Meet the Market
Thursday 21 August 2008
Securities Commission Update
Jane Diplock AO
Chairman
Good evening everyone. Thank you for coming along tonight. We very much welcome the opportunity to mix with you all. This evening provides a setting for some useful dialogue on matters of interest to us all.
The last year has seen a significant credit crunch in New Zealand markets and world wide. The collapse of finance companies started as a domestic issue but has been compounded by the international financial environment as the effects of the sub-prime crisis, which commenced in the US mortgage market, have reverberated around the world. The reduction in liquidity, combined with declining economic conditions and a falling New Zealand property market, began to influence the New Zealand capital market more generally.
It is not only our job to regulate the market and protect investors from systemic risks but also to consider the interests of the business community. The Commission works hard and will continue to do so to formulate cost effective regulation. It is important for us to hear from you.
Tonight, I take the opportunity to share with you what the Commission has been doing and what it intends to do to strengthen market confidence and foster investment in New Zealand.
First I would like to take the opportunity to welcome Liz Hickey to the Commission. Liz was Member of the Commission from 1992 to 2003 before she left to go to the UK and take up her position with the International Accounting Standards Board. We look forward to working with her again and benefiting from her expert knowledge on accounting and financial reporting matters.
Laws in New Zealand have come a long way. We now have a regime which is fast approaching international best practice.
Investigations into collapsed finance companies remain high on our enforcement priorities. Over 150 charges have been laid against the directors and others involved in failed finance companies and there are more to come!
The Commission has been extremely energetic in pursuing those who appear to have breached the law in relation to these companies and has cooperated with other regulators in an unprecedented way. We are determined to ensure that those whose actions have led to investor losses and to the ensuing loss of confidence in the market are brought to account. Where companies had offer documents registered or advertisements distributed after October 2006 the Commission has the powers to take civil actions under the new law that came into force in February. We can apply to the court for pecuniary penalty orders and in some circumstances orders to compensate investors.
Recently the Minister of Commerce announced her agreement to the Commission using its litigation fund for criminal prosecutions under the Securities act, as well as for civil action.
We are working closely with the Register of Companies to progress criminal proceedings in a number of cases.
To date, charges have been laid under the Securities and Companies and Acts against Bridgecorp Limited and its executive directors, Rod Petricevic and Robert Roest. Bridgecorp through its receivers has pleaded guilty to breaches of the Securites Act and Mr Petricievic has been declared bankrupt, and charges have been laid against the directors of Five star Finance limited and Five Star Debenture Nominees Limited.
While there is a great deal of work currently underway which cannot be yet be brought into the public arena (and I take this opportunity to thank my excellent staff and our fellow regulators for their energy and commitment) I am able to share with you some details.
There are currently 4 investigations completed and are before the Crown Solicitor for decision on prosecution, and we anticipate further charges will be laid in the next few weeks. Another four are at interview stage and five more are well advanced. These numbers are impressive but there are many more matters in the pipeline. The Commission is looking at all finance companies which have run into difficulties, including those in moratorium. While from the outside it may look as if little is happening let me assure you the work pace is intense and the results are rapidly emerging.
I would like to make the point here that no regulatory framework can or should prevent failures. Where there is a poor business model, or fraud, no regulatory framework will save a business. Similarly where there is poor corporate governance, poor risk assessment or poor capital management, businesses will fail.
Our task is to ensure that risks are appropriately disclosed so that the prudent investor can assess the risk properly and the return that is offered.
There has been some criticism that regulators didn't warn of the impending failure of some of these companies. The Commission did offer warnings about risk and return and advised investors to look closely at that risks involved. We wrote to all finance companies to require them to check their prospectuses to ensure that they were still accurate. If in our investigations we discover untruths in their responses we will take enforcement action.
Our regime on these companies relies on disclosure. The regime relies on the directors of finance companies to ensure that offer documents contain all information material to the securities being offered and that the advertising does not mislead, deceive or confuse investors.
Finance company collapses in the past year or so have illustrated the need for a comprehensive regulatory framework. Over recent years the government has undertaken a series of reforms affecting securities markets which aim to bring New Zealand's regulatory framework up to the standard that is needed in order to strengthen confidence in the market.
In February this year, new laws requiring increased disclosure by financial or investment advisers came into force. This new disclosure regime is an important step in the right direction. To enforce the law the Commission has also been given new powers which allow us to take both administrative and Court action against breaches of the law.
As part of our surveillance and enforcement role we wrote to over 1400 investment advisory firms and advisers, in March, requesting copies of their disclosure statements. We received over 2000 documents and have been taking a triage approach to assessment of the responses so that our resources are well targeted. However, we will not hesitate to take enforcement action on unacceptable standards of disclosure. Interestingly, and encouragingly, our early analysis indicates quite a high level of compliance.
Other laws that came into force in February included tightening of insider trading and substantial security holder disclosure, and new law on market manipulation. Our surveillance and enforcement work in these areas is ongoing. This year we also completed the third annual oversight review of NZX's performance of its regulatory functions and the 7th cycle financial reporting surveillance programme. Our surveillance programme has received positive feedback for its use as a training tool for directors and auditors. We are pleased to report on the generally good standard of reporting by listed issuers.
I have already mentioned some of the changes that came into force recently. Several important reforms are still underway. The Commission is providing advice to the government in developing the new regulations.
One of the main reforms before the Select Committee is the Financial Advisers Bill. This Bill addresses a shortcoming pointed out in the Financial Sector Assessment Programme carried out by IMF in 2003. It is an important reform for retail investors and consumers.
The proposed Bill will aid investor confidence in seeking advice on investments from financial or investment advisers by making advisers more accountable.
Advisers should be able to understand offer documents and have detailed knowledge of the products which they advise their clients about. Investors will be able to have the confidence that the advisers are proficient and competent and are subject to ongoing professional conduct and proficiency standards.
Other important areas of reforms are policy on deposit takers and regulation of collective schemes. We are also working on an inter-agency project aimed at strengthening New Zealand's anti money laundering laws.
Implementation of the reforms includes market awareness work like the education project we 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.
Ultimately our main aim is that these reforms will give New Zealand a world-class regulatory environment that provides confidence to both retail and institutional investors, both domestically and internationally.
Speaking of the confidence in the worldwide community brings me to the Commission's international work.
Our market benefits from greater international participation as it brings increased opportunities for New Zealand investors and local firms raising capital.
The Commission has been a member of IOSCO, the international standards setter for securities regulation, for over 20 years, and it has been my privilege to be the chair of the executive committee of IOSCO since 2004. Our presence at IOSCO has significantly raised New Zealand's profile in the international community and provided the opportunity for us to promote New Zealand as a well regulated capital market to international business audiences. We work to maintain our good standing through continuing contributions to many aspects of IOSCO's work, internationally and regionally.
We want to raise awareness of the New Zealand market and promote cross-border co-operation, which benefits our law enforcement work. The global nature of securities means that there are more choices for investors, but at the same time more chances of international financial crime.
To combat this, regulators must be able work together across borders. To facilitate this IOSCO has developed a Multilateral Memorandum of Understanding to which New Zealand is a signatory. The MMOU has helped the Commission in cases like Tranz Rail and Provenco. The Commission also has several other bi-lateral memoranda of understanding with individual countries that allow information exchange and sharing.
You may be aware that in June this year the Ministers of New Zealand and Australia signed an agreement on Mutual Recognition of Securities Offerings (MRSO). This is a part of the Closer Economic Relationship the two governments have been working towards over the last 25 years. It is an unprecedented agreement which marks Australia and New Zealand as global leaders in reducing costs for businesses raising capital across borders while maintaining the existing protection for investors.
I am pleased that one international investment bank has already given notice of its intention to use the scheme for 24 Australian managed funds to be made available to New Zealand investors.
There are a number long standing class exemptions which the Commission had in place for Australian issuers to offer investments in New Zealand. Since the MRSO is now in force the Commission is looking to review these exemptions. We will consult the markets in this review.
To sum up, I should say the Commission has had a busy year so far and will this will continue to be the case I the foreseeable future. We are fully committed to investigating failed finance companies and taking action where required. Of course not all failures are a result of breaches of the law. Some we have examined had poor business models or poor governance or other reasons for failure.
We will continue to advise the government on law reforms that will raise the standards and bring New Zealand law in line with similar jurisdictions. We urge issuers and market participants to aim for best practice. After all, following the law is only the minimum.
We are also committed to using our enforcement powers in cases of unacceptable market behaviour or standards of disclosure.
And, we will continue to carry out education campaigns to make the markets aware of law changes and new obligations.
Thank you.