Simon Botherway says measure of new regulator's success will be greater investment outside property

Simon Botherway says measure of new regulator's success will be greater investment outside property

The man overseeing the creation of a new integrated financial markets regulator hopes, over time, it will help shift some of the huge percentage of New Zealanders' money and savings currently tied up in the housing market elsewhere.

Simon Botherway, chairman of the Financial Markets Authority Establishment Board, told interest.co.nz although he had seen no empirical research measuring investor confidence in financial markets, he expected it had fallen in recent years. And this was reflected in household balance sheets being heavily weighted towards property.

According to Reserve Bank figures, NZ$603 billion - or nearly 97% - of the total NZ$624 billion household net wealth held by New Zealanders last year was tied up in the housing market.

“I think it’s one of the things that when you’re measuring the success or otherwise of a regulatory regime, or a desire to boost confidence over time, is whether or not those household balance sheet measures change over an extended period of time, say a decade,” Botherway said.

Botherway, a Chartered Financial Analyst (CFA), former executive chairman of Brook Asset Management, Securities Commission member and director of Fisher & Paykel Appliances, stressed this was a personal view.

“There will, of course, be enforcement actions and sanctions and bannings over that time but I don’t think by number that those are the measures of success. What we do want to have is a dynamic, competitive, deep financial market that allocates capital on a sound, risk adjusted basis.”

This erosion of investor confidence follows the collapse of carpet maker Feltex in 2006 just 26 months after a NZ$254 million sharemarket float and wholesale collapse of the finance company sector. A total of 59 finance companies and investment trusts collapsed or have been frozen in the last four years endangering NZ$6.8 billion held in nearly 200,000 accounts. See out Deep Freeze list here.

“One of the criticisms I think that can be leveled at the finance company sector is that there was a sophistication arbitrage out there,” said Botherway.

“The rates at which those companies were raising debt capital were substantially lower than you might otherwise expect them to be had they been in a deeper capital market.”

The Financial Markets Authority Establishment Board was appointed by Commerce Minister Simon Power to consolidate the powers and functions of the Securities Commission, some of the functions of the Registrar of Companies and the Government Actuary, and some of the regulatory roles of sharemarket operator NZX into a new body, the Financial Markets Authority (FMA). Power says the move is at the centre of a government push to restore the confidence of mum and dad investors in the financial markets.

Botherway said the board hoped to have a short-list of FMA CEO candidates together in early September and hopefully an appointment by Christmas, with the FMA on track to be launched in the second quarter of 2011. Further, a draft statement of intent for the FMA should be finalized by late September, Botherway added.

He said it was important to note that board decisions would be recommendations to Power.

Two key areas the board had recognized as important were a need for good coordination between regulatory agencies, such as between the FMA, the Serious Fraud Office and Commerce Commission, and the importance of a market intelligence gathering function and a surveillance function.

“So I think those are areas where you’re likely to see an increased level of resource and attention in the FMA itself,” said Botherway.

There was a need for the regulator to keep an eye on the perimeter of regulation.

"One of the useful things the Minister has flagged are these call in powers so to the extent (financial) product is structured to eventually drive around the outside of regulation, then you’d want to be able to draw that within the net," said Botherway.

He said the new regime could make more use of guidance notes with the FMA publicly stating a position on something giving the market a better understanding of how the regulator was likely to treat various products and practices.

The Establishment Board members had talked to international counterparts in Hong Kong, Canada and those from the Australian Securities and Investments Commission (ASIC). The Canadians were going through a similar process to New Zealand, Botherway said, and their plans, released in a recent organisational paper, weren’t dis-similar to what the Establishment Board had in mind here.

Separately, Botherway said there was a question of whether the likes of the recent District Court case taken by the Companies Office against five former Feltex directors over financial reporting matters, should be heard by a specialist rulings panel rather than the District Court. He noted the NZX market disciplinary tribunal would ultimately be replaced by a new Rulings Panel. The latter will be independent of the FMA but serviced by it. Although NZX will continue to be self regulatory on minor issues, serious matters will go to the Rulings Panel.

“Now the question is do you widen that jurisdiction over time to include a broader range of commercial (civil) matters?”

“If you look at the time delay in the current court system, you have to say that there is an issue of justice delayed,” Botherway said.

The Establishment Board was in favour of a widened commercial jurisdiction for the Rulings Panel. This could include, for example, auditors, trustees, financial advisers and conduct breaches.

Meanwhile, he noted that the Establishment Board wasn’t trying to use words like “protect” because, although it wanted to promote the interest of investors, there was no way to eliminate risk entirely from investment.

“Investors need to understand that that there is no investment without risk,” Botherway said.

“We’re trying to promote a market that offers investment opportunities to investors and offers capital raising avenues for issuers on a sound risk adjusted basis.”

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Surely the problem is caused by these centralised institutions in that investors presume that they can rely on them.  When have they ever prevented financial wrongdoing?.  Why not just put in large capital letters "CAVEAT EMPTOR" on every single investment vehicle and let individuals decide?

MATE, everyone from John key down should be concerned to get investment in NZ directed AWAY from property and into productive capital. It is going to take a lot more than this one regulatory agency to get this happening.

I suggest abolishing corporate tax altogether, for a start. Why tax profits before they are distributed or reinvested? This is a tax on economic growth, period. This is why countries (especially in Eastern Europe) that have cut this rate heavily, have seen such good results.

The other essential ingredient, is land use policy reform. Property price bubbles will become a permanent feature of our economies otherwise. An abundant supply of land for competing developers was the element that used to prevent these land price bubbles from happening. No tax reform is going to stop them happening, at least not without severe side-effect costs.

CGT's, for example, exert a counter-force to natural redevelopment of land to the most efficient uses. Japan discovered that CGT rates had to go to close to 100% before they acted as a brake on land value bubbles; and at a CGT rate of 100% there is almost no point in redeveloping land, resulting in natural and beneficial urban "churn", at all.

By the way, Andy Rodgers above is right too. A great deal of the moral hazard that has already led to financial breakdown, is the result of everyone "relying on regulators" to assess risk. The consequences of bailing out the financial system this time, in new moral hazard introduced, may be severe.

THIS quote is starting to go around on the net:

In 1836, President Andrew Jackson forced the closing of the Second Bank of the U.S. by revoking its charter. He said:

"Gentlemen, I have had men watching you for a long time and I am convinced that you have used the funds of the bank to speculate in the breadstuffs of the country. When you won, you divided the profits amongst you, and when you lost, you charged it to the bank. You tell me that if I take the deposits from the bank and annul its charter, I shall ruin ten thousand families. That may be true, gentlemen, but that is your sin! Should I let you go on, you will ruin fifty thousand families, and that would be my sin! You are a den of vipers and thieves."

Muzza, I've added a link in the story to the Reserve Bank figures.

Want people to investr in other things apart from Residential property? Simple, tax the hell out of it!

Where is the REINZ president Peter MacDonald? We need a comment from the throne!!! Endless real estate investing needs its champion!! Why does the REINZ have a spokes man now?? We demand the man!! Step up Peter its time to spruik,spruik,spuik

He's probably hiding under the kitchen table rocking and muttering to himself.

Disincentivising investment in property does only half the job. We need to generate enthusiasm for investing in enterprises that produce real, lasting and sustainable benefits while offering the chance to realise appropriate returns for risk.

The NZX may never free itself of the lingering taint it rightly aquired in the '80's. The perception that directors of publicly listed companies worked to part investors from, rather than grow their nest eggs was well deserved. I would love to be able to peruse a website containing every piece of information required to make an informed investment decision in hundreds of companies. The share buying process could be as simple as hitting the "Invest" button and transferring the funds online. Minimal ticket clipping. Maximum transparency. Make the process one that encourages a developing awareness that investment is about informed ownership of fractions of organisations in which genuine entrepreneurs are utilising capital, labour and resources to grow real businesses to the lasting benefit of ourselves, our families, the country and the whole planet. Amen.

And besides, it might be fun.  

Vera, I concur 100% with your post.

"I would love to be able to peruse a website containing every piece of information required to make an informed investment decision in hundreds of companies. The share buying process could be as simple as hitting the "Invest" button and transferring the funds online." -> I am gobsmacked to learn that it is not possible to do what you describe. No wonder people don't invest in the NZX! I can follow every single company listed on the Paris Stock Exchange in real time and buy and sell at the click of a button for a minimal fee. Full control, no intermediates.

I have just registered on the NZX to check and it is actually true that if I wanted to do anything I'd have to contact one of the brokers in the list  kindly provided (!). They even have a platform where people can learn to trade "virtually" (they put $50K of virtual money that you can apparently play with as if you were in the real world) but you can't go and do it for real yourself once you have learnt. Amazing.

Double taxation was taken care of ages ago Olly.

http://www.ird.govt.nz/business-income-tax/imputation/imputation-basics/

Olly is partly right. See my comment earlier. It is just plain nuts to be taxing profits BEFORE they are either ploughed back into the business or distributed as income. If you plough profits back into the business, you should not have to pay tax on those profits because no-one is taking them as "income". This tax is a "spite" tax pure and simple, founded on the worst kind of anti-business spite and low ignorance. It is the single biggest brake on economic growth.

It is also the number one reason that so many businesses fail in their earliest phases. Most businesses are meant to "grow", and the tax on their only unencumbered source of funds for this growth, starves them of vital cash flow.

I agree 100% with Olly on taxes on interest. It is absurd for governments to be lamenting a low savings rate among their citizens, and not concluding immediately that the fact that saving is taxed has something to do with it. People who save have ALREADY paid tax when they earned the money. If they decide to save it, why is it fair to load them with yet another tax for deciding to do so?

Getting them to relent on interest tax would be a toughie because it is administratively so easy to collect. Practically fully automated.

These RBNZ tables need to be treated with care. The statement 97% of Households net wealth is held in housing is a loose interpretation of the figures. Table 2 shows net equity in housing being around 70% of Household Wealth (435b / 624b).

The other thing is the notes explain these tables only include financial assets and liablities, equities and housing. The following items are NOT included. (see first tab)

• Equity in farms

• Equity in unincorporated businesses

• Shares in unlisted incorporated businesses

• Equity in directly-held commercial property

• Direct ownership of assets such as forests

• Consumer durables

• Overseas property owned by New Zealand residents

• Non-equity overseas financial assets

• Notes and coin held by households

In addition, it is likely that direct ownership by NZ residents of overseas equities is underestimated in the series presented here.

I dont know what these amount to but they would be a reasonable amount and some of the debt recorded would be financing these business assets.

"NZ desperately needs "competiting" online platforms that enable the public to trade stock and commodities without unnecessary and time consuming intermediaries." - Are you saying that people can not see real-time information and buy & sell stock and commodities online on the NZX? If so, yes it's bad!!

It BS from TA anon....poor stuff too!. To take just one piece of fluff from the pile: " That will eventually mean higher job security for those of us left behind."....a real arse about face argument suggesting the exodus to aus is not a negative........no point in wasting time on TA about that...he has the religious belief in himself you see and himself is never wrong...never misguided....never going to admit property is in decline and has a long way to fall....he really thinks that he can talk up activity....he can save the economy...by keeping the bubble of madness intact...go figure!