
management. The Chief Executive Officer would be responsible for the day-to-day
functioning of the agency and for
technical preparations for Commission
meetings, while the Chair would manage the decision-making process. The next
year or two will
be a demanding time for the Commission, and it is likely that,
even with a Chief Executive Officer in place, the Chair will remain
a full-time
position. It should in our view however be possible for the Commission to
delegate a range of powers and decisions
to the agency once its management
structure has been strengthened by the appointment of a full-time Chief
Executive Officer.
(At the present time no delegations exist except in the
management area).
If this recommendation is adopted, it will be important to select a Chief
Executive Officer who not only has the right technical and
managerial skills and
experience but will approach his or her role in a spirit of positive partnership
with the Chair and Commission.
Care will need to be taken over the formulation
of a job description and candidate profile. Thought will also need to be given
to the likely “knock-on” effects to current second tier positions in
the agency. As has often been said, one of the most
important responsibilities
of any Board is to select the right person as Chief Executive officer - and
thereafter perform a careful
“assess and assist” role. The Chair and
the Chief Executive Officer must form a team dedicated to the efficiency and
quality of the agency’s work. The Crown Entities Act and a Crown Entities
Manual currently under preparation by the State
Services Commission provide
guidance on the procedures to be followed in selecting, appointing and working
with a Chief Executive
Officer. Responsibility for appointing the Chief
Executive Officer would rest with the Commission.
As a footnote, the timing of the appointment of a Chief Executive Officer
will need to be given careful consideration. It may be that
this should be
deferred until the future role and responsibilities of the Commission are
determined.
Recommendation:
• That the governance and management functions of the Commission be
separated by the re-designation of the Chair position as non-executive
and the
appointment of a Chief Executive Officer with day-to-day responsibility for
management of the agency.
6.5 Skill sets
The Commission is, we believe, extremely fortunate in the calibre of its
members at present. Their qualifications and experience are
appropriate to the
role the Commission is expected to play. In the eyes of a number of
stakeholders however the Commission does
not have quite the level of recent
current commercial or securities market experience it needs. This is not a
question of veering
away from the range of qualifications currently represented
at the table. But as vacancies occur on the Commission it might be worth
looking for new members with current or recent commercial and technical
securities market experience in such areas as capital raising
and issuing,
notwithstanding that this will inevitably raise conflict of interest questions
from time to time. We note that the maximum
number of Commission members under
the Act is
eleven and there are ten currently appointed. An additional Commission member
would enable this broadening of skills and experience
as well as assist in the
management of conflicts of interest.
Suggestion:
• That consideration be given to filling the currently vacant
position on the Commission and when selecting new members particular emphasis
be
placed on recent or current commercial and technical securities market
experience in such areas as capital raising and the issuing
of
securities.
6.6 “Future Watch” role
As indicated above, the Commission already spends a significant amount of
time on planning its work and looking ahead to identify
emerging issues and
changing priorities. If our recommendations on broadening its mandate and
powers are adopted, this role will
become even more important and require
further time and effort to be devoted to the gathering and analysis of market
intelligence
and the provision of high-level advice to the government. It
seems to us important that the main regulator of the securities market
should be
in a position to spot emerging problems, maintain a watching brief on new
products coming on to the market and furnish
appropriate advice, warnings and
recommendations to both the public and the government. This might require the
inclusion of new
skill sets (e.g. economics, mathematics) around the Commission
table. It might also lead to cross-membership of the Commission (as
the
regulator of market conduct) and the Reserve Bank Board (as prudential
regulator). The establishment of a small market intelligence
unit would support
this function. It would also help in the Commission’s performance of
its supervisory work generally,
including the inclusion in the Annual
Report of a section on trends, developments and issues in New
Zealand’s
securities market.
Suggestion:
• That, if the recommendation to give the Commission a formal
monitoring and “future watch” role over the securities market
is
accepted, consideration be given to the establishment of a small market
intelligence unit to support the Commission and to
cross membership between the
Commission and the Reserve Bank board.
6.7 Audit and Risk Review Committee
As indicated above, the Commission’s Audit and Risk Review Committee is a well-set up body which plays an important role in the Commission’s governance arrangements. A review of papers covering some of the Committee’s recent meetings and external audit reports confirms that it takes its responsibilities seriously and performs them well. Its mandate seems entirely appropriate.
The Auditor-General’s good practice guide on audit committees in the
public sector suggests four main principles that should
guide the work of such
bodies. They are that: members should be independent; they should have relevant
expertise and experience;
the committee should have
a clearly defined purpose; and the committee should encourage open and
transparent communication with staff and stakeholders.
The Commission’s committee scores well on most of these counts. The
one area where action could usefully be taken relates to
the first principle -
the independence of members. While some state sector agencies have established
audit committees consisting
of mainly independent members, a number have kept to
a pattern of mixed or fully internal membership. There is not necessarily a
right or wrong way to set up these committees – it is a matter for
judgement as to what pattern of membership best suits the
circumstances of each
agency. In this case we believe that the present composition of the committee
covers all the key bases. It
could however be advantageous to appoint a
suitably-qualified independent person to the committee in order to ensure the
objectivity
of advice from the committee and provide an extra degree of
assurance to the Commission.
Suggestion:
• That the Commission consider appointing a suitably-qualified
independent person to its Audit and Risk Review Committee.
6.8 Designation of the Securities Commission
While hesitant to add to the number of changes already in train in this
sector, the review team was struck by the fact that the Commission’s
current designation means very little to most members of the public and does not
highlight the important role to be played in investor
protection. Moreover, if
the wide ranging changes to the architecture of market regulation recommended in
this report are accepted,
a new designation for the Commission may be seen as
appropriate given the significantly expanded role and mandate envisaged
for it. While conscious of the risk of being accused of slavishly following
Australian practice, the best suggestion we can
put forward is
“Investments and Securities Commission”. There may be other,
better options – for example, “Financial
Markets Authority” is
a designation now used in a number of overseas jurisdictions.
Suggestion:
• That consideration be given to changing the Commission’s
designation to emphasise the importance of its role in protecting investors
and
to mark the changes envisaged in its role and
mandate.
7 Capability issues
7.1 Introduction
The KPMG February 2009 baseline funding report on the Securities Commission
gives a comprehensive account of the agency’s management
structure and
processes and we will not duplicate it here. Annex F of this report contains an
organisation chart of the Commission
as at July 2009.
The Commission has grown significantly since it was first established in
1978. Its mandate has been progressively broadened and its
powers significantly
strengthened, most noticeably in the past few years. From 22 staff members in
2002, its Wellington office
has expanded to an establishment of 40 full-time
employees. The new responsibilities given to it under the Financial
Advisers Act 2008 are likely to add a further 30 positions to its establishment.
A further expansion is likely when the Anti-Money
Laundering and Countering
Financing of Terrorism Bill is enacted into law and closer scrutiny required
over trustee supervisory responsibilities
and collective investment
schemes.
The KPMG report assessed the Commission to be operating efficiently and well.
It observed that resources were being managed effectively
and could not point to
any significant ways of redeploying resources to better effect. Staff
remuneration policies were seen as
appropriate and the staff turnover rate was
satisfactory. The Securities Commission topped the small workplaces category in
the Unlimited/JRA
Best Places to Work in New Zealand Survey 2006 (as well as
being a top 10 finalist in the previous two years) and continues to rate
highly
in this survey. The Commission may take satisfaction from these ratings.
Office accommodation was deemed to be of a good standard –
with some potential for expansion if Wellington-based
staff numbers grow.
Corporate support functions rated well in terms of both efficiency and
effectiveness.
Recent management reports from Audit New Zealand confirm that this is a
well-run agency. Audit New Zealand describes it as having
appropriate policies,
systems and controls in place and as running them effectively. The 2007 report
notes that the Commission’s
objectives are clearly defined, with
appropriate performance standards and measures in place. Financial information
systems and
controls are described as “good”. The agency is
commended for the quality of its risk management and legislative compliance
frameworks.
7.2 Observations
There are some significant capability issues requiring to be addressed. One
of the major factors militating against better regulation
of New Zealand’s
markets is the chronic under-resourcing of the Commission. We regard it as
important that the team being
established to implement the Financial Advisers
Act be based in Auckland – where some two thirds of the action takes
place.
A significant investment is required in the Commission’s IT
systems. Staff training has had to be put on a back burner in
recent years.
And one of the factors contributing to the negative perceptions currently
evident among stakeholders has been the
inability of the agency - often
for
straight work pressure reasons – to put more time and thought into its
engagement with market participants and its communications.
7.2.1 Suggestions
We offer two major recommendations and four minor suggestions for addressing
this set of management and resourcing issues.
7.3 Resourcing
It is clear from the review team’s surveys and research that
under-resourcing is at the heart of many of the Commission’s
current
problems. Partial relief has been given for the current year but as matters
stand the Commission will be running an operational
deficit for the foreseeable
future – and that without any additional pressures such as are envisaged
to flow from the Anti-
Money Laundering Bill and other regulatory changes
currently under consideration.
International comparisons of resource levels are not easy because of
variations in the size and nature of securities markets and the
very different
approaches taken to market regulation in different jurisdictions. Chapter 9
below summarises the results of our research
into six other administrations.
The one point that emerges very clearly is that, even allowing for the
comparative smallness of
New Zealand’s market, as a country New Zealand
puts considerably less funding into market regulation than any other comparable
country. The Morningstar report referred to above gave New Zealand a
“D-” rating for investor protection. A key factor
in this low score
was that it was deemed (alone among the 16 jurisdictions reviewed) to be
“not sufficiently staffed”.
The KPMG report referred to above concluded that the Commission had never been adequately funded for the services expected of it and that additional operational funding of the order of $4 million was needed for the 2009/10 financial year. In the event the latest budget round produced a modest increase in operational funding for the current year. The report also found that additional operational funding of some $10 million would be needed in the 2010/11 and
2011/12 years. The Commission’s reserves as at 1 July 2009 stood at
$2.4 million. The KPMG review team identified a shortfall
of the order
of $1.5 million to $2.2 million in the Commission’s capital
funding for the next two years - primarily
for the upgrading of IT
systems.
The report acknowledges that there is some looseness around some of these
figures and that more precise estimates will need to await
further decisions
relating to the Commission’s new responsibilities. Moreover, any
decisions arising from the recommendations
in this report will need to be taken
into account in framing firm estimates for the next couple of years. Regardless
of the outcome
of this report, however, the Commission faces a period of
significant change and expansion in the next two or three years. It is
manifestly not currently resourced to implement these changes. Yet it is
important that it at least maintain its current levels
of effectiveness as it
beds in these changes - and many stakeholders are of course looking for a marked
improvement in the way the
New Zealand market is
regulated.
It may be that the recommended consolidation and rationalisation of the
current market regulation architecture will free up some funding
from agencies
other than the Commission. Consideration will also need to be given to the
extent to which fees and levies should fund
the Commission’s operations.
At the same time, there appears to be no escaping the need for additional Crown
funding if the
overall effectiveness of New Zealand’s market regulation is
to be brought up to standard.
Recommendation:
• That an inter-agency task force (involving inter alia the
Ministry of Economic Development, the Treasury and the Securities Commission) be
established with some urgency to assess and report
on the Commission’s
funding and staffing requirements for the coming two or three
years.
7.4 Auckland office
The Financial Advisers Act (FAA) 2008 makes the Commission the
financial advisory industry’s main regulator, bringing
New Zealand into
line with overseas standards. It requires financial advisers to attain
specified levels of competence,
professional standards and disclosure. An
18-month programme is now in train to put in place the systems and training
needed for
the Act to be fully operational by the end of 2010. An announcement
was made in July concerning the membership of the Code Committee
which is to
draft the Code of Professional Conduct for financial advisers. A
Commission member has been appointed Commissioner
for Financial advisers to
oversee the operation. A summary of the approach being taken to the
implementation of the FAA requirements
is contained in the KPMG baseline funding
review referred to above.
Final funding levels and phasing for the FAA team have yet to be established,
as do the staffing numbers. The sum of $800,000 was
allocated specifically for
this purpose in the 2009/10 year. A provisional baseline increase of $1.4
million was also apparently
agreed for each of the succeeding two years. We
were told that the intention is for the industry to pick up much of the funding
responsibility thereafter.
The KPMG report examined the funding requirements for the FAA operation,
including additional enforcement activity, in considerable
detail. The only
point we would make on top of the KPMG recommendations is that the FAA office
should be located in Auckland –
since that is where over two thirds of
financial advisory work occurs. And given that the head of the FAA operation is
required to
be a member of the Securities Commission, it would seem to us to
make sense to use the Auckland office for broader Commission purposes.
It
would facilitate the transaction of the Commission’s business in New
Zealand’s commercial capital. On-the-spot
Securities Commission
representation, headed by a member of the commission, would be seen as a
positive move by the issuer community
in Auckland and should do much to improve
the Commission’s engagement and relationships with stakeholders
there.
7.5 Staffing issues
As indicated above, no pressing issues were drawn to our attention in such
areas as morale, remuneration and general working conditions.
The Commission
clearly manages such matters efficiently and well. The specific issues of
communication and stakeholder relationship
management are dealt with in Chapter
8 below.
The Commission currently operates a centrally-controlled financial management
system. This seems to work well insofar as it allows
highly-qualified senior
managers to focus on their specialist tasks and not spend time complying with
the increasingly demanding
requirements of the public sector financial reporting
system. It also carries benefits in terms of the need for the Commission to
be
constantly reassessing its work priorities and redeploying staff to where the
need is greatest.
The panel had the opportunity to talk to all heads of department and to watch
their participation in meetings of the Commission.
They are obviously competent
and dedicated people and we rate the technical capability of its staff as a
strength of the Commission.
There are some major questions around staffing numbers. These are explored
in detail in the KPMG report and do not require elaboration
here. Sufficient to
say that a longstanding legacy of staffing shortages continues to handicap the
Commission in its work and that
a close eye needs to be kept on the implications
for the Commission of the numerous decisions being taken, or about to be taken,
about the way market regulation in New Zealand should be handled in the
future.
We would add that the Commission faces an 18 month to 2 year period of major
structural change and adaptation. If its effectiveness
and the efficacy of the
overall market regulatory system are not to suffer, the Commission will need to
contract in additional resources
to cope with this intensive period of change
management. As new functions such as the implementation of the FAA are acquired,
the
Commission should consider how its current financial management system
should be adapted to meet those requirements.
Suggestion:
• That a dedicated working group be established to work with the relevant Division on planning and preparations for the structural and other changes facing the Commission in the next 18 months to 2 years. This could include consideration of how the current financial management system might best be adapted to the Commission’s new role and responsibilities.
The final point we would make in relation to the agency’s staffing is
that a common criticism from market participants was that
the agency has a high
level of technical capability in such areas as accountancy and law but lacks
people with current or recent
market experience. There are dimensions to the
work of regulating securities markets that go beyond law and accounting. There
is
a need to assess the commercial substance and risks of an offer and determine
whether these are communicated effectively in the offer
documents. This stands
to be all the more important if the Commission broadens its scope as we have
suggested in section 5.2. It
is obviously no easy matter to recruit suitably
qualified and experienced people from the market for work in a regulatory
agency.
Remuneration levels and career discontinuity are
two
problems that are frequently cited. Secondments can help, but they are
notoriously difficult to arrange. Nevertheless, we assess
that there is some
validity in the criticism and consider that the Commission would greatly benefit
from a “leavening”
of this kind if it can recruit the right kind of
people with market experience. This might be assisted by the current state of
the
labour market. Training of staff – for example by short-term
observation attachments in selected sectors of the market –
can also help
here, although this will require better resourcing levels.
Suggestion:
• That the Commission be given the power of pre-vetting offer
documents in order to assess whether risks are appropriately disclosed.
We note
that this power would need to be exercised carefully and that any findings would
need to be communicated in such a way as
to avoid moral hazard. The staff
concerned would need to have commercial experience and knowledge to discharge
this function, either
through bringing in staff with recent securities market
experience and/or arranging training attachments for existing staff in key
sectors of the securities market
7.6 Operating procedures
At present guidelines on the Commission’s operating procedures and
standards are spread around a number of circulars and papers.
With its
expansion - and against the likelihood of a branch office being set up in
Auckland - it would be appropriate to bring all
the guidelines and instructions
together in a consolidated manual. This might or might not include a Charter
for the Commission
itself. There are several examples of such manuals around
the Crown entity world.
Suggestion:
• That the Commission’s operating procedures and instructions
be brought together in a consolidated manual.
8 Stakeholder relationships and communication
8.1 Introduction
Our terms of reference required us to evaluate the state of the Securities
Commission’s relationships with its key stakeholders.
This was done
mainly through our meetings with a representative range of business leaders,
commercial firms, securities
market participants, regulatory agencies,
investor groupings and media commentators. Most of the meetings were in person,
a few
were by video or teleconference.
8.2 General
The first point we would make is that we encountered an enormously wide range
of views on the attitude and the performance of the
Commission. At one end of
the spectrum we heard trenchant criticism of the Commission, while at the other
end stakeholders spoke
highly of its achievements and performance. There were
of course a number of people holding mixed views in the middle of the range,
where credit was given for what the Commission has achieved despite its
legislative and resource constraints but a number of suggestions
were made as to
how its performance - and the effectiveness of the overall regulatory regime -
could and should be improved. At
the risk of oversimplification, the harshest
criticism tended to come from market participants (e.g. directors, issuers and
financial
advisers), media commentators and investor groups, while the more
positive assessments came from law and accounting firms,
other agencies
involved in market regulation and small business representatives. We understand
this to be very much in line with
patterns found in other jurisdictions.
A second point is that we found it difficult to separate the most
commonly-held criticisms of the Commission from perceptions that
the regulatory
system more generally had failed to do its job. Many of the issues raised with
us seem to have more to do with the
inadequacies of the current legislation, New
Zealand’s highly dispersed and fragmented regulatory architecture and the
Commission’s
lack of powers than with any failings on the part of
Commission or staff members. Not all the people we spoke with were
aware of
the extent to which responsibilities are currently dispersed around other parts
of the regulatory system, neither is it
generally appreciated just how
constrained the Commission is by a tight resource situation and how much work
comes to it under its
various remits.
It has to be recognised too that the role of a regulator necessarily implies
a degree of distance from the market and that regulators’
decisions will
not always find favour with market participants. Regulatory decisions can impact
heavily on business through compliance
demands and enforcement actions alike.
A survey conducted earlier this year of stakeholders of Australia’s
regulatory counterpart,
the Australian Securities and Investments Commission
(ASIC) found that many of the concerns and complaints that our team encountered
featured equally prominently in the feedback from Australian business firms. It
also found that ASIC is not without its critics:
for example, only 45% of the
business representatives polled considered ASIC to be performing well overall;
only 42% gave it a satisfactory
rating in terms of its contribution to the
efficiency of the economy; and only 41% thought it was doing a reasonable job in
identifying
and dealing with emerging issues.
8.3 The negative....
To begin with the criticisms of the Securities Commission, some of the people
we met spoke negatively about what they saw as the Commission’s
lack of
understanding of, and engagement with, the market. It was variously described to
us as “aloof”, “bureaucratic”
and even
“antagonistic”. The location of the Commission in Wellington rather
than Auckland was seen by some as a fundamental
problem. The peremptory tone of
some of its communications was criticised, as was its perceived reluctance to
tackle major cases
of fraud and abuse. The effort currently put into IOSCO work
was questioned by some. Most critics wanted to see the Commission
move from an
“ambulance at the bottom of the cliff” stance to a more proactive
approach. The regulatory system overall
was seen by many to be pushing up
compliance costs for no real benefits to the way capital market functioned.
There was a sense
that Commission staff, while technically competent, were not
“market savvy” enough or sufficiently focused on the needs
of market
participants. Investor groups wanted better protection against fraud while
issuers wanted greater clarity and certainty.
On the enforcement front, there
was a universal desire to see action taken more quickly and decisively against
those who transgress
the rules. Tighter regulation of financial advisers and
more public education were also on many people’s wish
lists.
8.4 And the positive
On the positive side, a number of stakeholders felt that the Commission
deserved high marks for its achievements in recent years.
There was a high
level of respect for the independence and integrity of Commission members and
for the professional skills and calibre
of Commission staff. Many were
impressed with the quality of the Commission’s work and expressed the view
that individual
Commission members and staff were helpful and forthcoming when
advice was sought. The Commission’s contribution in the international
arena, and particularly the Chair’s work with IOSCO, were seen as notable
achievements which carry real benefits for New Zealand.
The Commission was
seen to be playing a valuable leadership role among other regulatory and
enforcement agencies and is clearly
regarded by those agencies as cooperative
and good to deal with. There was recognition of the Commission’s recent
efforts to
lift its game in the fields of public education and market
engagement, including the Chair’s articles and public presentations.
Many
judged the Commission to have found the right point of balance in its weighing
of the principles of natural justice and due
process against the need to take
action – and to be seen to be taking action – against alleged abuses
of the market.
As indicated above, there was a strong body of opinion among many with whom
we met that the Commission was seriously handicapped in
its work by the
inadequacies of the current securities market legislation and chronic
under-funding. The fragmentation of responsibility
for the supervision of
market conduct and enforcement was seen as adding to the overheads of market
supervision and generally causing
confusion - “....too many referees for a
comparatively small playing field” was one person’s observation.
And,
as indicated above, the Commission’s lack of “teeth” to
make rulings, investigate right across the spectrum of
a security’s life
and impose sanctions was viewed as a major constraint on its ability to do its
job.
8.5 Conclusions and suggestions
We have dealt elsewhere in this report with the constraints on the
Commission’s effectiveness that lie outside the direct control
of the
Commission. This section focuses on actions that are within the
Commission’s power to take and which would, we believe,
improve both its
relations with stakeholders and its operational effectiveness.
8.6 Public education
A number of steps have been taken in recent years to inform and warn the
public of the risks involved in investing in certain types
of offerings. We were
for example impressed by the range of information pamphlets and booklets that
have been issued as well as the
speeches made by the Chair. The Commission has
worked hard to get organisations such as the New Zealand Qualifications
Authority
to help in its public education work. It liaises closely with
the Retirement Commission and other bodies working in this
area. At the same
time, we are conscious of the comments made by a number of stakeholders along
the lines that press releases,
speeches and even brochures have only limited
impact nowadays and that well-publicised enforcement action is the most
effective way
of getting messages across. Strong views were expressed about the
low levels of economic literacy and gullibility of the New Zealand
public:
“regulators have to provide fighter cover for those idiots who persist in
buying rubbish” was one comment.
It is our view, after considering the stakeholder feedback and reviewing the
role of the various parties in public education, that
overall coordinating
responsibility for publicly funded activities in this area should be vested in
one agency. While the Securities
Commission has done a lot to improve
investors’ literacy (and will always be a major player in this area), it
should not in
our view be the coordinating agency for public education. We
consider that the best contribution that the Securities Commission
can make,
given its limited resources, is to supervise the conduct of the market, issue
clear investor warnings about scams and fraudulent
behaviour and take prompt
action against fraud and abuse. In addition it is well placed to synthesise
periodically information on
the New Zealand market and regulation, perhaps in
its Annual Report.
8.7 Collapse of finance companies
The strongest criticism of the Commission we encountered related to its
perceived failure to regulate finance companies before their
collapse over the
last couple of years. A number of critics put this down to a reluctance on the
part of the Commission to go beyond
an overly narrow and legalistic
interpretation of its remit. Commentators criticised the Commission for being
“to all intents
and purposes invisible” and “missing in
action” in the period leading up to the failures. It is however difficult
to say, even with the advantage of hindsight, just what more the Commission
– or indeed other parts of the regulatory system
- could or should have
done under the existing legislation when the alarm bells started to ring. A
discussion document put out by
the Commission as long ago as 2004 raised serious
concerns about the non-disclosure of risk by finance companies. This was
followed
in April 2005 by a report Disclosure by Finance Companies.
Between April and August 2006 a special review was conducted of finance
companies’ disclosure documents, as a result of which
12 companies were
ordered to amend offer documents, advertisements or financial statements. An
explicit warning about the risks
involved in investing in finance companies was published in August 2006. A
series of actions was taken against individual finance
companies in 2006 and
2007. From 2006 the Commission was involved in developing proposals to tighten
regulatory controls over finance
companies. These culminated in the passing of
the Financial Advisers Act in September 2008.
As we have already noted, there was no body with prudential regulatory
responsibilities over non bank deposit takers during this period.
This
responsibility has since been given to the Reserve Bank.
A detailed list of the Commission’s actions in relation to finance companies is provided in
Annex G.
8.8 Members’ role in stakeholder engagement
Although Commission members from time to time attend and “front”
workshops and make presentations to business organisations
(as well as, on
occasions, represent the Commission at overseas meetings), we believe that it
would be good public relations –
and help remove any perception that the
Commission is out of touch with today’s market realities - to have members
engage more
often and more directly with the business community. This would best
be done as part of the public relations strategy discussed in
section 8.9
below.
Perceptions are an important element in effectiveness, and effective
communication is an important function of leadership.
New Zealanders by and
large do not like to be told what to do by faceless people. The Chair does a
valuable and highly commendable
job in terms of speeches, articles and
participation in meetings and gatherings in New Zealand. In our view however it
will be important
in the period ahead for other Commission members to get out
and about and make themselves known to the market. Done well, such outreach
can
do much for stakeholder confidence in, and respect for, the organisation. It
can add value to consultations and other contacts
that already occur between the
commission and its stakeholders. Stakeholder relationship management is a key
element in any
public organisation’s risk management. Stakeholders
have a legitimate interest in being properly informed and appropriately
consulted on both policy development and service delivery. There is clearly an
appetite out in the market to see more of the Commission
members.
8.9 A communication strategy
There is a clear need for the Commission to put in place a more proactive
public relations and communication strategy. While it is
understandable –
and in many ways commendable – that the Commission should have put this
work on a back burner in recent
years in order to concentrate its limited
resources on its substantive tasks, its communication with key audiences clearly
needs
to be paid more attention. Among the comments we heard were
that the Commission “lacks good antennae” and
often fails to get
its message across to target audiences. We were encouraged to find that,
conscious of this problem, the Commission
devoted a meeting late last year to
putting in place a new, overarching communication strategy. The strategy,
which is to be overseen
by a special five-member Division of the Commission, is
based on an agreed set of objectives. It includes a calendar of activities
which
is to be reviewed at six-
monthly intervals and a research programme. The review team was impressed
with both the coverage and the content of the strategy.
The challenge will be to maintain this high level of attention and secure
adequate resourcing for the implementation of the strategy
on an ongoing
basis. Currently the Communications Manager has just one staff member
working with him, yet his duties include
overseeing the production of all
Commission reports and publications, media relations, dealing with public
enquiries, maintaining
the Commission’s website and database,
producing the quarterly bulletins, liaising with a range of external
groups and organisations, managing the Commission’s public education
activities, assisting with the Chair’s public
speaking programme and
advising the Commission on public relations and communications issues. Clearly,
this level of resourcing is
not sufficient.
The review team endorses the approach encapsulated in this strategy and urges
that it be given early attention. We repeat here our
encouragement in section
5.2.2 that the Commission adopt a less risk averse approach to its communication
about matters it has under
review and in the way it reports publicly on its
findings. We also see it as a high priority task to get the Commission’s
relationships with the news media on a better footing. The media are well
placed to help the Commission get its messages across
to both the market and the
public. We consider it would be helpful if regular briefings were held with key
journalists, if necessary
on an “off the record” basis, on matters
being dealt with by the Commission.
As a footnote, engagement is a two-way street and requires effort on both
sides. We see scope for a more positive and constructive
attitude on the part
of some market participants as well as the Commission.
We have one recommendation and a number of suggestions on stakeholder
relationships and communication:
Recommendation:
• That priority be given to the establishment of an Auckland office
of the Securities Commission with a broader representational role
as well as
functional responsibility for the implementation of the Financial Advisers
Act.
Suggestions:
• That the Commission’s communication section be equipped to
take responsibility, under the relevant Division, for implementing
the
Commission’s communication strategy and monitoring progress in the
strengthening of the Commission’s relationships
with businesses,
investors, the media and other important stakeholders.
• That priority be given to putting the Commission’s
relationships with the news media on a better footing and to making more
use of
press briefings, if necessary on an off- the-record basis, on matters before the
Commission which are of concern to investors
when this would serve the public
interest.
• That, where an activity is judged inappropriate but is beyond the Commission’s
powers to act, press releases go beyond a matter of fact interpretation of the law to
state an opinion. It is also important that press releases be worded in
such a way as to have the desired impact on the target audience.
• That all staff be reminded of the importance of maintaining a
strong client focus and observing a high standard of communication
with
the business world and other stakeholders, with senior managers to be
responsible for enforcing this requirement. This
would include responding as
helpfully as possible to requests for guidance on the interpretation of
securities law, timely acknowledgement
of complaints or requests, keeping an eye
on the tone of correspondence and keeping people regularly informed of
progress.
• That a programme of public speaking and attendance at relevant
meetings by Commission members and senior staff members be developed
to support
the outreach work being done by the Chair. This would both help make the
Commission and its work better known to investors,
businesses and the media and
give Commission members and senior staff opportunities to listen to the
market.
• That the section in earlier Securities Commission annual
reports describing the securities market, including recent trends
and
developments, be reinstated.
• That formal responsibility for coordinating financial literacy
education by publicly funded bodies be vested in one agency, with the
Securities
Commission continuing to have a major input in order to ensure that full use is
made of its actions and activities to
support public education goals. A close
relationship should be encouraged with other privately funded groups involved in
financial
literacy education.
9 International comparisons
9.1 Introduction
Elsewhere in this report we have referred to regulatory practices followed in
other jurisdictions based on a survey of published information
about the scope
of other countries’ activities and approaches
We selected Australia, Singapore, Netherlands, Israel and Canada as the
jurisdictions which provided the best basis for comparison
with New Zealand
based on a combination of cultural and historical factors and securities markets
that operate relatively well in
the IOSCO context. All of these countries’
regulators work within a “twin peaks” framework except
Singapore’s
financial services regulator (MAS).
Our comparison of New Zealand with other jurisdictions took into account the
following considerations:
• the nature of functional segregation between supervision,
enforcement, and decision making
• the regulator’s operating style in the way it deals with
stakeholders and approaches its work
• the level of staffing and other resources
Comparisons of some of the key regulatory dimensions are set out in Annex H.
Taking each of these matters in turn:
9.2 Rule making powers
New Zealand’s framework is based on black letter legislation, which is
the case in the other jurisdictions we reviewed. Within
the limits of black
letter law, the Commission has taken some opportunities to operate in a
principles-based manner through the issuing
and periodic review of a number of
class exemptions. It has also notified interpretations, such as deeming offers
to be a certain
type of security (with the resulting regulatory compliance
requirements). This compares favourably with other regulators, which either
do
not attempt rule making at all or do not go as far. ASIC has released a number
of “Regulatory Guidance” notices,
but these contain a disclaimer
that they do not constitute legal advice – which does not provide a lot of
certainty to market
participants.
We identified one area in which the Commission could adopt practice from
overseas. There is an opportunity to follow the example of
some other
jurisdictions whereby the law reform (both legislation and regulations) process
is defined publicly and includes target
timeframes, the groups that should be
consulted and the points in the process during which the consultation should
occur. This approach
would help to address the concerns expressed to us by some
market participants about stakeholder engagement as well as ensure all
amendments to regulations are able to be effectively implemented by the
market. We consider too that it would be advantageous
for the Commission
to be able to advocate changes in the legislation and regulations as an
independent and expert regulatory body.
While primary responsibility for policy advice rests with the
Ministry of Economic Development, the Securities Commission
has an important
role to play in securities market law reform. As indicated above, the review
team would like to see this role strengthened.
Suggestion:
• That the Commission be given a greater measure of independence in
making the case for legislative or regulatory improvements and,
once changes
are in prospect, be responsible for formulating and making public a defined
law reform process that includes appropriate
consultation with market
participants.
9.3 Disclosure or merit based regulation
New Zealand’s disclosure based framework is typical of the comparison
group. ASIC in Australia is an exception in that it
has the power to
prohibit or limit offerings based on assessment of merit, not just disclosure.
This is unusual: EU rules prohibit
this kind of involvement from the regulator
on the grounds of moral hazard risk and the “caveat emptor”
principle. The
disclosure based regulators all have law reform functions and
defined processes to move things through the policy pipeline towards
updated
regulations or legislation, but this can never be a nimble process.
While most other regulators focus on disclosure issues, we have noted a
number of public statements by the Commission emphasising
the particular risks
inherent to certain investment types, which investors need to understand. These
statements are not-so-subtle
hints to investors about the investment’s
merits – and go about as far as could be expected from a regulator with
only
disclosure based powers. This approach is at least as proactive as any we
have noted in the comparison group. The commentary included
in these statements
describes in a straightforward way how the investments work and how the risks
arise. (We have however suggested
elsewhere in this report that the Commission
look at ways of sharpening up its warning to investors.)
9.4 Powers of administrative sanction
New Zealand’s Securities Commission, along with ASIC in Australia, does
not have powers of administrative sanction. All actions
must be through the
courts. By comparison, Singapore, Netherlands, Canada and Israel do have powers
of administrative sanction. In
our view, the power to impose fines or prohibit
individuals provides for timely and efficient regulation and is preferable to
using
courts in the first instance. The courts exist as an appeal forum and
remain
the first point of action for criminal proceedings. We have not researched
in detail the level of administrative sanction available
to each regulator
– we understand that the main jurisprudence hurdle relates to the
appropriateness of a non-judicial body’s
imposing administrative sanctions
rather than the level of those sanctions.
9.5 Separation of functions
Other regulators have addressed the need for a separation of functions in
different ways. One natural division is between supervision
and enforcement
(both typically “agency” functions) and decision making (typically a
“commission” function).
A second is the requirement to segregate
supervisory and investigative actions from enforcement decisions. On a matter
related
to governance, we noted that New Zealand’s Securities Commission
is relatively independent of government compared to some of
the other
regulators. We consider this to be a strength, even acknowledging that the
Commission is to some extent constrained from
taking a public position on its
law reform proposals.
The approach taken to separation of functions in our comparison group is as
follows:
Table 2 – how different countries are achieving separation of
functions
Country
|
Approach to separation of functions
|
Independence from government
|
New Zealand
(proposed)
|
Formal segregation within the agency of supervision and enforcement
functions now proposed as a corollary of expanded powers: likewise
a separation
of governance and management roles is proposed
|
Independent Crown entity
|
Australia
|
Separate functional divisions exist within the agency structure
|
ASIC’s policies and priorities (but not individual cases) are
subject to direction by the Treasurer
|
Singapore
|
Separate roles of Chairman and Managing Director. Separate officers head
various supervision of market segments, with no high level
separation between
supervision and enforcement
|
Government Ministers are included on the board of MAS, and its chair is a
senior Minister
|
Israel
|
Full time Chair with no Chief Executive. Enforcement functionally separate
from other activities
|
Chair and commission members appointed by Minister of Finance
|
Netherlands
|
No Chief Executive. An Executive
|
Autonomous from government
|
Country
|
Approach to separation of functions
|
Independence from government
|
|
Board has joint responsibility for all
areas and delegates responsibility for different aspects to individual
“directors”. The Executive Board itself is
subject to
supervision and advice of the independent Supervisory Board
|
|
Canada (British
Columbia)
|
Separate roles of Chair and Executive Director. Enforcement is functionally
separate from other activities
|
Independent government body, members appointed by government
|
Source: review team research
9.6 Operating style of the regulator
New Zealand’s Securities Commission appears to some critics to be
primarily about administering legislation in a technically
“accurate” way, giving lower priority to timeliness and up-front
helpfulness. Our review of publications suggest that
a similar approach is
taken by most regulators. In relation to timely communication, ASIC in
Australia and BCSC in British Columbia,
Canada, have well publicised targets
about processing times and keeping people informed. However the results of
recent customer satisfaction
surveys do not suggest that a “client
oriented” culture has yet permeated these organisations. Our
recommendation to
the Commission to develop a stronger client focus will, if
successfully implemented, put it ahead of most other regulators. Binding
rulings
and no action letters, which are not currently used by the Commission, do not
appear to be in widespread use in the review
group. In certain jurisdictions
however considerable use is made of consultative panels representing the
interests of retail investors
and other categories of market
participants.
Many stakeholders see the Commission as mainly reactive – dealing with
complaints rather than preventing problems from occurring
in the first place.
This does not fairly describe the secondary markets supervision function and
is only partly true in relation
to primary markets – the Commission has a
track record of publishing its concerns about certain sectors and of requesting
meetings
with issuers if it has concerns. The extent of publications by the
Commission that could be considered “proactive”
compares
favourably with the overseas regulators we reviewed. As far as we are able to
tell, prosecutions arise from complaints
rather than surveillance in most
jurisdictions.
Lastly, our report raises the question of whether the Commission could be
better at prioritising its work and taking more of a risk
based approach. Based
on our review of other jurisdictions, there seems to be a measure of support for
this view. Some other regulators
have established targets about focusing effort
towards riskier areas and targeting outcomes. It would however be difficult to
argue
that these regulators have achieved better outcomes than New Zealand in
recent times. ASIC has this as a specific goal, and we
have suggested that the
Commission
consider moving more in this direction. We do not however wish to minimise
the difficulties inherent in making judgement calls under
a risk-based
approach.
9.7 Level of staffing and other resources
Direct comparison between Securities Commission and its overseas counterparts
is difficult. Most of the other organisations have different
functions (MAS in
Singapore is an integrated regulator) and larger capital markets. Further,
we understand there is reluctance
by the regulators to publish details of
their staffing establishments because they see a regulatory benefit in
“mystery”.
Nevertheless, a comparison of operating budgets shows
that New Zealand’s regulator operates on a fraction of the resources
available to its counterparts. All of the other regulators are fully or
significantly industry funded, with New Zealand having the
greatest dependence
on government funding.
Table 3 – staffing and funding levels of regulators in a
range of countries
Country
|
Operating budget (NZ$ millions)
|
Staff numbers
|
New Zealand
|
9
|
40
|
Australia
|
342
|
1,660
|
Singapore
|
218
|
Not published
|
Israel
|
40
|
145
|
Netherlands
|
150
|
420
|
British Columbia, Canada
|
41
|
192
|
Source: websites and/or annual reports of each body, converted at exchange
rate 31 July 2009
A Annex A – terms of reference
The review panel agreed the following terms of reference with the members of the Commission: The review will assess the effectiveness of the Securities Commission, in particular how
well the Commission is achieving the outcomes it seeks. The review will cover the effectiveness of:
1. The conduct of securities regulatory work in the Commission, the
allocation of work, decision making, and organisation of resources
2. The governance of the Commission, including its governance practices and
its governance structure
3. The Commission’s relationship with its primary stakeholders,
including its reputation
4. Such other matters as the review team considers relevant
The review will build on the work contained in KPMG’s report to the
Ministry of Economic Development dated February 2009, “Baseline
funding
review of the Securities Commission”.
The review will generally follow the approach as developed by members of the
review panel
Timing and reporting
The review will take place during the 2 month period, June and July 2009. The
reviewers expect completing their final report by Monday,
31 August
2009.
B Annex B – list of stakeholders interviewed
External Stakeholders
PricewaterhouseCoopers (Bruce Hassall, Partner, and Leo Foliaki, Partner) Chapman Tripp (Roger Wallis, Partner)
NZX Limited (Andrew Harmos, Chair)
Serious Fraud Office (Grant Liddell, Director and Chief Executive) Minister of Commerce (Hon. Simon Power, MP)
Opposition Spokesperson on Commerce (Hon. Lianne Dalziel, MP) Ministry of Economic Development (David King, Director)
Ministry of Economic Development (Andrew Jackson, Deputy Secretary) NZX Limited (Mark Weldon, Chief Executive)
Companies Office (Liz Thomson)
New Zealand Institute of Chartered Accountants (Bruce Bennett, General
Manager Admissions/Standards & Quality Assurance,
and Steven Bailey,
Director Government Relations)
Trustee Corporations Association (David Brown Douglas, Chief Executive) Trustees Executors (Yogesh Mody, Regional Manager)
Cameron Partners (Murdo Beattie, Principal)
Crown Law Office (Maria Deligannis, Crown Counsel)
Crown Law Office (Una Jagose, Crown Counsel Team Leader)
Investment Savings and Insurance Association (Vance Arkinstall, Chief Executive) Kensington Swan (Gerald Fitzgerald, Partner, and David Ireland, Partner)
KPMG (Godfrey Boyce, Partner) Terry Hall, commentator
Russell McVeagh (Derek Johnston, Partner) Crengle, Sheves Ratner (Peter Ratner, Partner) Grey Power (Peter Rutledge, Director)
Ministry of Foreign Affairs and Trade (Simon Murdoch, Secretary) NZX Limited (Chris Moller, Director)
Minter Ellison (Lloyd Kavanagh, Partner)
Society of Independent Financial Advisers (Murray Weatherston, Chair) NZ Shareholders Association (Bruce Shepherd, Chair)
AMP Services (NZ) Limited (Jack Regan, Managing Director) Takeovers Panel
(David Jones, Chair, and Colin Giffney, Deputy
Chair)
First New Zealand Capital (Scott St John, Chief Executive)
ANZ National Bank of New Zealand, (David Green, Managing Director Institutional) Fran O’Sullivan, commentator
Rob Stock, commentator
Westpac New Zealand (Peter Wilson, Chair)
Tower (Sam Stubbs, Chief Executive Investments) Securities Industry Association (Rob Dowler)
Business New Zealand (Phil O’Reilly, Chief Executive, and Steve Summers, Economist) Brian Gaynor, commentator
John Milne, company director
Reserve Bank of New Zealand (Toby Fiennes, Head of Prudential Supervision) INFINZ (Paul Hocking, Executive Director, and Bruce McKay, Board member) Commission members
Jane Diplock (Chair) David Jackson
John Holland Colin Beyer Keitha Dunstan Annabel Cotton Cathy Quinn Mai Chen Neville Todd
Elizabeth Hickey
Staff members
Alastair Boult (Chief Accountant)
Kathryn Rogers (Director, Primary Markets)
Nick Arathimos (Director, Chairman’s Office & International) Liam Mason (General Counsel)
John Mulry (Director, Market Supervision) Angus Dale-Jones (Director,
Supervision) Roger Marwick (Communications Manager) Sanjiv Jetly
(Chief
Operating Officer)
C Annex C – list of key documents
Annual Reports 2001 - 2008, Securities Commission “Strategic Plan 2009 – 2012”, Securities Commission “Statement of Intent 2009 – 2012”, Securities Commission
“Ministry of Economic Development, Baseline Funding Review of the Securities Commission
2009 – 2012”, KPMG
“2007/08 Financial review of the Securities Commission, Report of the
Commerce Committee”, House of Representatives
“Company and Securities Law in New Zealand”, John Farrar et
al, 2008, Brookers Limited
“When no Law is better than a Good Law”, Address to INFINZ, Auckland, 1 July 2009, Prof
Utpal Bhattacharya, Cornell University
“Securities Act 1978” (reprint as at 12 March 2009) “Securities Regulations 1983” (reprint as at 10 April 2008) “Securities Markets Act 1988” (reprint as at 2 May 2008) “Financial Advisers Act 2008” (reprint as at 5 December 2008)
“Anti-money Laundering and Countering the Financing of Terrorism
Bill”
“2007/08 Financial review of the Ministry of Economic Development”, Report of the
Commerce Committee, House of Representatives
“Annual Report 2008/2009”, Monetary Authority of
Singapore
“ASIC: a guide to how we work”, Australian Securities and
Investments Commission
“ASIC Stakeholder Survey”, The Allen Consulting Group, April
2008
“Public Sector Governance: Better Practice Guide”, Australian National Audit Office, 2003 “Crown Entities Legislation”, presentation by Minter Ellison Rudd Watts, 2005
“Distributed Public Governance”, OECD paper, 2002 “Report of Ministerial Enquiry into the Sharemarket”, 1989
Securities Commission meeting papers, 2009
Securities Commission Audit and Risk Review Committee papers, 2009
Audit New Zealand management reports on Securities Commission, 2007 and
2008
IMF Financial System Stability Assessment, 2004
Financial Action Task Force report on money laundering, 2003
MOU between Securities Commission and NZX, 2009
IMF Country Report no. 04/417, 2004
Selected press clippings January – August 2009
Morningstar Global Investor Report, May 2009
D Annex D – overview of the market
Introduction
This section briefly describes the securities market in which the Commission performs its work. In commencing this review, we found no comprehensive document which would provide a clear presentation of both the “economics” of the market – volumes, trends, major events, number
and nature of market participants etc - and of the architecture and substance
of the regulatory framework. This information is important
for an understanding
of the context for our review of the Commission’s effectiveness so we have
obtained the latest statistics
available from a range of sources. These include
the Reserve Bank of New Zealand (RBNZ), NZX Limited, and the Spicers Household
Savings
Indicators compiled jointly by Morningstar and the New Zealand Institute
for Economic Research.
We have recommended that, as principal regulator of New Zealand’s
securities market, the Commission re-commence regular reporting
of the
dimensions of the securities markets along these lines. Information in this
format was reported in the Commission’s
Annual Report up to and including
2001.
New Zealanders’ financial assets
The main types of financial assets held by households in New Zealand are debt
securities (bank deposits, and other debt securities
with non-bank deposit
takers), equity securities (both direct New Zealand and overseas equities), and
mutual funds (superannuation,
life insurance). The total of New Zealand
households’ financial assets was $193.7 billion as at December 2008. The
distribution
of these assets is represented in the following figure.
Figure 1 - New Zealand households’ main financial
investments as at May 2009
New Zealand Equity
Overseas Equity
Superannuation
Life Insurance
Other Managed Funds
Dec-08
Dec-07
Deposits with registered banks
Other Debt Securities
0 20 40 60 80 100
Source: RBNZ
Debt securities
Financial institutions include registered banks as well as non-bank deposit
takers. All registered banks, and since 2008 non-bank
deposit takers, are
subject to the prudential supervision of the RBNZ. They are also subject to the
advertising provisions of the
Securities Act 1978
and
Securities Regulations 1983. The majority are subject to and abide by the rulings of the
Banking Ombudsman.
As at 29 May 2009 there were 18 registered banks, of which 8 were incorporated in New Zealand. Non-bank deposit takers (companies that are not banks, but which issue debt securities to the public and are engaged in the business of borrowing and lending money, or providing financial services) include around 50 small credit unions, 11 building societies, PSIS, and
around 70 finance companies.
The New Zealand household sector's aggregate investment in debt securities
issued by both bank and non-bank financial institutions
(M3) stood at $121.8
billion as at December 2008. Included in this amount are debt securities traded
on the Debt exchange market
(NZDX) provided by NZX Limited. As at May 2009 the
market capitalisation of the NZDX was valued at $14.5 billion. Issuers listed
on
the NZDX include the government, banks and corporates.
Equity securities
NZX is a listed for-profit company that is New Zealand’s principal stock exchange operator. It runs two markets for equity securities, the NZ stock exchange (NZSX) and the NZ Alternatives exchange (NZAX). The NZAX is designed for small to medium sized companies which are
fast-growing or looking for additional sources of capital to fuel growth. The
NZSX is the market designed for mature corporations.
The total market capitalisation of the NZX in May 2009 was $48.3 billion, with the NZSX
being $47.8 billion of this total.
The New Zealand Super Fund, which has assets of $13.1 billion, holds 6% of
its assets ($823 million) in equity securities listed on
the NZSX.
Managed funds
Managed funds are investment funds managed professionally by an expert fund
manager who invests in a variety of investments. With
managed funds, invested
money is pooled together with that of other investors to create a single strong
fund to provide investor
benefits.
Managed funds totalled $54.5 billion as at December 2008. These are
predominantly made up of Superannuation funds ($$18.9 billion),
Unit Trusts
& Group Investment Funds ($12.1 billion), and Life Insurance ($7.6 billion).
Other managed funds make up the remainder.
Of the $12.1 billion in superannuation funds $2.1 billion has been invested
into the KiwiSaver scheme introduced by Government in
2007. The KiwiSaver
schemes available range from conservative risk to growth funds, with a large
percentage of contributors opting
for the lower risk conservative schemes. This
may reflect a general propensity to invest in safer, interest bearing
investments implied
by the distribution of New Zealanders’ financial
assets presented in figure 1 above.
Financial literacy and its impact on sections of the market
There is general agreement among commentators that financial literacy levels in New Zealand are low. This is the case in most advanced economies, with analysis on this very point having been made public in both the UK and France. The majority of household wealth in New Zealand is invested in the family home and non financial assets (such as residential investment property, land, etc) which do not come within the scope of securities regulation. The distribution of households’ financial assets set out in figure 1 above implies that the majority of investors mainly use products they understand. This leaves a share of the market invested in financial assets that is relatively small by overseas standards. Many people consider that the low level of financial literacy, coupled with the tendency for investors to stick with what they
understand, explains the limited amount of capital available for long term business expansion in
New Zealand.
On the other hand, it seems there has traditionally been a significant
minority segment of the public who are prepared to invest in
financial assets
they do not understand and who do not appreciate the drivers of risk and return
on their investments. Such investors
are susceptible to products that promise
returns greater than is available from products they do understand. This segment
of the
market has tended to suffer a large proportion of unexpected losses by
investors over the years. A view was expressed to us that
this pattern has not
changed, although the vehicles in which these investors lose their money do
change over time to keep ahead of
regulation. Examples of such vehicles given to
us include contributory mortgage schemes and, more recently, finance companies
with
high concentrations of risk.
The collapse of a whole investment sector, in addition to causing loss of
confidence, contributes little to making capital available
for long term
business expansion. For example, the collapse of risky finance companies led to
a loss of confidence, and drying up
of deposits, for much of the entire finance
company sector. Finance companies were previously a significant source of
finance for
smaller expanding businesses.
Another factor in this equation is that it has been possible to offer services as a “financial adviser” without any qualifications or even any knowledge of investments. The payment of commissions to such advisers is considered by some to be a significant driver for investors with low financial literacy to invest in risky financial products. Indeed, there has been little incentive for financial advisers to advise clients to invest in low risk, low return products. The Financial Advisers Act 2008 is an attempt to improve the standard of advice provided to investors and
will provide for classes of financial advisers with levels of registration
dependent upon demonstrated competence, though the vast
majority of financial
advisers will still be remunerated via commission rather than fees for
advice.
Legislation and regulation
In common with many other countries, New Zealand’s is a disclosure
based regime.
The following table sets out the main legislation and regulations affecting
securities. In each case, significant amendments have
been made to the original
legislation and the comments reflect the current state as at the date of this
report.
Table 4 – summary of the major securities legislation and
regulations
Legislation/
regulation
|
Scope in relation to securities
|
Securities Act 1978
|
• Establishes the Securities Commission and its powers and
functions.
• Sets out laws related to initial offering of securities by
“issuers”,
including the requirement for a prospectus, and responsibilities of
directors and promoters.
• Establishes the requirement for a trust deed in debt
securities and
collective investment schemes, and the responsibilities of trustees.
• Sets out the sanctions available through the courts.
|
Securities
Regulations 1983
|
• Sets out rules in relation to registration of
prospectus and contents of
prospectuses and investment statements, as well as advertisements
for offers of securities.
• Minimum requirements for contents of trust
deeds and, in the case of
“participatory securities”, deeds of participation.
|
Securities Markets
Act 1988
|
• In general, the laws governing the fair operation of
secondary
markets for securities.
• Continuous disclosure requirements on issuers about
information
significant to investors, and about substantial security holders.
• Specific provisions defining and prohibiting insider trading
and
market manipulation.
• Registration of exchanges, including the requirement for
listing and
conduct rules.
• Recognises the general desirability of co-regulation of listed
markets
by the registered exchanges and the Commission, and sets out
specific rules around the provision of information by registered exchanges
to the Commission (enabling oversight by Commission).
|
Companies Act
1993
|
• Establishes the powers of the Registrar of Companies,
including the
power to prosecute issuers, directors and promoters for breaches of
both securities and company law.
|
Financial Reporting
Act 1993
|
• Sets out requirements for issuers to prepare and publish
financial
statements in accordance with generally accepted accounting practice
(GAAP).
|
Financial Advisers
Act 2008
|
• Establishes the powers of the Commission to register and
supervise
financial advisers, including the requirement for a Commissioner for
Financial Advisers.
|
Source: Review team review of printed legislation
E Annex E – Commission member profiles
Jane Diplock AO BA (Hons), LL B, DipEd (Sydney), Dip Int Law (ANU), FIPAA, FNZIM
Chairman of the Commission since September 2001.
Barrister and Solicitor of the ACT Supreme Court and High Court of Australia, Barrister of the New South Wales Supreme Court; Fellow of the Institute of Public Administration of Australia; Chevening Fellow at London School of Economics; Chairman of the Executive Committee of
IOSCO; Fellow the New Zealand Institute of Management.
Colin Beyer LL B, DistFlnstD.
Consultant to Simpson Grierson, Wellington.
Solicitor, Wellington
Mai Chen LL B (Hons) (Otago), LL M (Harvard), FNZIM
Partner of Chen Palmer, Wellington, Barristers and Solicitors, Public Law
Specialists. Specialist in government regulation of business, administrative
and constitutional law, public policy and legislation. Member of the
New Zealand
Trade and Industry Beach Heads Advisory Board and the Asia New Zealand
Foundation. Formerly on the Advisory Board of
AMP Life Limited (NZ) and Senior
Law Lecturer at Victoria University of Wellington. Fellow of the New Zealand
Institute of Management.
Annabel Cotton BMS (Accounting and Finance), ACA, CSAP
Business Consultant, Hamilton
Consultant to companies listed in New Zealand and overseas.
Director of Genesis Power Limited, Kingfish Limited, Barramundi Limited, Marlin Global
Limited and a number of private companies.
Keitha Dunstan PhD (QLD), M Bus (QUT), Grad Dip Mgt (UCQ), B Com
(QLD), CA Research Professor, School of Accounting Commercial Law, Victoria
University of Wellington. Head of School, School of Accounting and
Commercial Law at Victoria University of Wellington.
Elizabeth Hickey M Com (Hons), FCA, MInstD
Chartered Accountant, Auckland.
Board member New Zealand Institute of Chartered Accountants, Adjunct Professor, Dept of
Accounting and Finance, University of Auckland.
John Holland B Com, LL B.
Solicitor, Christchurch
Partner and Board member of Chapman Tripp specialising in securities and
competition law and mergers and acquisitions.
David Jackson M Com (Hons), FCA. Company Director, Auckland Chartered Accountant
Director of Fonterra Co-operative Group Limited, Nuplex Industries Limited, Pumpkin Patch
Limited, and the New Zealand Refining Company Limited.
Cathy Quinn LL B.
Solicitor, Auckland
Partner of Minter Ellison Rudd Watts specialising in corporate and securities
law.
Neville Todd B Com (Otago).
Company director, Wellington
Managing Director of Kinloch Funds Management Limited
Director of Kinloch Funds Management Limited and its
subsidiaries.
F Annex F – overview of current Commission and agency functions
and structure
Executive Chairman
Commissioner for
Financial Advisers
Members
Director, Supervision
∗ Financial
Advisers
∗ Liaison with
relevant agencies
e.g. Companies
Office
Chief Operating Officer
∗ Strategy and
planning
∗ Change Leadership &
Programme Office
∗ Secretary to the
Commission
∗ Financial Management
General Counsel
∗ Regulatory Policy
& Reform
∗ Legal Compliance
∗ Corporate
Governance
∗ Exemptions &
Director,
Primary
Markets
∗ IPOs
∗ Offer
Documents
∗ Illegal Offers
∗ Financial
Adviser
Disclosure
Director, Market
Supervision
∗ Insider
Trading
∗ NZX
∗ Market
Manipulation
∗ Secondary Market
Chief Accountant
∗ Financial
Surveillance
∗ Financial
Statements of
Issuers
∗ Auditor Oversight
∗
Director, Chairman’s Office and International
∗ Risk Management HR Management
∗ IT Management
∗ Communications &
Public Understanding
Authorisations
∗ Official
Information
∗ Statutory
Management
∗ Barrister role
Intermediaries
∗ Liaison with
relevant agencies
eg Serious Fraud
Office
Liaison with
relevant agencies e.g. Institute
of
Chartered
Accountants
Source: Securities
Commission
55
The following information is taken from the 2007/08 Financial review of the Securities
Commission report to the Commerce Committee of the House of Representatives
(Appendix B).
September 2004 Commission publishes release expressing concern about
adequacy of disclosure by finance companies, particularly about the risks of
investment, and invites comment on proposals for improved disclosure.
April 2005 Report, Disclosure by Finance Companies, published.
Commission says finance companies need to improve disclosure; sets out
expectations for disclosure and signals intended
approach to
enforcement.
April–August 2006 Commission undertakes further review of
finance company disclosure documents. Twelve companies ordered to amend offer
documents, advertising,
or financial statements.
August 2006 Commission publishes warning about finance company risk. Says that finance company loans carry a “significantly higher risk” than bank loans, and that this poses added risk to finance company investors. The warning:
• says investments carrying 50 percent higher return than banks represent at least 50 percent
more risk; expresses concern that investors are not discerning the additional risk represented
by a few extra percentage points of interest
• stresses importance of governance in finance companies
• urges investors to read disclosure documents and seek advice, and to be clear who the
finance company is lending money to, so that risks can be assessed
• warns finance companies of the need to update offer documents if financial situation
changes for the worse
• explained that the commission has no remit as a prudential regulator of finance companies,
and can take action only where disclosure documents are shown to be
misleading.
September 2006 Ministry of Economic Development discussion document proposes new role
for Securities Commission in supervision of performance by corporate
trustees, including power to remove and replace trustees. Document
notes that
current model provides no mechanism for accountability of trustees for their
performance, no official oversight of trustees,
and no public remedies against
trustees.
March 2007 Commission bans finance company prospectus for failing to
disclose adverse information about the competence and honesty of
director.
June 2007 Commission suspends prospectus of Bridgecorp Limited, three
days prior to the company being placed in receivership, after being alerted
of a
failure to meet a repayment on debentures.
August 2007 Commission seeks formal statements from directors of 67
finance companies regarding compliance with disclosure obligations. Warns
two
companies that offer documents may be banned; both withdraw offer documents and
close offers.
September 2007 Commission recommends urgent changes to regulations to strengthen reporting to trustees by finance companies and giving extra powers to trustees to gather information. Changes include:
• six-monthly audit of accounts for all finance companies
• monthly reports to trustee on liquidity, reinvestment rates, asset quality (including arrears
reports, and impaired debt), and any breaches of third party financial covenants
• quarterly certification by finance companies of compliance with disclosure and trust deed
obligations
• management accounts
• power for trustees to appoint separate auditor
• power for trustee to call in independent expert to provide report on financial position of
finance company.
November 2007 Launched “Look Learn Invest”
advertising campaign, website, and brochures to give investors basic information
about making investment decisions, with particular
focus on risk.
May 2008 Secured consent of Minister of Commerce to use litigation
fund to take criminal prosecutions under Securities Act against finance
company
directors.
September 2008 Reserve Bank Amendment Act provides prudential
oversight role for Reserve Bank in respect of finance companies and other
non-bank
deposit takers; provides liability for trustees regarding performance
of duties.
September 2008 Financial Advisers Act 2008 passed, providing for
authorisation and supervision of financial advisers by Securities
Commission.
October 2008 Government Deposit Guarantee Scheme announced.
December 2008 Following two-year investigation, Commission lays
criminal charges against all directors of Bridgecorp and Nathans
Finance.
.
H Annex H – comparison table with overseas regulators
The following table sets out a comparison of some of the broad dimensions of
the regulators referred to in this report.
Table 5 – comparison of the regulators in the review
group
Jurisdiction
|
Disclosure or
Merit
|
Black Letter or
Principles
|
Power of Administrative Sanction?
|
New Zealand
|
Disclosure
|
Black letter
|
No
|
Australia
|
Merit
|
Black letter
|
No
|
British Columbia
|
Disclosure
|
Black letter
|
No
|
Singapore
|
Disclosure
|
Black letter
|
Yes
|
Israel
|
Disclosure
|
Black letter
|
Yes
|
Netherlands
|
Disclosure
|
Black letter
|
Yes
|
Source: each organisation’s website
NZLII:
Copyright Policy
|
Disclaimers
|
Privacy Policy
|
Feedback
URL: http://www.nzlii.org/nz/other/NZSecCom/2009/6.html