By Gareth Vaughan
The Government’s new financial markets super regulator may need double the budget of the Securities Commission if it’s to do its job properly, says the man overseeing its creation.
Simon Botherway, chairman of the Financial Markets Authority Establishment Board, told interest.co.nz in a Double Shot interview the Financial Markets Authority (FMA) had a “very good” chance of improving regulatory outcomes. However, much would depend on its budget. Botherway said the Establishment Board had put together a range of budget scenarios that have been submitted to the Ministry of Economic Development for consideration.
“It would be fair to say at the higher end of those budget estimates I think you’re probably going to get a better regulatory outcome than you would at the lower end,” said Botherway.
“What you’re looking at now on a run rate basis (if current funding levels are extrapolated over a year) is the Securities Commission’s annual operating budget at around NZ$15 million.”
The Establishment Board wants the FMA to boost market intelligence and surveillance capacity and Botherway notes the Commerce Commission and Reserve Bank receive much higher levels of taxpayer funding via the Government. In the year to June the Commerce Commission received NZ$43.29 million and the Reserve Bank received NZ$46.9 million.
Botherway says the FMA Establishment Board hopes the FMA, due to be up and running from next April, will get somewhere between NZ$15 million and what the Commerce Commission and Reserve Bank receive.
“Certainly we’d be looking for a decent sized kick up on that NZ$15 million,” says Botherway.
“I think for double that (NZ$15 million) you’d have a very good regulatory apparatus and you could expect very good regulatory outcomes.” (Also see Bernard Hickey's article on why New Zealand should get serious about fraud.)
Investor confidence lost
The FMA is being set up to tackle a loss of investor confidence in financial market regulations in the wake of more than 60 finance industry failures since 2006, putting at risk more than NZ$8.5 billion of investors' money. See our Deep Freeze List for detail. Based on the Financial Markets (Regulators and KiwiSaver) Bill, currently working its way through Parliament, the FMA will consolidate regulatory functions of the Securities Commission, the Government Actuary, the Companies Office, and some from sharemarket operator NZX.
The Bill raises the possibility of a levy on financial market participants to help fund the FMA.
Last week Botherway announced the appointment of expatriate New Zealander and Australian Securities and Investments Commission (ASIC) executive Sean Hughes as FMA CEO.
Botherway said Hughes, also the former global head of compliance at ANZ, had been the outstanding candidate for the job. Given his experience, Hughes had seen regulation both from the private sector and regulator enforcement side, Botherway added.
Among the new powers set out in the Bill is the ability for the FMA – along similar lines to ASIC - to take legal action on behalf of investors if it considers it’s in the public interest to do so. This could be against financial market participants such as issuers and promoters, owners, directors, senior managers, trustees, auditors and experts who make statements in prospectuses.
Botherway says he personally would also like to see a “substantial” review of the “whole area” of independent reports. This would cover the way independent experts, who provide views on the likes of takeover bids and moratorium proposals, are selected, the nature of their mandate, the way their opinion can be “narrowed” by the terms of the mandate they’re given, the process they go through to get the information required for them to form an opinion, and the “incentive alignment,” or how they’re paid and by whom.
“I don’t have a particular model in mind although I think the deficiencies we’re seeing in this area are not dis-similar in some ways to auditors and credit rating agencies who, in fact in some ways, have not wanted to bite the hand that feeds them in some instances,” said Botherway.
“I’m not saying that has been broadly observable but there are instances where I believe that auditors and credit rating agencies, and independent experts, could probably have done a better job and could have pushed back a little bit harder if they had a different duty, if you like.”
Under the Takeovers Code the directors of the takeover target are required to engage an independent adviser to provide views on the proposed deal. The adviser's fees are paid by the bidder. See the Takeovers Panel's guidance for independent advisers here. Commerce Minister Simon Power has said the role of independent appraisal reports will be considered under a review of the Securities Act.
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