Simon Botherway, chairman of the establishment board of the Financial Markets Authority, speaks to Rachel Alembakis about its creation and the impact it will have on the industry
Rachel Alembakis: What impact do you think the Financial Markets Authority (FMA) will have in the New Zealand market?
Simon Botherway: If you look at the fallout from the global financial crisis, it has exposed a number of regulatory shortcomings in both the prudential banking sector and in the capital markets more generally. The establishment board’s vision is to create an internationally recognised capital markets regulator that is appropriately resourced and has the policies, procedures and powers that support an oversight and enforcement regime consistent with best practice.
In New Zealand, the major area of investor harm was not in the prudential banking sector – it was in the non-bank deposit sector. Many second tier non-bank deposit takers failed. Like many other countries, we experienced a credit boom which was characterised by poor quality speculative lending. The losses have unfortunately been quite spectacular. The problems were manifold, really. The way that those products were promoted and sold was problematic. Financial advisers were not licensed, so regrettably anyone could be a financial adviser. They didn’t for example have to disclose their remuneration, so there were numerous instances of advisers whose primary source of income was associated with placing product. The regulatory response to these deficiencies was to establish the financial advisers licensing regime.
Additionally, The reserve bank has taken over the prudential regulation of the non-banking sector. Further, a review of all securities legislation is under way. It is an important and comprehensive review of legislation pertaining to securities, and primary and secondary market conduct. We also have the anti-money laundering and financing of terrorism issues as well. There is substantial reform under way.
Rachel Alembakis: What impact will the creation of the FMA have on retirement saving schemes?
Simon Botherway: The FMA establishment legislation actually clarifies a previously grey issue – whether the issuer of the KiwiSaver is the trustee or the manager. It makes clear that the manager is legally the manager of the scheme. Overall in terms of the task of returning investor confidence, KiwiSaver has by far the greatest level of participation in terms of popular uptake of any financial product. It will be very important that KiwiSaver schemes are held to the very high standards of integrity, that they are suitable, that they are as advertised and that investors can have confidence in them and the KiwiSaver regime.
That applies to financial literacy and the overall corporate superannuation sector. It isn’t a big sector in New Zealand, and KiwiSaver is likely to dwarf that over time.
Trustees and auditors will also be required to be licensed. In addition, the Securities Act review flags up the prospect of fund managers being licensed. Most of these professions are moving from being unlicensed to licensed. However, auditors have been required to be members of an accrediting body such as the New Zealand Institute of chartered accountants. The accreditation bodies from a legal perspective will have to be approved by the FMA to subsequently undertake audits of accounts.
Rachel Alembakis: How will you build the FMA’s staff? Will you be drawing on existing personnel from the securities commission and the government auditor’s office?
Simon Botherway: The bulk of the staff on day one will be the securities commission staff who automatically become employees of the FMA. Sean Hughes, who is a senior executive leader at the Australian Securities and Investment Commission currently, is coming over to head up the FMA. The establishment board will be working with Sean to see what’s needed in terms of capability and skill sets to deliver on the FMA’s expanded mandate.
Rachel Alembakis: Industry sources have said that to succeed, the FMA will have to be resourced far better than the Securities Commission currently is. What’s your take on that?
Simon Botherway: It’d be fair to say we anticipate there will be a requirement for significantly increased resourcing of the FMA than the existing regulatory bodies, if only just to discharge the obligations under the new legislation. On top of that, you’ve got to take into consideration the likes of the new International Organisation of Securities Commissions (IOSCO) principles which include a requirement to keep the perimeter of regulation under constant review and vigilance around systemic risk issues. This means a significant increase around market intelligence capability. For example, if you have a look at the SEC and the newly established Financial Stability Oversight Council, that has quite a broad mandate with respect to keeping matters of micro/macro developments and systemic risk under surveillance.
To deliver on those sorts of things, the Establishment Board is recommending a significant resource boost in the area of market intelligence. We are conscious we are in tight fiscal times, however there is a series of legislatively mandated objectives and responsibilities and you can’t deliver on those if you don’t have adequate resources. The government has determined what the FMA needs to deliver via the legislative reform programme.
Rachel Alembakis: What international peers has the oversight board looked to in creating the FMA?
Simon Botherway: We looked at a number of regimes internationally. We have established the governance structure with a board of up to nine non-executive directors. We were really informed by the likes of (former Federal Reserve chairman Paul) Volcker’s G20 research as well as the International Monetary Fund research on regulators and regulatory structures. We had discussions with Hong Kong and with one of the Canadian regulators as well as with the Australian Securities and Investments Commission before we decided on the governance structure, delegations and reporting framework
Rachel Alembakis: In terms of how the FMA will work in practice, how will it govern market conduct?
Simon Botherway: We anticipate there will be a close dialogue between the regulator and the market. It’s about establishing expectations as much as anything else. I would certainly expect an appropriate level of engagement between the regulator and the financial market participants.
The FMA will have at its disposal a range of enforcement powers from warnings through to enforceable undertakings, banning orders and of course the line of civil and criminal litigation. The FMA’s enforcement philosophy will naturally be designed to deter while also recognising that self-reporting and practical remediation are concepts that the FMA might usefully encourage. I think the days of light touch capital market regulators are in the past.
Rachel Alembakis: How will disclosure documents be changed?
Simon Botherway: The FMA has the responsibility to vet offer documents as part of the new lodgement regime. The FMA has broad powers in this area, for example to suspend offers. I also anticipate that, in the Securities Act Review, there will be a review of the overall PDS regime.
What’s clear to me is that there are many investors despite the volume of information you give them who don’t have the skill set to adequately analyse that information and decide if it’s an appropriate investment for them. I guess that’s a bit of a starting point and look at what is appropriate and what role intermediaries can play to get the right outcome.
Rachel Alembakis: Does you see a place for stand-alone corporate superannuation in the industry?
Simon Botherway: I don’t have a view on that. I guess on the one hand, corporate superannuation could be quite an attractive means by which to attract and retain employees. I don’t have a view as to whether these schemes will flourish or whether employers and employees will prefer Kiwisaver.
Rachel Alembakis: What is the five to ten year projection for the FMA’s evolving role?
Simon Botherway: Household balance sheets in New Zealand reflect a low level of household assets and a high exposure to property – residential and commercial and relatively high debt levels. I would think that one measure of success is the extent to which household balance sheets change to represent a higher weighting to financial assets. That would be a measure of success as to the primary objective of the restoration of investor confidence.
The regulator has an important part to play in ensuring markets are transparent and are operating with integrity and efficiency. It’s about making sure all investors get information in a timely manner, that the intermediaries are licensed and that investors can have confidence in the licensing regime.
That doesn’t mean there won’t be any corporate failures or any financial vehicles that don’t return what they were expected to, but that’s the nature of financial risk. Our job is to make sure the relevant information is available and the participants in the market act appropriately and I think that will go a long way to restoring investor confidence.
Simon Botherway is a member of the NZ Securities Commission and is chairman of the establishment board of the Financial Markets Authority. The establishment board is charged with creating the FMA in line with its legislative agenda.
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