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.”