Speeches: Sustainable regulation - help rather than hindrance


	Advanced Search

Print this page.

Sustainable regulation - help rather than hindrance

Association of Superannuation Funds New Zealand (ASFONZ)

2008 Conference

Auckland, 29 August, 2008

Cathy Quinn

Member of the Securities Commission

"Sustainable regulation - help rather than hindrance"

Thank you for inviting the Commission to speak at this conference today. We appreciate the opportunity to share our views about regulation and securities markets with you.

I have been asked to talk about sustainable regulation, so I would like to begin by looking at what this means. We, at the Commission strongly believe that regulation should not exist for regulation's sake - it has to be sustainable. To me it means that regulation should not only protect the interests of investors, but should also be cost effective for business, and should contribute to an environment that encourages investment. What is important here is the need to keep in step with the continually evolving securities markets. Regulation must be able to adapt to changing market practices and financial products and the technology used in delivering the products and messages.

So I'd like to highlight some of the key changes in securities regulation we have seen over the last decade that have benefited both investors and businesses.

The Commission's job is to promote the efficiency and integrity of securities markets, and to ensure that regulation is cost-effective.

As New Zealand's main investment regulator the Commission has oversight of the primary and secondary securities markets, and of the disclosure obligations of investment advisers and investment brokers. Ultimately, it works towards strengthening market confidence and thereby fostering capital investment in this country.

We are currently operating in a climate of significant market turbulence in New Zealand and world wide. In this country we have witnessed a crunch in the market in the form of finance company collapses. Driven by the global market slump, managed funds are looking at major losses for the past year. And all this at a time when KiwiSaver in its infancy. Market confidence has certainly taken a big hit. But if it wasn't for changes to the securities market regulatory framework that have been undertaken over the last decade the situation could have been worse.

Regulatory framework

Over the last seven years the regulatory framework for securities has changed significantly as the government has carried out a series of reforms.

As we entered the 21^st century, with new technologies supporting the globalization of securities markets, New Zealand needed to have legislation aligned with similar jurisdictions overseas in order to attract investment and be accepted in the international financial community.

Our regulatory framework has evolved to keep pace with the changing market environment, new technologies and increasingly sophisticated products. By taking this approach we now have a regulatory regime that is fast approaching international best practice.

Let's take a look at some of the existing practices at the Commission that helps maintain a sustainable approach to regulation.

Co-regulatory environment

First, is the Memorandum of Understanding between the Commission and the NZX that enables information sharing and exchange between the two organisations. This is particularly helpful as the Commission and the Exchange have a co-regulatory role relating to securities markets. This type of regime has the advantage of giving front line responsibility to those who are closest to the market (NZX) and adds public accountability to this by the oversight and statutory enforcement powers of a public regulator (the Commission).

The Commission has undertaken three annual oversight reviews of NZX's performance of its regulatory functions. While there may have been some initial scepticism on the part of market, continuous reporting and good dialogue has developed and the reviews are now viewed very much as business as usual.

Financial Reporting Surveillance Programme

Second, the Commission's Financial Reporting Surveillance Programme is designed to encourage high quality financial reporting so that investors can have confidence in the credibility of information provided by issuers. It focuses on compliance by issuers on their reporting standards, mainly examining the level of compliance with Generally Accepted Accounting Practice (NZ GAAP) and the transition to NZ IFRS.

The surveillance programme's sustainability lies in the fact that it provides educative guidance that is integrated into the whole governance process. The programme has received very positive feedback for its use as a training tool for directors and auditors.

Enforceable undertakings

Third, enforceable undertakings are an efficient and cost effective means of remedying inadvertent errors by companies or directors.

They are written undertakings to the Commission that can be enforced by the Court if a party fails to fulfil their obligations.

Generally a party that offers the Commission an enforceable undertaking has acknowledged non-compliance with securities law or other matters of concern and has agreed to take specific steps to address the breach.

The Commission will accept an enforceable undertaking when it considers it to be the most appropriate outcome. Accepting an undertaking however, does not prevent the Commission from exercising any of its other enforcement powers if necessary.

FSAP

In the interests of international benchmarking, New Zealand's financial sector, including the regulatory framework, was assessed by a team of international experts in 2003. This was part of the Financial Stability Assessment Programme (FSAP) conducted by the IMF and World Bank.

In general New Zealand was given a good report. Any shortcomings identified have largely been addressed by subsequent reforms. One of particular interest was the lack of regulation of financial intermediaries which I will talk about later on.

Law reform

One of the functions of the Commission is to make recommendations to the Minister of Commerce on law reform concerning securities and bodies corporate.

Law reforms are necessary for sustainable regulation and, to an important degree are responses to the evolving nature of securities markets.

The government has, over recent years, undertaken a series of reforms affecting securities markets, intended to bring New Zealand's regulatory environment up to the standard that is increasingly needed in order to attract investment and build confidence in the market.

Let's look at the main changes.

Continuous disclosure

Amendments to the Securities Markets Act which came into force in 2002 gave statutory recognition to continuous disclosure rules. Continuous disclosure requires listed companies to immediately disclose all new material information that could affect the price of their securities and the interests of its shareholders.

New disclosure obligations were also introduced for directors and officers of listed companies who trade in their own company's securities.

The aim of this law is to ensure the market is promptly informed of any changes and its participants act on information that is available to all, thereby maintaining the integrity of the market.

Initially there were some suggestions from the market that continuous disclosure was too difficult to maintain - a hindrance perhaps? But over time the issuers and their advisers have adapted to this, and there has been a growing appreciation of the benefits of timely market information.

Insider trading

New Zealand's insider trading law was given a boost in 2002, allowing the Commission to bring civil enforcement proceedings. A more comprehensive review to address some of the shortcomings of the law resulted in changes that came into force in February this year.

These changes have seen an overhaul of insider trading law focusing on the threat that insider trading poses to market integrity.

Anyone who has inside information, regardless of their connection to the company, is an information insider - that is, someone who has material information about a public issuer that is not generally available to the market, where the person knows or should know that the information is material and is not generally available. Material information is information that would be expected to materially affect the issuer's share price if it were generally known.

Information insiders must not trade in securities, disclose the information to others to trade on, or advise or encourage anyone else to trade or hold securities.

Anyone who breaches the insider trading law is liable for substantial civil penalties, which will be sought by the Commission. Insider trading is also now a criminal offence.

Market manipulation

Law on market manipulation which also came into effect earlier this year is new to this country.

Market manipulation is behaviour or practices likely to give a false or misleading impression about the supply, demand, price or value of securities traded on a registered exchange.

Market manipulation law prohibits:

making false or misleading statements or spreading information which is likely to induce a person to trade or which might affect the price of the securities, and

creating a false or misleading appearance of securities trading.

Substantial security holder disclosure

Substantial security holder disclosure aims to promote an informed market and to deter insider trading, market manipulation, and secret dealing in potential takeover bids. This is achieved by ensuring that all market participants have information about trading by persons who control or influence significant voting rights in a public issuer.

There have been some important changes to this law, designed to streamline compliance and make disclosure more meaningful. These include that a person becomes a substantial security holder by having a relevant interest in 5% of the listed securities in any class (rather than 5% of the total number of voting securities of an issuer).

Also, disclosure applies to listed voting securities only, not to unlisted securities; but the Commission can require any person to disclose the nature and extent of any relevant interests in securities of a public issuer, including unlisted and non-voting securities.

Investment adviser disclosure

In the area of investment advice New Zealand has had laws requiring disclosure by advisers and brokers since 1996, but there has been no ability for the Commission to enforce this law, and most disclosure had to be given to investors only on request.

New disclosure laws which came into effect in February require more information to be given to clients, especially about fees and remuneration. Full disclosure must be made up-front by investment advisers before investment advice is given to members of the public and by investment brokers before receiving investment money from members of the public.

The disclosure is mandatory. It must be made in a disclosure statement, and provided without the client having to ask for it.

Disclosure statements must be kept up-to-date and must not be deceptive, misleading or confusing.

The new law also brought in rules for advertisements made by investment advisers and brokers. The law applies to advertisements for adviser services and to any communication by an adviser that contains or refers to investment advice.

Enforcement Powers

A consistent theme of the recent reforms has been a move towards public enforcement of our securities laws by the Commission. The Commission now has wide ranging powers to seek remedies against any offences. It can ban disclosure documents, make prohibition orders and corrective orders, seek compensation on behalf of investors, fine and make disclosure orders, accept enforceable undertakings as well as take Court action. Previously it was largely left it to investors to pursue remedies or civil penalties for breaches of the law.

The wide ranging powers help the Commission in reaching the best result for the public with the optimum use of resources available - thereby taking a more sustainable approach.

Financial advisers

The largest remaining gaps in our regulatory framework relate to the regulation of financial advisers. Recent events have shown the significance of the role of finance advisers but this important sector is currently unregulated. The industry is calling for change and investors clearly want it too. Major changes are now heralded with the Financial Advisers Bill, currently before the Select Committee.

This bill addresses shortcomings pointed out in the Financial Sector Assessment Programme carried out by IMF in 2003. It is an important reform for retail investors and consumers. It aims to ensure quality financial information and advice is provided to the public and also to assist New Zealanders to make the most of their investments.

The bill seeks to impose certain conduct and disclosure obligations on financial advisers and provide the Securities Commission and the courts with enforcement powers.

Minimum standards and the rules will ensure that all advisers are held accountable for the advice they provide.

Investors will be able to have the confidence that the adviser is proficient and competent and is subject to ongoing professional conducts and proficiency standards.

Public understanding

Implementation of the reforms includes market awareness activity such as an education project the Commission recently completed about securities law and reforms. Industry feedback on this was very positive. We see benefits, as a regulator, in helping market participants get into grips with new obligations as early as possible, reducing uncertainty and assisting with transition costs.

The Commission also works with Enterprise New Zealand Trust which offers financial education in schools. We sponsor their projects with the aim of developing a generation that will be financial aware and invest confidently.

International cooperation

The changes I mentioned earlier have been designed to provide New Zealand with a world class regulatory environment that provides confidence to both retail and institutional investors - both domestically and internationally.

New Zealand securities regulation has made significant advances in the eyes of the international community. Significant reforms over recent years address shortcomings that were identified by the IMF in 2003.

Important here is our involvement in the International Organization of Securities Commissions known as IOSCO. It is the global standards setter for securities regulation and the leading institution to foster international cooperation among securities regulators and affiliate organisations. It aims for the worlds securities markets to be regulated on explicit and sound principles and standards and for regulators to effectively enforce securities law through cooperation and information exchange.

New Zealand have been a member for over 20 years and our Chairman, Jane Diplock, was recently elected for an unprecedented third term a Chair of the IOSCO Executive Committee.

IOSCO has developed 30 broad Principles for securities regulation, and it actively promotes and facilitates the full implementation of these Principles in the regulatory framework of every member jurisdiction. They are a set of international benchmark standards against which any jurisdiction is able to measure and align their own laws in a manner consistent with their own priorities, traditions, market developments and conditions and legal frameworks.

The globalization of securities means that as well as greater choices for investors there are more chances for international financial crime. To facilitate information sharing and cooperation to engage in effective enforcement across borders, IOSCO has also developed a Multilateral Memorandum of Understanding (IOSCO MMOU) to which members can sign up. New Zealand is a signatory along with 63 jurisdictions from around the world who have either signed on to the IOSCO MMOU or committed to making the changes necessary to do so.

As signatories the securities regulators can gather information from their counterparts overseas on cases of insider trading or other securities law violations that they are investigating.

Our markets benefit from greater international participation which brings increased opportunities for New Zealand and local firms raising capital.

Mutual recognition of securities offerings

An excellent example of international cooperation is the new regime for trans-Tasman securities offerings which was launched in June. Ministers from New Zealand and Australia signed an agreement on Mutual Recognition of Securities Offerings (MRSO)

The mutual recognition regime means that issuers of securities can now use one prospectus to offer securities to investors on both sides of the Tasman, subject to meeting certain requirements. It will bring cost savings for companies offering securities and will benefit investors with a wider range of investment opportunities.

The regime is part of the Closer Economic Relationship the two governments have been working on for the last 25 years. It is an unprecedented agreement which is being used as a model for other countries around the world.

Capital Market Development Taskforce

Another important move designed to help restore confidence to our markets is the establishment of the Capital Market Development Taskforce.

Launched by the Commerce Minister in July, the taskforce involves government and the private sector work together to develop New Zealand's capital markets. It has been charged with the task of developing a blueprint and action plan to be released in late 2009.

The Capital Market Development Taskforce will be chaired by investment banker Rob Cameron. It will develop a blueprint and action plan to be released in late 2009.

New Zealand's capital markets have been boosted over recent years - particularly with the introduction of KiwiSaver - but to strengthen this position we must continue to develop their breadth and depth.

As a member of the taskforce I welcome the opportunity to help position New Zealand's capital markets in a rapidly evolving global environment.

Conclusion

In conclusion, I would like to say that our regulatory regime and market infrastructure is now much closer to international best practice.

Our markets benefit from greater international participation which brings increased opportunities for New Zealand and local firms raising capital.

I believe the sustainable approach to securities regulation is the most appropriate. It benefits business and investors alike because it encourages market participation and facilitates investment growth. Ultimately this is good for New Zealand and raises our international profile as a well-regulated and confident market.

Thank you

[I'll now hand you over to David Benison]

Return to Index