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2008 Annual Report

Chairman's report

This year has seen significant market turbulence in New Zealand markets and world wide. The sub-prime crisis which commenced in the US mortgage market and the effects of this crisis have reverberated around the world. The credit constrictions which have accompanied the crisis affected New Zealand companies and institutions as credit became more difficult to source. For the first three to six months of this financial year the turmoil in New Zealand was largely a result of domestic concerns. But, post-August 2007 when the sub-prime effects were being felt in the US and the UK, credit to all banks began to be constrained. Inter bank lending was reduced. While few New Zealanders were directly exposed to the securitized products which caused turmoil in other parts of the world, the reduction in liquidity more generally did affect this market. This, combined with declining economic conditions and further falls in the New Zealand property market, began to influence the New Zealand capital market more generally.

The collapse of a number of finance companies in early 2007-2008 was due to a combination of a downturn in the property market, poor business models, poor governance, and in some cases fraud. There had been a high appetite for debt instruments by the New Zealand investing public. As a number of finance companies collapsed this appetite quickly turned away from these instruments, limiting reinvestments and causing other finance companies to suffer difficulties. Some of these companies then failed as investors sought other investment products. While the finance company sector is a relatively small part of the capital market as a whole, the failures in this sector were damaging to individual investor confidence when they were affected and had an impact on investor confidence more broadly.

These collapses are being investigated by the Commission as well as the Serious Fraud Office, the National Enforcement Unit of the Registrar of Companies, and the New Zealand Police. Each agency brings its special skills and regulatory responsibilities and we work closely together. Investigations are revealing misleading disclosures and poor behaviour by directors. We are also concerned about reports of investors being given very dubious investment advice.

These events show the wisdom brought to bear in recent years in developing this country's regulatory framework. The securities law now in place enables the Commission to take actions that previously it could not take. It was under law introduced in 2002 that the Commission was able to take the Tranz Rail insider trading case in which the defendants paid some $27 million in settlements. Subsequent law reforms have further enhanced the rules about insider trading and introduced new law on market manipulation, that is, behaviour or practices that give a false or misleading impression about the supply, demand, price or value of securities traded on a registered exchange. These changes have strengthened the regulatory framework and made it more effective in both discouraging and prosecuting poor market behaviour.

The largest remaining gaps in our regulatory framework relate to regulation of financial advisers. The experiences of the past year have shown a distinct need for a truly professional sector with set standards for training and performance. Government is addressing this. In the meantime a first step has been taken with the new requirement for investment advisers to provide clients with a disclosure statement. This should ensure that people at least know the range of investments an adviser gives advice on, their qualifications for giving advice, the relationships they have with product providers, and how they get paid. The Commission has exercised its powers since this came into force at the end of February by seeking disclosure documents from all advisers and will take action against non-compliance.

As the legal framework has been developed the Commission has stepped up its staffing and capability for enforcing these new laws and will continue to do so to meet the demand that new requirements for financial intermediaries will bring. We will have the right people with the right training and the necessary commitment in place.

The Commission's role is not to remove or even lessen investment risk. However, it is concerned that investors should be aware of the risks they are taking with any investment. The past year revealed a lack of understanding by some investors about risk. To address this we carried out the Look, learn, invest - be a smart investor campaign to encourage people to use the information available to them when choosing investments. We continued to support the work of Enterprise New Zealand Trust in schools. This aims to eventually bring forward a generation of young people who feel competent to take part in the capital markets as investors.

Investors are, of course, at the heart of the Commission's work. This year has seen pleasing results in recovery of investors' money not only from the Tranz Rail settlement but also from contributory mortgages managed by a replacement broker appointed by the Commission.

Opportunities for investors, and for business, are increasing with the mutual recognition of securities offerings regime now in force with Australia. A great deal of work has gone into getting this regime in place with its supporting regulatory structure. The strong relationship between the Australian Securities and Investments Commission and the New Zealand Securities Commission has been constructive in assisting this important aspect of the single economic market between our two countries to come to fruition. It will reduce costs for issuers raising capital on both sides of the Tasman and increase choices for investors. This regime is being used as a model for other counties around the world.

Further afield New Zealand has continued its role with the International Organisation of Securities Commissions (IOSCO). I was honoured recently to be elected for an unprecedented third two-year term as Chairman of the Executive Committee. This means we can see IOSCO through to its self-imposed 2010 deadline for all members to join the IOSCO Multilateral MOU which enables exchange of information to enforce securities law and combat international fraud. The IOSCO role also provides opportunities to promote New Zealand's markets in financial centres around the world. We are grateful to the Ministry of Foreign Affairs and Trade and New Zealand Trade and Enterprise for arranging meetings with investors and business leaders at which we promote New Zealand as an attractive investment destination.

For the fourth consecutive year the Commission rated in the top ten small workplaces in the Unlimited/JRA Best Places to Work Survey. This is a remarkable achievement particularly given our serious role and responsibilities as a regulator.

I would like to thank the Members and staff of the Commission for a year of hard work, commitment and significant achievements.

Jane Diplock AO, Chairman.

Jane Diplock AO
Chairman

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