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SYD-NZF00111-003

Financial Services

Roadmap for markets regulationFinal report

2011

| www.oliverwyman.com

SYD-NZF00111-003

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Confidentiality

2SYD-NZF00111-003© 2011 Oliver Wyman < www.oliverwyman.com

Executive summary

§ Oliver Wyman was engaged by the Financial Markets Authority (“FMA”) to canvas stakeholder opinion on the effectiveness of markets regulation in New Zealand and to assist FMA in developing a strategic plan to guide FMA over the next 2-3 years

§ Stakeholders highlighted significant gaps in the effectiveness of the Securities Commission, particularly with regards to:– Proactivity and effectiveness of enforcement– Communication with stakeholders

§ Consequently, most stakeholders welcome FMA as an opportunity for change, with clear expectations around:– Proactive enforcement– Some elements of investor education/advocacy– Consistent, clear communication and engagement– Improved user-friendliness

§ These stakeholder priorities, and FMA’s statutory functions, imply four key strategic priorities:– Delivering effective enforcement– Improving communication channels– Proactively monitoring the market environment– Deepening organisational capabilities

§ Executing the required initiatives to deliver on these strategic priorities implies a focused effort over the near term


Contents

1. Introduction

2. Stakeholder priorities

3. Implications for FMA – Overview

4. Strategic Priority 1: Delivering effective enforcement

5. Strategic Priority 2: Improving communication channels

6. Strategic Priority 3: Proactively monitoring the market environment

7. Strategic Priority 4: Deepening organisational capabilities

8. Implementation Plan

SYD-NZF00111-003

Introduction

Section 1


Context

§ FMA was established as a consolidated financial markets regulator in New Zealand, and started operations on 1 May 2011 as a Crown Entity

§ FMA succeeded the Securities Commission, taking on functions previously performed by that agency, as well as parts of the functions performed by the Ministry of Economic Development (MED) including the Government Actuary and the Companies Office

§ As a next step, it needed to: 1. Understand the priorities of its stakeholders across the New Zealand financial services industry

and investor community2. Define its key functional and capability gaps and priority areas for improvement3. Outline a high-level implementation plan to act upon these gaps

§ FMA commissioned Oliver Wyman to conduct an assignment to address these three goals

§ This document forms the output of this assignment

§ FMA recently developed a Statement of Intent (SOI) to define its high-level objectives.


Define functional and organisational priorities

Understand priorities of stakeholders

The process included three key steps to meet the project goals

Desktop review of existing assessments§ Review existing assessments of progress against

recommendations from the CMDT1 and the Prada Walter report2

Strategic goalsStakeholder interviews

§ Conduct more than 30 interviews with stakeholders across the New Zealand financial services industry

Stakeholder survey

§ Conduct an Internet-based survey to gather feedback from a broader range of stakeholders

1: Capital Markets Development Taskforce – Progress Against Proposed Actions and Timetable2: Report on the effectiveness of New Zealand’s Securities Commission (Prada Walter report) 20093: The Financial Markets Authority Act 2011

Section 2: Stakeholder Priorities

Appendix: Review of progress assessments

Oliver Wyman global experience

with regulatory strategy definition

Implementation plan

§ Define key initiatives

§ Suggest timelines and prioritisation

§ Estimate resource requirements

Section 3: Strategic implications

Section 4: Roadmap

§ Identify key strategic goals aligned with the key objectives as defined in the Act3 and the SOI

Functional priorities§ Identify in further detail priorities in each function aligned to

the strategic goals

Capability development priorities§ Identify organisation-wide capability gaps and initiatives to

address them

1 2

Outline a roadmap for implementation

3


The project conducted interviews with more than 30 key stakeholders representing a wide range of interests across the New Zealand financial services industry and investor community

Industry associations

Other Gov’t and regulatory bodies Other market participants

Self-regulatory bodies

Securities Commission/FMA stakeholders

Section 2 presents summary inputs from the stakeholder interviews

Investor advocacy bodies

Financial press and legal professionals


The project also conducted a Stakeholder Survey to reach a broader range of participants than was possible with the interviews

Section 2 presents summarised inputs from the FMA Stakeholder Survey

Survey outcome

§ Survey took place between 18th April and 9th May 2011

§ 71 stakeholders completed the survey

Survey design

FMA Stakeholder Survey

§ Overall effectiveness over the past three years

§ Future objectives

§ Priorities for investor and consumer protection

§ Priorities for market participant oversight

§ Priorities for enforcement

§ Priorities for reducing regulatory burden

§ Online survey questionnaire designed by Oliver Wyman, with programming conducted by Colmar Brunton

§ 433 stakeholders, identified by FMA, representing a diverse range of New Zealand financial services market participants were invited to participate

The survey included a variety of multiple response and free-

text questions on New Zealand financial markets

regulation

Survey goals

§ Gathering input from a more comprehensive set of stakeholders to consider in developing strategic goals

§ Providing an empirical baseline to measure progress against objectives in the future

0 10 20 30 40 50

Business ow ner or executive orboard member

Other business or f inancialservices provider or intermediary

Financial planner

Involved in another w ay

Investment manager, fundmanager or superannuation

trustee

Number of participants

Survey respondents were mostly industry participants

SYD-NZF00111-003

Stakeholder priorities

Section 2


We structured stakeholder inputs across five key dimensions

No. Dimension Objective1 Perceived effectiveness § What was the overall perceived effectiveness of financial markets

regulation in New Zealand over the last three years?

2a Key future objectives– Enforcement/participant

oversight

§ What should be the key objectives of FMA over the next three years?

2b – Retail investor education

2c – Other objectives

3 Key areas to deprioritise § What activities should FMA de-prioritise?

4a Capability improvements § What areas of capability development should FMA invest in?

4b Organisational improvements

§ What organisational improvements should FMA pursue?

5a Risks- Market/product

§ What products/business practices pose emerging risks for New Zealand financial markets as a whole?

§ What are the emerging risks for FMA as an organisation in meeting its objectives?

5b - Organisational

forw

ard-

look

ing

back

war

d-lo

okin

g

This section outlines the inputs we have received from the interviewees and survey participants along each of the key dimensions


No. Dimension Summary of stakeholder input1 Perceived

effectiveness§ Shortcomings observed in Securities Commission’s performance, particularly in proactive

enforcement, protection of retail investors and communication with stakeholders

2a Key future objectives– Enforcement/

participant oversight

§ Proactivity of enforcement is critical to instill confidence, and requires a robust triaging strategy to determine enforcement action

§ Transparency and timeliness are also important but due process must be carefully observed

2b – Retail investor education

§ Lesser priority compared to enforcement, mostly not considered FMA’s direct responsibility but some stakeholder support for limited product-based education

2c – Other objectives § Improving user-friendliness through guidance and technology is important

3 Key areas to deprioritise

§ International activities – however, it is critical to maintain linkages to Australia

§ Regular checking of financial accounts – benefits are invisible to most

4a Capability improvements

§ Commercial understanding/private sector experience of staff

§ Specific investigative and enforcement capabilities, especially forensic accounting

§ Market intelligence capabilities, leveraging analytical and economic skills

§ Communication skills to facilitate increased media profile

4b Organisational improvements

§ Active deployment of tactics to attract and retain talent at entry and experienced level

§ Increased delegations and leadership development to further develop talent

5a Risks- Market/product

§ Important to maintain focus on niche/unlisted/novel products, as well as KiwiSaver

§ Political risk less apparent, however, institutional change efforts can introduce transition risks at a time of increasing responsibilities5b - Organisational

The inputs from stakeholders point to a number of priorities and improvement needs for FMA


Dimension 1: Perceived effectivenessInputs from stakeholder interviews

§ Majority of interviewees found the Securities Commission’s past performance lacking in many aspects– Retail investor protection was seen as the area with most weakness– Regulation of wholesale activities was seen as relatively more robust

§ Enforcement was seen as the weakest link by many interviewees. The Securities Commission was seen as not proactive enough– Many interviewees argued that the Securities Commission had sufficient powers to be more active against

finance companies– Some interviewees argued that it had limited powers previously to raise warnings on finance companies.

However, they also stressed that it could have been much more active in bringing the issue to public attention

§ Communication was another area where participants found the Securities Commission lacking– The Securities Commission was frequently considered as not reaching out enough to stakeholders or the broader

public– Some industry participants described their interactions with the Securities Commission as being one-way in

nature

§ Many interviewees noted that the Securities Commission had lifted its game recently– More proactive enforcement/communication actions– Comprehensive consultation with stakeholders, including during development of the Financial Advisers Act


Dimension 1: Perceived effectivenessInputs from stakeholder survey

NZ financial market regulation performance over the last three yearsShare of participants

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

Assistingretail

investors andconsumers

Protectingretail

investors andconsumers

Buildingconfidence inthe integrity of

NZ capitalmarkets

Reducingcosts for

business byusing new

technologies

Managing thedomestic and

intl'implicationsof the GFC

Well Poorly

“Compared to international benchmarks, the Securities Commission has discharged its duties well, over the last three years”Share of participants

Strongly agree1%

Tend to agree8%

Neither agree nor disagree

24%

Tend to disagree

28%

Strongly disagree

39%

Survey respondents share interviewees’ view that NZ financial markets regulation performed poorly along most dimensions over the last three years


Dimension 2a: Key future objectives – enforcement/participant oversightInputs from stakeholder interviews

§ Strong/decisive and timely enforcement was the most commonly heard key objective– “Making examples” of bad behaviour where warranted, demonstrating willingness to act– FMA should identify a consistent enforcement strategy, taking into account various enforcement tools and other external

constraints (e.g. court bottlenecks)– Robust triaging system to decide on existing backlog of cases, and to select cases to pursue

§ Beyond strength, interviewees also wanted more proactivity in enforcement from FMA– FMA should not refrain from taking cases on principle, even where the outcome is not clear, to send messages to the public

and the industry– Testing boundaries of case law can also be an effective means of “market education” on acceptable behaviours– While big, public company cases attract public attention, FMA should maintain a vigilant eye on the periphery and identify

regulatory gaps

§ Self-regulatory organisations expressed willingness to work with FMA in market participant oversight and sanctions. However, they would like more structure to the interactions, including referral processes

§ Interviewees praised transparency in enforcement but recommended caution in exercising it– Being transparent about enforcement actions helps reinforce public perception that wrongdoers are being pursued– Transparency also sends a reinforcing signal to the broader market about market integrity and acceptable behaviour– However: (1) Due process and confidentiality concerns must be strictly preserved; and (2) FMA should not hesitate to take

enforcement action without transparency, if it believes the hurdle for public disclosure is not met but the hurdle for action has been met

§ Interviewees also warned against overreaction and overzealous enforcement that may scare issuers/intermediaries, and recommended coupling enforcement with constructive engagement to help participants come up the compliance curve


Dimension 2a: Key future objectives – enforcement/participant oversightInputs from stakeholder survey

Respondents reflected interviewees opinion of overcautious enforcementSecurities Commission’s enforcement activitiesShare of participants

0%

10%

20%

30%

40%

50%

60%

Picks the rightissues to

investigate

Produces theright

behaviourthrough

enforcementaction

Is consistentand fair in thew ay it takesenforcement

action

Focuses toomuch on

punishmentand not

enough onprevention

Is toocautious

about takingenforcement

action

Agree Disagree

higher agreement is better

higher disagreement is better

0%

10%

20%

30%

40%

50%

60%

70%

Protecting theintegrity of New

Zealand's financialmarkets

Protecting retailinvestors andconsumers

Ensuring stability ofNew Zealand'sfinancial system

Supporting thegrowth and

development of NewZealand's financial

sector

Ensuringcompetitiveness of

New Zealand'sfinancial markets

1st Priority 2nd Priority

Stakeholders saw protecting market integrity as a much higher priority for FMA than market developmentPriorities for financial markets regulationShare of participants


Dimension 2b: Key future objectives – retail market/investor educationInputs from stakeholder interviews

§ Interviewees broadly categorised investor education into two key areas:– Financial literacy: familiarity with financial concepts, e.g. diversification, risk/return, compounding– Product knowledge: Specific information about financial products and their risk/return profile

§ Some stakeholders argued that the Commission for Financial Literacy and Retirement Income (CFLRI) did an effective job in investor education, though two areas stood out as potential issues:– Sole focus on “retirement”– Limited materials beyond simple products, e.g. on complex investment offerings

§ Many interviewees, mostly with industry focus, argued investor education should be best left to other agencies. Particularly, financial literacy was seen as an area that should be left to other agencies, and not a realistic goal for FMA

§ However, some other interviewees, particularly those with investor focus, argued that FMA should be involved in investor education, especially in product knowledge, though opinion was mixed on the degree of involvement and actual role– active role, similar to ASIC– supportive role to other agencies, such as CFLRI

§ Participants considered communication and decisive enforcement activity as a core ancillary to investor education – e.g. media briefings, outreach efforts and public charges

§ Interviewees were unanimous in prioritising investor confidence in fairness and integrity of the market and its institutions over confidence in the investment outcomes


Dimension 2b: Key future objectives – retail investor education Inputs from stakeholder survey

0%

10%

20%

30%

40%

50%

60%

70%

80%

Making betterfinancial decisions

Avoiding financialscams

Making soundinvestments

Planning forretirement, incl.understanding

KiwiSaver

Comparing financialproducts they are

interested in

Understanding newand complex

products

1st Priority 2nd Priority 3rd priority

Financial market regulators’ top 3 priorities for helping financial services consumersShare of participants

Respondents want regulators to provide ‘insight’ to avoid scams and make sound decisions, rather than providing ‘information’ on basic products


Dimension 2c: Key future objectives – otherInputs from stakeholder interviews

§ Industry stakeholders emphasised the importance of user-friendliness, which included several actions, e.g.– Explaining to the industry what the guidelines for acceptable behaviour are – to supplement principle-based regulation– Providing step-by-step, easy-to-follow compliance guidelines and requirements in an easy-to-find common location for

market participants to access on a self-serve basis – particularly important for smaller operators– Providing a “one-stop shop” single point of contact to participants so that they do not have to address different departments

within the regulator– Leveraging more effective online platforms and electronic submissions, rather than paper-based forms, for data requests

from industry – particularly important for larger operators– Simplifying prospectuses and providing a common electronic format to ease completion

§ Reducing regulatory burden and promoting development of the New Zealand financial services sector were not widely shared as valid objectives– Some argued for the importance of “not scaring the issuers” and having a constructive dialogue with issuers who want to

introduce new products to the market– Some others also suggested that FMA should encourage good behaviour from market participants, by publicly praising

good practice and condemning bad practice

§ Industry participants were keen for FMA to establish strong links of communication with a broad range of stakeholders

§ Market operator regulation was not raised as a major objective by most interviewees. However, some suggested that the NZX’s regulatory role can give rise to potential conflicts of interest in the future


Dimension 2c: Key future objectives – otherInputs from stakeholder survey

Survey respondents disagreed that regulators have paid enough attention to ease regulatory burdenNew Zealand financial market regulators have…

0%

10%

20%

30%

40%

50%

60%

70%

Reduced regulatory red tape Helped small businesses to understand theirobligations

Improved services by using newtechnologies and processes

Agree Disagree

In contrast to interviewees, survey respondents, comprising mostly market participants, think more attention to reducing regulatory burdens is needed


Dimension 3: Key areas to deprioritiseInputs from stakeholder interviews

§ Many industry stakeholders indicated that FMA had more budget, more staff and more statutory powers, in comparison to the Securities Commission. Hence they felt it should not abandon any of its current efforts

§ International relationship building/advocacy activity, however, was considered as an area to deprioritise by many stakeholders, due to four main reasons:– Provides limited perceived benefits– Distracts attention of staff– Consumes leadership bandwidth– Absorbs budget

§ However, participants noted that relations with Australian regulators should continue at a stronger intensity– Broader interaction at leadership and mid-management level– Further joint work on complaints and referrals

§ Organisationally, stakeholders indicated that they perceive limited benefits from regular financial accounting surveillance, and recommended replacing these efforts with more theme/risk-driven reviews


Dimension 3: Key areas to deprioritiseInputs from stakeholder survey

Areas New Zealand financial market regulators should put less emphasis onShare of participants

0%

5%

10%

15%

20%

25%

Managing thedomestic andinternational

implications of theglobal financial

turmoil

Reducing costs forbusiness by usingnew technologies

Facilitatinginternational capital

flow s andinternationalenforcement

Liftingef fectiveness andservice levels of

regulatoryoperations

Protecting retailinvestors and

consumers

Producing qualityinformation andstatistics aboutNew Zealand

financial markets

Assisting retailinvestors and

consumers

Building conf idencein the integrity ofNew Zealand'scapital markets

Similar to interviewees, areas where most respondents indicated less focus were

international activities


Dimension 4a: Capability improvementsInputs from stakeholder interviews

1. Commercial familiarity

§ Almost universally, participants noted that FMA should increase the financial markets and commercial understanding of its staff, and recruit private sector experience

§ Participants noted that this was critical to increase credibility and form a sustainable “two-way” dialogue with the industry, and to further improve understanding of operational complexities as well as risky or unsustainable business practices

3. Litigation/investigation

§ At least a temporary increase in litigation capabilities was seen as necessary by many, in order to manage the backlog of finance company cases– Beyond legal, this includes particularly forensic

accounting skills.§ Some participants perceived there were not enough

experienced practitioners to proactively investigate a case and pursue it in court

2. Market intelligence/analysis

§ Many participants emphasised that FMA needs to boost its market intelligence gathering and proactive horizon scanning activities. Two capabilities were seen as critical for this:– Analytical and economics skills to provide tangible

analytical backing to risk assessments– Industry links and private sector experience

4. Public communication

§ Participants noted a need to increase FMA’s profile in the media and define a strategy to use various communications platforms

§ Many participants rejected the idea of a PR spokesperson, and suggested that the Leadership Team should be accessible and engage with the media directly

§ Specialist journalistic skills to broaden outreach were also seen as important

Participants noted that capability improvements are needed in four key areas


Dimension 4a: Capability improvementsInputs from stakeholder survey

“Have the New Zealand financial markets regulators’ staff been knowledgeable and professional?”Share of participant responses

Strongly agree

1%

Tend to agree23%

Neither agree nor disagree

37%

Unsure13%

Tend to disagree

15%

Strongly disagree

11%

§ Stakeholders are mostly ambivalent regarding the knowledge and professionalism of the New Zealand financial markets regulators’ staff

§ Investment managers and financial planners were more likely to find regulatory staff helpful, while other FS providers were more likely to find them unhelpful


Dimension 4b: Organisational improvementsInputs from stakeholder interviews

Attracting talent

§ Talent attraction was seen as key to bolster capabilities and manage transition to the new organisation

§ Establishing a vibrant Auckland office is critical, not only to attract talent but also to facilitate industry outreach, according to some stakeholders

§ Other ideas mentioned by the participants included:– Attracting successful private sector people in

late career stages, who now want to make a public contribution

– Taking in junior or mid-level talent from the private sector (lawyers, bankers, etc.) on a secondment basis – similar to SEC

– Sending promising talent to foreign regulators on secondment to broaden experience

– Establishing a graduate recruitment and rotation programme

Retaining and developing talent

§ Stakeholders particularly close to the Securities Commission indicated the importance of leadership development opportunities to retain talent

§ Substantially higher degree of delegations was also seen as critical:– Manage increased level of responsibilities– Gain confidence to act proactively in

enforcement– Increase credibility for broader industry/market

outreach efforts

§ Other ideas mentioned by participants included:– Maintaining independent pay scale to retain

key talent– Maintaining positive cultural characteristics of

the organisation, such as the emphasis on work/life balance


Dimension 5a: Market/Product risksInputs from stakeholder interviews

§ Participants universally noted the difficulty of predicting the products that will cause future crises, and indicated the imperative for FMA to keep abreast of new investment product developments

§ Particularly for retail investors, stakeholders suggested a sharp look into the peripheries of traditional financial services activity to uncover risky practices

§ On the other hand, some stakeholders suggested focusing attention on conflicts of interests in the mainstream corporate sector, including auditors’, trustees’ and directors’ duties

§ The participants particularly listed KiwiSaver as a critical risk, due to its high uptake and implicit government endorsement, with potentially adverse outcomes such as:– Unregulated providers facing liquidity/soundness problems– Unnecessary churn in investments driven by financial adviser remuneration– Misrepresentation of performance– Inadequate returns due to over-conservative default investment options, creating a gap in retirement savings

and reducing interest vs. other investments e.g. property and share market– Excessive hidden fees eroding investment balances and reducing retirement savings


Dimension 5a: Market/Product risksInputs from stakeholder interviews

Risk driver Products/practices Frequency of discussion

Growth of KiwiSaver § Liquidity risk management§ Alleged adviser-driven product churn§ Transparency of fee disclosure

Property investment vehicles

§ Proportional property investment § Financing with real-estate agent intermediation§ Property and farm syndicates

Financial adviser practices

§ Commission-based remuneration§ Alleged pressure on individuals to classify themselves as wholesale investors

Speculative trading § Margin/CFD providers§ Commodities (milk, gold, wood etc.) trading§ FX trading

Other securities § Unlisted products§ Retail bonds

Jurisdictional and ownership/ custody risks

§ ETFs§ Offshore deposits§ Funds with offshore custody of assets

Unlicensed providers § Foreign auditors operating in NZ without licensing requirements§ Temporary exemptions in Canterbury, resulting in unlicensed financial advisers

advising on investment of lump-sum earthquake insurance payments

Technology-driven products

§ Mobile banking§ Internet banking

Participants listed a broad range of risk drivers relating to products and practices


Dimension 5a: Market/Product risksInputs from stakeholder survey

“I disagree that the following financial market participants in NZ are given proper oversight”

0%

10%

20%

30%

40%

50%

60%

70%

Fina

nce

com

pani

es

Fina

ncia

l pla

nner

s an

d ad

vise

rs

Cre

dit r

atin

g ag

enci

es

Cre

dit p

rovi

ders

or i

nter

med

iarie

s

Der

ivat

ive

issu

ers

(eg,

CFD

pro

vide

rs)

Liqu

idat

ors

and

inso

lven

cy p

rofe

ssio

nals

Fund

man

ager

s

Sto

ckbr

oker

s

Inve

stm

ent b

anks

Pen

sion

fund

s

Kiw

iSav

er p

rovi

ders

Dep

osit

take

rs

Insu

rers

Com

pany

boa

rds

and

exec

utiv

es

Aud

itors

Acc

ount

ants

NZX

Increase, when survey responses from these participants are excluded

Apart from finance companies, financial planners were seen as

the least properly regulated business area Most respondents do

not see problems with oversight of NZX

or auditors/accountants

Beyond this question, the survey did not

directly address KiwiSaver


Dimension 5b: Organisational risksInputs from stakeholder interviews

§ Several participants, especially those close to the Securities Commission, noted the risks of embarking on major organisational changes, even though they understood the rationale:– FMA is going through an establishment period– Responsibilities are increased, and so are expectations– Aggressive pursuit of performance-based culture may cause friction with staff/unions– Potential for loss of institutional memory from staff departures

§ Participants emphasised that FMA should maintain focus on a finite number of things and rigorously prioritise its actions

§ On the other hand, some industry participants noted that FMA needs to demonstrate that change is not just a name change, by showing a renewed skill set in staff

§ Increased public expectations (exemplified in references to a “super-regulator”) were seen as a risk, as FMA’s actions in the first few months could be limited by the backlog of cases

§ Participants considered the risk of a reduction in political support, and available financial resources, as relatively unlikely, regardless of the outcome of the election later this year but depending on the importance attributed to further reforms in the Commerce portfolio and the agenda of the next Minister

SYD-NZF00111-003

Implications for FMAOverview

Section 3


Stakeholders’ expectations of FMA can be grouped into four key dimensions, with improvement opportunities along each of them

Proactive in its enforcement, trusted for its judgment

Connected with its stakeholders and community

Agile to respond to future risks Respected for its capabilities

§ Enforcement activity is insufficientlyproactive and does not consistentlyfocus on the right issues

§ Enforcement tools are mostly limited to legal recourse

§ Enforcement action is insufficientlyconsistent and strategic

§ Communication is too often a “one-way street”

§ Commercial implications of regulation are not always taken into account

§ Actions are rarely visible in the broader community

§ Limited horizon scanning for future risks

§ Overly legalistic approach in evaluating risks

§ Limited commercial experience in staff

§ Capability gaps in several specialist areas

§ Limited empowerment

Key stakeholder expectations and perceived current gaps


Additionally, FMA has set itself six functional priorities in its Statement of Intent (SOI) and seeks to achieve five specific outcomes

§ Monitor compliance with, investigate contraventions of, and enforce securities and investment law, financial reporting law and companies law, in respect of financial markets participants

§ Promote confident and informed participation in the financial markets

§ License and supervise particular financial markets participants, including financial advisers, trustees, auditors and exchanges

§ Monitor and conduct inquiries and investigations into financial markets and financial market participants

§ Keep the law under review

Functions of FMA

Source: Financial Markets Authority Draft Statement of Intent 2010-2014, March 2011

§ Financial markets participants have clear and well understood responsibilities

§ Investors have access to the information they need to make informed decisions

§ Investors clearly understand and have confidence in the regulation of financial markets

§ Emerging risks are identified and mitigated

• Our markets are internationally attractive

• FMA’s regulatory actions support market activity

Key outcomes sought by FMA

3

2

1

5

4

3

2

1

5

4

6


We identify four strategic priorities emerging from stakeholder expectations and the functional priorities and target outcomes expressed in the SOI

Stakeholder prioritiesSO

I Objectives

1 – Delivering effective enforcement

§ Increase effectiveness of enforcement – firm and proactive enforcement where merited

§ Use full suite of tools available to influence behaviour

§ Develop (and stick to) a clear enforcement strategy

§ Investors have access to the information they need (disclosure)

§ Investors understand and have confidence in regulation of financial markets

2 – Improving communications

channels

§ Strategic relationship management with key stakeholders

§ Open channels of communication with the broader community

§ Engage with participants constructively to help bring them up the compliance curve and minimise adverse business impacts

§ Financial markets participants have clear and well understood responsibilities

§ Investors have access to the information they need (education)

§ Investors understand and have confidence in regulation of financial markets

3 – Proactively monitoring the market

environment

§ Focus on identifying problems before they arise and intervening appropriately

§ Take a broad view of the scope of FMA’s areas of interest

§ Apply economic and financial lenses to market analysis, as well as a legal and compliance view

§ Emerging risks to FMA’s objectives and appropriate responses are identified

4 – Deepening organisational

capabilities

§ Address absent or underweight skill sets:

– Economic analysis– Communications– Enforcement– Investigation

§ Increase overall levels of industry/product knowledge

§ Increase organisational empowerment


Each of these strategic priorities implies a specific set of action items to pursue

Strategic priorities Strategic actions

The following sections will detail rationale and action items for each priority

Tactical actions

Deepening organisational

capabilities

§ Developing a strategy for talent attraction, development and retention

§ Identifying organisational requirements to improve capabilities

4 § Assessing areas where capability gaps are perceived and filling these gaps

Proactively monitoringthe market

environment

§ Building up market intelligence function

§ Adopting a strategy to identify and assess issues

3 § Defining the purpose of a market intelligence function

§ Defining a prioritised approach for monitoring broad market activity

Improving communications

channels

§ Developing a detailed strategy to engage with each stakeholder group

2 § Defining a comprehensive set of stakeholder groups that are impacted by FMA’s outcomes

§ Defining a set of engagement methods§ Communicating with the broader public to

provide transparency on FMA’s activities and contribute to investor education

Delivering effective enforcement

§ Defining a strategy to deploy the enforcement toolkit, including levels of proactivity and execution priorities

1 § Defining a comprehensive set of tools available for enforcement action

SYD-NZF00111-003

Strategic priority 1:Delivering effective enforcement

Section 4


Delivering effective enforcement: Summary

Objectives

§ Proactive enforcement action that is perceived as effective and strong, yet also fair and principled

§ Clear enforcement strategy based on these principles to decide on a prioritisation of enforcement efforts

§ Cost-effective use of all enforcement tools and resources to influence behaviour, focusing on prevention alongside punishment

Activities

§ Identifying a comprehensive set of tools that can be used towards enforcement goals:– Legal tools– Administrative tools– Communication, as a tool for enforcement

§ Defining a strategy for enforcement to prioritise enforcement actions in a consistent way, including prioritisation of the existing backlog of finance company cases

§ Ensuring that enforcement practices are developed for and principles are adopted by the newly regulated market participants, including those with a self-regulating role


FMA will have a broad range of tools at its disposal to pursue enforcement actions and prevent wrongdoing

Summary toolkit of enforcement and prevention actions

Tools Examples Considerations Potential applicationLegislative § Alert lawmakers of inadequacies

§ Identify needed amendments§ Cost/benefit impact§ Long-term, potential

unintended implications

§ Novel products/practices not covered within legislation

§ Regulatory gaps

Legal § Criminal court action§ Civil court action§ Settlement/negotiation§ Action on behalf of natural persons

§ Significant bottlenecks in criminal courts

§ Ability of civil damages to provide sufficient relief

§ Public communication

§ Serious fraud with direct monetary loss

§ Intention to deceive/misrepresent§ Breach of regulations with

specific damage§ Cases with significant adverse

impacts on public confidence

Investigative § Seizure§ Summons§ Entry

§ Due process§ Trade-off between transparency

and confidentiality

§ Suspected issues§ Signalling concern and intention

to act

Administrative § Issue fines§ Force disclosure of

information/warnings§ Revoke licences§ Alert other regulators (e.g. RBNZ

re: operational risk)§ Demand enforceable undertakings§ Block issuance§ Grant exemptions

§ Final set of tools included within Securities Act

§ Establishing “boundaries” of law to take action

§ Impact as an education tool for investors and market participants

§ Detected breaches of codes/guidances

§ Minor infractions of regulations with minimal damage/losses

Communication § Public warnings § Media releases§ Private warnings

§ Distinguishing participant misconduct vs. investor misjudgement

§ Typical first port of call for suspicious activities

Incr

ease

d co

st a

nd c

ompl

exity


Nature of misconduct

Defining an enforcement strategy will allow FMA to prioritise enforcement action on a consistent basis – based on the nature of misconduct and constraints

Extent of damage

§ Extent of damage ($NZ losses incurred)

§ # of damaged individuals/entities

§ International dimension

Impact on confidence

§ Nature of product/service

§ Spread of damages (retail/wholesale; local/regional/national)

§ Connections to other parts of the market

§ Risks to FMA’s reputation

§ Extent of commission (e.g. misrepresentation, fraud)

§ Extent of omission (e.g. negligence, dereliction)

§ Intent to breach

§ Involvement of other parties

Severity

§ Ability to bring timely action

§ Monetary and staff cost

§ Bottlenecks in legal system § Unintended consequences on market (e.g. availability of Board Directors)

Board-approved enforcement strategy

Constraints on enforcement action

§ Governance and delegations § Triaging method to prioritise

enforcement and select optimal tool§ Execution strategy

Key components

Illustrative structure


Deprioritise enforcement action

Civil litigation for redressAdministrative action for

punishment (e.g. bans/fines)

Criminal litigation

In particular, a triage effort is needed to resolve the existing backlog of finance company cases

Existing finance company cases

§ Dedicated multi-disciplinary team for each case

§ Outsourced resources where necessary

No/little evidence of significant misbehaviour

Evidence of misbehaviour

Substantial damages

Already in court

Not in court yet

Decide on litigation strategy

§ Prioritisation of litigation resource allocation

§ Alternative strategies (settlement)

§ Potentially dropping low value/probability cases

Investigate extent of damages

Confined damages with lower amounts

Investigate severity of

misbehaviour

Potential triaging approach for pursuing finance company cases



With an expanded mandate, FMA will also need to develop a monitoring and enforcement approach for a broad range of market participants

Advisers

§ Enforcing compliance with the licensing regime– Understanding the

operational implications for advisers

– Developing a risk assessment model to assist monitoring

– Monitoring application of wholesale/retail divide

§ Encouraging good practices, e.g.– Giving advice statements

and justifications in writing– Fixed-price remuneration

§ Developing a coherent approach for Trans-Tasman licensing

Issuers and Directors

§ Identifying specific expectations for duty of care for directors and defining responsibility

§ Replacing/complementing periodic financial accounting surveillance with a risk-driven surveillance method

§ Increasing simplicity and clarity of issuer disclosure across length, accessibility and ease of understanding

Auditors and Trustees

§ Identifying specific expectations for duty of care and defining responsibility

§ Determining potential conflicts of interest and other risk drivers

§ Identifying interaction strategy with self-regulatory organisations and their relevant disciplinary bodies

§ Addressing Trans-Tasman coherence in licensing and self-regulation, particularly for auditors

Potential considerations in monitoring and enforcement approach for various market participants

Participants recently coming under FMA’s increased regulatory scope

SYD-NZF00111-003

Strategic priority 2:Improving communications channels

Section 5


Improving communications channels: Summary

Objectives

§ Effective communication with all stakeholders and the broader public

§ Strategic relationship management with key contacts

§ Credibility with industry stakeholders

§ Raised profile with media and broader public

§ Clarity and appropriate expectations on FMA’s role

§ Use of communication as a cost-effective prevention mechanism

Activities

§ Defining a comprehensive map of stakeholders

§ Engaging with each stakeholder in an appropriate way:– Identifying the most effective methods of

communication– Recognising diverse groups of industry

stakeholders and helping them come up the compliance curve

§ Increasing accessibility to the media and broader public

§ Defining and communicating FMA’s role more clearly

§ Articulating the desired level of transparency to guide all communications efforts

§ Contributing to investor education efforts


With an expanded mandate and increased public scrutiny, FMA will need to reach out to a significantly extended stakeholder group

FMA Stakeholders Map

FMA

Public sector

§ NZ Parliament

§ RBNZ

§ Ministry of Economic Development

§ Crown Law Office/SFO

§ CFLRI

§ Commerce Commission

§ Other regulatory/public bodies

International

§ ASIC

§ AUSTRAC

§ APRA

§ IOSCO

§ Key overseas regulators

Private sector§ Ombudsmen/disciplinary bodies§ Self-regulatory bodies§ New Zealand Stock Exchange§ Investor advocacy bodies§ Industry associations§ Market participants§ Specialised task-forces§ Issuers

Community

§ Financial media

§ Mainstream media

§ General community

§ Special community segments

§ Broadcast media

§ Social media


FMA can apply a combination of four standard engagement models with its key stakeholders

Common engagement models with stakeholders

Consultation

Coordination

Communication

Cooperation

3

2

4

1

§ Seeking commentary on proposed FMA guidelines/revisions§ Seeking expert opinion on FMA actions§ Listening for improvement opportunities

§ Ensuring alignment of goals§ Ensuring consistency of actions and messages

§ Providing transparency on FMA’s guidelines§ Ongoing dialogue to share mutual perspectives§ Raising awareness of FMA’s activities

§ Dividing responsibilities towards a shared target§ Agreeing on roles in joint activities§ Mutual support on individual priorities

Dec

reas

ing

inte

nsity

of e

ngag

emen

t

Engagement model Typical activities


Industry stakeholders are a particularly diverse group, with some dissatisfaction on past engagement – FMA should pay close attention to reaching out to a broad set of industry stakeholders with the right tone and message

§ Banks

§ Non-bank deposit-takers

§ Investment managers

§ Financial advisers

§ KiwiSaver providers

§ Stockbrokers

§ Insurers

§ Investment schemes

§ Trustees

§ Auditors

§ Securities lawyers

§ Company directors

Industry stakeholders Reaching out to a broad set§ Leveraging other departments’ (e.g. MED, RBNZ) existing contact lists

to develop FMA’s own contacts base

§ Establishing a robust Auckland presence to improve closeness to industry stakeholders

§ Experimenting with alternative interaction methods, e.g. workshops on market practices

§ Delegating ownership of engagement priorities across FMA management:

– Establishing a “Relationship Manager” for certain stakeholders (e.g. NZX, the SROs, etc.)

– Presenting a “one-stop shop” to stakeholders and avoiding departmental fragmentation

Ensuring the right tone and frequency§ Contacting key stakeholders regularly, with structured annual reviews to

discuss big-picture agenda items beyond day-to-day priorities

§ Maintaining, wherever possible, “two-way” communication:

– Being prepared to listen, to break the existing stakeholder perception of not reaching out sufficiently

– Ensuring responsiveness to complaints, tip-offs, and keeping people updated on actions taken where possible


FMA will need to define an engagement strategy for each key stakeholder group

§ Coordination of investor education efforts, especially delineation of mutual responsibilities§ Consultation to understand potential conduct issues on retirement products and financial advice

CFLRI

§ Coordination of Trans-Tasman regulatory priorities/gaps, sharing of best practices§ Coordination of licensing, registration and compliance monitoring activities

ASIC

§ Co-operation in regulation of public listed markets (defining mutual roles and responsibilities, and agreeing on information sharing guidelines)§ Consultation on evolving practices in listed markets

New Zealand Stock Exchange

§ Co-operation in enforcement: defining mutual roles and establishing MoUs to clarify referrals§ Communication to understand nature/frequency of complaints raised

Self-regulatory bodies

§ Consultation on relevant law review, e.g. Securities Act, issuer disclosure guidelines§ Consultation on gaps in market efficiency

Ministry of Economic Development

§ Defining philosophy on systemic risk monitoring and scanning for future risks§ Development of MoU to clarify mutual responsibilities and facilitate crisis response

RBNZ

§ Communication to understand issues/complaints and align conduct expectations§ Communication on pain points re: issuer disclosure, mis-selling and performance reporting of funds§ Consultation on new guidelines, particularly on disclosure

Investor advocacy bodies

§ Communication of guidelines and regulatory expectations§ Consultation on guideline revisions§ Communication to understand industry priorities/compliance challenges and impact§ Communication of regulatory actions and priorities

Industry associations

§ Clear delineation of responsibilities§ Consultation on appropriate strategy for pursuing court cases, e.g. finance company cases§ Coordination of investigative efforts for serious financial fraud and money laundering

Crown Law Office/SFO

§ Regular briefings on activities/priorities§ Communication of lawmaker priorities/community feedback

Parliament

Engagement prioritiesStakeholder group

Suggested engagement priorities for selected stakeholders


To ensure effective engagement with the media, FMA should also define a media engagement strategy based on a set of core principles

Accessible

§ Visible media profile from senior management– Chief Executive acting as

visible face of the organisation, similar to SFO for example

– Specialist non-executive public-relations spokesperson function is unnecessary

§ Increased delegations of media contact towards L2, in order to ensure broad coverage and elevated media profile

Professional

§ Increased focus on print media by optimising press releases, along key dimensions:– Conciseness– Consistency of message– Clarity– Accessibility of language

Strategic

§ Media communication as a means to strategic goals:– Raising awareness in

community on specific issues

– Raising general profile of FMA

– Proactive market education

– Specific enforcement goals

§ Maintaining due process and confidentiality where appropriate, e.g. in early stages of investigation

Suggested principles to underline media engagement strategy


FMA should also seek ways to increase its outreach, as well as accessibility of its message, to the broader community

§ Simplifying investor communications

§ Use of imagery to appeal to broader demographics

Increase outreach to broader public

Traditional channels

§ Newsletter leveraging electronic media

§ A user-friendly website for community and businesses (IRD mentioned as an example by some stakeholders)

Novel channels

§ Blogs to discuss potentially niche topics and reach out to special segments

§ Interactive social media to maintain pulse and understand pain points

Increase accessibility of message

Example imagery used by other public bodies

FIDO*(ASIC)

Sorted(CFLRI)

*FIDO has been recently replaced by MoneySmart


FMA should define its role and the desired level of transparency to guide its communication

Level of transparency and opennessRole

Key tools to define and communicate role

§ Clear, memorable tag-line for the public

§ 1-3 sentence statement of purpose for the industry

§ Succinct, 1-page mission statement, primarily aimed at staff but broadly available

Key dimensions to define transparency level

§ Enforcement strategy and specific actions (which cases are pursued, which ones are not, and why) where beneficial

§ Broad areas to issue public commentary (market practices, policy/legislation) and not (market performance)

§ Communication of strategy to the extent possible, and an implementation roadmap to manage expectations

§ Areas to commend and encourage (e.g. exemplary behaviour and good practices)

Defining a role and a transparency level consistent with it

“What is our role and what isn’t?” “What should we communicate and what shouldn’t we?”


FMA also needs to clarify its role regarding investor education

Active role

§ FMA is actively involved in financial literacy efforts, similar to ASIC’s model in Australia:– Developing comprehensive materials– Providing active guidance and outreach on

website and other fora

§ FMA has a clear role among other stakeholders involved in financial literacy (e.g. CFLRI, Commerce Commission, Ministry of Education and other related parties):– Investment-related financial literacy– Detailed knowledge of investment products

Support role

§ Key responsibility for financial literacy efforts lies in another agency (existing or to-be-defined)

§ FMA provides guidance (similar to Securities Commission) to this agency, in preparing and updating a general suite of product knowledge materials related to popular investment products

§ FMA selectively takes proactive action in raising awareness of investor education concepts related to specific niche products and practices:– Provide general guidance on emerging and

evolving products– Alerts on suspicious practices

Two options emerge for FMA’s involvement in broader financial literacy efforts

We recommend FMA not focus too heavily on investor education efforts initially, pending clarification of a national strategy and associated responsibilities

SYD-NZF00111-003

Strategic priority 3:Proactively monitoring the market environment

Section 6


Proactively monitoring the market environment: Summary

Objectives

§ Agility in recognition and response to emerging risks in NZ financial markets

§ Effective management of internal knowledge

§ Familiarity with global best practices in financial markets regulation

§ Holistic perspective on the scope of FMA’s areas of interest

Activities

§ Building the strategic intelligence function and its value to FMA

§ Identifying key roles and responsibilities in horizon scanning for future risks

§ Applying economic and financial lenses to analyse potential risks, as well as legal and compliance lenses

§ Evaluating identified emerging risks to decide on optimal response


FMA should establish a strategic market intelligence function with a clear role

Activity dimension Objectives Tools Challenges

Research and analytics § Identify emerging risks/regulatory gaps

§ Analyse emerging risks to establish a firm basis for action recommendations

§ Regular networking and discussions with a broad range of industry stakeholders

§ Engagement with RBNZ to monitor systemic vulnerabilities

§ Economic and financial analysis

§ Maintaining a holistic perspective needs to be complemented with a risk-based view to prevent “boiling the ocean”:– Regulatory gaps may be more prevalent

for niche/untested markets and periphery providers

– Misconduct at a large organisation may have greater severity and investor-confidence implications

Knowledge Management

§ Capture, manage, share and deploy knowledge internally

§ Information systems to organise internal information and facilitate sharing

§ Policies to govern information sharing

§ Getting the balance right between enforcement activity and encouraging market participants to come forward with information (doctor vs. police role)

Offshore research § Understand best practices deployed by global financial market regulators

§ Identify risks that are more emerged or researched offshore

§ Desktop research§ Bi-lateral communication§ Participation in international

working groups§ Targeted studies

§ Observed practices in surveillance and enforcement efforts need to be calibrated to local market context and development level

The proposed establishment of a Strategic Intelligence function addresses this strategic priority

Suggested activities for a strategic market intelligence function


Market intelligence efforts should focus on monitoring emerging risks from a wide range of products and practices in current financial market environment

Emerging risks in current financial market environment and key dimensions for analysis

Extent of market imperfections§ Regulatory gaps § Information asymmetries§ Conflicts of interest§ Uneconomic remuneration/payout models

Severity of impact§ Invested amounts/coverage of practices§ Growth rates§ Increase in investor interest/activity

Focus of impact§ Use by sophisticated vs. unsophisticated investors§ Targeting of specific segments (e.g. retirees)

Suggested focus in evaluating emerging risks

§ Risks identified, analysed, and updated by strategic intelligence function on a regular basis

Emerging risks

SYD-NZF00111-003

Strategic priority 4:Deepening organisational capabilities

Section 7


Deepening organisational capabilities: Summary

Objectives

§ A regulator that understands and can talk in the same language as its industry

§ An organisation respected in the market for competence and professionalism of its staff

§ A desirable workplace for a broad range of talent

§ An organisation that develops its leaders

Activities

§ Attracting a broad range of talent, from private sector to specialists, e.g.– Promising junior graduates– Experienced senior private sector professionals

§ Creating incentives for the best talent to remain in the organisation, e.g.– Competitive remuneration– Attractive culture

§ Developing specific capabilities, leadership skills, and perspective of staff, e.g.– Formal training– Secondments overseas


Staff capabilities can be further developed in three specialised areas in particular

Specialist capability improvement needs

1. Investigation and enforcement

§ Specialist investigation capabilities, including forensic accounting and investigative work, in order to:– Increase proactivity against

expanded areas of responsibilities

– Respond to the complexity of novel financial products

– Achieve rapid progress on finance company cases

§ Ability to assess risk of misconduct, and effectively scrutinise issuer documents and financials on substance rather than form

§ Increase in-house legal skills, both in litigation management and embedded within functions

2. Analytics

§ Analytical, macroeconomic and econometric skills to provide tangible evidence supporting monitoring and risk assessment efforts

§ Corporate finance and financial modelling capabilities

§ Skills to effectively analyse market data and identify potential issues by asking the right questions

3. Communication

§ Journalistic skills to forge effective relationships with key media, and optimise media coverage of FMA’s activities

§ Public communication, and IT implementation, skills to broaden footprint on the Internet and social media


Additionally, we identify two key areas where commercial capabilities of staff base can be further developed

1. Deepening commercial empathy

§ Commercial understanding, and empathy with operational considerations and complexities for a diverse set of financial market participants

§ Commercial sensitivity and pragmatism in tone, beyond emphasising purely legal considerations

§ Avoiding legal/bureaucratic jargon in communication with the industry and stakeholders

2. Deepening market and product familiarity

§ Familiarity with key financial markets and products:– Ability to ask the right questions– Maintaining commercial credibility– Holding an effective two-way dialogue with the

industry and stakeholders

Talent implications§ Continuing to recruit senior private sector professionals

– Benefit: Maintaining commercial credibility at leadership level– Lever: Emphasising unique nature of FMA work compared to private sector– Challenge: Balancing conflicts of interest, avoiding regulatory capture, providing attractive remuneration through

independent pay scale§ Attracting temporary secondments from mid-level managers and experienced professionals, in finance, accounting, legal

and related fields– Benefit: Ensuring cross-fertilisation of practices– Lever: Emphasising career and further development opportunities within FMA and public sector– Challenge: Effective integration into the organisation, avoiding cultural discord between old and new staff

Commercial capability development opportunities


To respond to these capability gaps, FMA will need to develop a talent management strategy with specific initiatives in each stage of the talent life-cycle

Initiatives to develop talent§ Improved formal training:

– Skills training for younger graduates– Leadership development for management

§ Rotation of promising young recruits across functions to developas leaders

§ Secondments to foreign regulators to provide career perspectives and cross-fertilise best practices

Initiatives to attract talent§ Secondment programme for

experienced mid-level professionals from finance and legal fields

§ Graduate recruitment programme for targeted areas

§ Recruitment of successful private sector people in late career stages

§ Outsourcing of specialist skills (e.g. litigation/forensic accounting) on a temporary basis, where needed, e.g. clearing backlog of finance company cases

Initiatives to retain talent§ Independent pay scale§ Continuation of positive cultural

characteristics such as work/life balance emphasis

§ Integration of staff culture nationwide, between Wellington and Auckland

§ Increased empowerment of staff, especially mid-level managers

Talent management strategy

Talent life-cycle

Develop

Retain

Attr

act



In addition, FMA will need to undertake changes to its organisational model to sustain its talent management efforts over the longer term

§ Higher degree of delegated decision-making authority throughout the management, with corresponding responsibilities and accountabilities for managerial staff

§ Performance-based culture driven by increased managerial accountability, targeting tangible impact outcomes

§ Organisational restructuring to align to key functional priorities

§ Institutionalisation of key processes and regulatory know-how to preserve institutional memory on a sustainable basis

Organisational change considerations

SYD-NZF00111-003

Implementation plan

Section 8


Recap: Strategic priorities emerging from FMA’s stated goals and stakeholder priorities indicate specific action items

The following slides illustrate each action in detail and provide perspectives on timings and prioritisation

Strategic priorities Strategic actionsTactical actions

Deepening organisational

capabilities

§ Developing a strategy for talent attraction, development and retention

§ Identifying organisational requirements to improve capabilities

4 § Assessing areas where capability gaps are perceived and filling these gaps

Proactively monitoringthe market

environment

§ Building up market intelligence function

§ Adopting a strategy to identify and assess issues

3 § Defining the purpose of a market intelligence function

§ Defining a prioritised approach for monitoring broad market activity

Improving communications

channels

§ Developing a detailed strategy to engage with each stakeholder group

2 § Defining a comprehensive set of stakeholder groups that are impacted by FMA’s outcomes

§ Defining a set of engagement methods§ Communicating with the broader public to

provide transparency on FMA’s activities and contribute to investor education

Delivering effective enforcement

§ Defining a strategy to deploy the enforcement toolkit, including levels of proactivity and execution priorities

1 § Defining a comprehensive set of tools available for enforcement action


Prioritisation of initiativesStrategic Priority 1: Delivering effective enforcement

Initiatives Priority Prioritisation considerations

Estimated time requirements

1.1 Managing existing court cases against finance companies

§ Critical to maintain FMA profile and achieve resolution for the public

1 year

1.2 Triaging enforcement efforts towards backlog of finance company cases

§ Speedy resolution will improve FMA profile and investor confidence

6 months

1.3 Defining a comprehensive set of tools available for enforcement action

§ Important step prior to determining an enforcement strategy

§ Influenced by Securities Act outcome

2 months

1.4 Defining a long-term strategy to deploy enforcement tools, including levels of proactivity and execution priorities

§ Critical for long-term consistency and impact of enforcement actions

3 months

1.5 Finalising Financial Adviser Act implementation

§ Most implementation work already underway

6 months

1.6 Contributing to review of Securities Act § Not driven by FMA – contribution only but high long-term strategic importance

3 months

Highest priority Lowest priority


Prioritisation of initiativesStrategic Priority 2: Improving communications channels



2.1 Defining a comprehensive set of stakeholder groups and building key contacts/relationships

§ Key component of stakeholder engagement strategy

6 months

2.2 Developing an engagement strategy for each major stakeholder group

§ Critical to maintain a holistic focus on stakeholder management

3 months

2.3 Defining role of FMA more clearly § Useful communication tool 1 month

2.4 Defining level of transparency § Useful to determine optimal leveraging of transparency, though not a pain point

4 months

2.5 Drafting MoUs with key stakeholders § Some MoUs already in place 9-12 months

2.6 Deciding on FMA’s role in investor education

§ Role for FMA likely to be limited compared to other entities

6 months



Prioritisation of initiativesStrategic Priority 3: Proactively monitoring the market environment



3.1 Establishing a market intelligence function

§ Critical function to realise the strategic priority

2 months

3.2 Defining a prioritised approach for monitoring broad market activity

§ Important to maintain appropriate focus to identify emerging risks

6 months

3.3 Developing internal knowledge sharing systems

§ A important enabler for strategic intelligence but systems dependent and not critical

9-12 months

3.4 Agreeing systemic risk and broad market oversight role with RBNZ

§ Helpful to determine appropriate co-ordination and eliminate conflicts and duplication

4 months

3.5 Deciding on degree of information sharing

§ Likely application only following development of relevant systems

6 months



Prioritisation of initiativesStrategic Priority 4: Deepening organisational capabilities



4.1 Executing organisational restructuring § Critical effort to align organisation with operating model

2 months

4.2 Recruitment of additional staff and temporary resources to aid with backlog of finance company cases

§ Critical short-term activity to enable effective enforcement action

3 months

4.3 Developing a talent management strategy for talent attraction, development and retention

§ Important activity with longer-term focus on talent management

6-9 months

4.4 Deciding on new governance and delegations structure to increase responsibilities of managerial staff

§ Important activity to enable wider leadership development, engagement and empowerment within the organisation

3 months



This prioritisation of initiatives is informed by two key factors

§ Direct impact on FMA’s key objectives

§ Potential linkages with other initiatives

§ Level of public scrutiny

§ Direct monetary cost

§ Staff resource cost

§ Length of implementation

§ Implementation risks

Urgency

Ease of execution

1

2

“Aims to prioritise most important and beneficial efforts”

“Aims to prioritise demonstrable quick wins and maintain momentum”

Factor Considerations


Illustration: Prioritisation of initiatives based on urgency and ease of execution

Urgency vs. Ease of Execution matrix

Low Medium High HighestPriority

Managing existing court cases against fin. co.’s

Triaging backlog of finance company cases

Defining a set of tools for enforcement

Defining long-term enforcement strategy

Finalising Financial Adviser Act implementation

Contributing to review of Securities Act

Defining a set of stakeholder groups and building key contacts

Developing an engagement strategy for each stakeholderDefining level

of transparency

Establishing a market intelligence function

Defining approach for monitoring market activity

Agreeing systemic risk and broad market oversight role with RBNZ

Deciding on degree of information sharing

Executing organisational restructuring

Recruitment of staff and temp resources to aid backlog of fin. co. cases

Developingtalent mgmt. strategy

Deciding on new governance and delegations structure

Defining role of FMA more clearly

Drafting MoUs with key stakeholders

Deciding on FMA’s role in investor education

Urgency

Ease

of e

xecu

tion

Low

High

High

Developing internal knowledge sharing syst.


Report disclaimer

§ Oliver Wyman was commissioned by FMA to (i) assist FMA to understand the priorities of its stakeholders across the New Zealand financial services industry and investor community; (ii) define the key functional and capability gaps and priority areas for improvement; and (iii) outline a high-level implementation plan to act upon the key functional and capability gaps.

§ This report sets forth the information required by the terms of Oliver Wyman’s engagement by FMA and is prepared in the form expressly required thereby. This report is intended to be read and used as a whole and not in parts. Separation or alteration of any section or page from the main body of this report is expressly forbidden and invalidates this report.

§ Information furnished by others, including without limitation interviews and surveys conducted with various stakeholders, upon which portions of this report are based, is believed to be reliable but has not been verified. No warranty is given as to the accuracy or completeness of such information. Public information and industry and statistical data, including without limitationthe report of the Capital Markets Development Taskforce and the 2009 September Report on the Effectiveness of New Zealand’s Securities Commission, are from sources we deem to be reliable. However, we make no representation as to the accuracy or completeness of such information and have accepted the information without further verification.

§ The findings contained in this report may contain predictions based on current data and historical trends. Any such predictions are subject to inherent risks and uncertainties. In particular, actual results could be impacted by future events which cannot be predicted or controlled, including, without limitation, changes in business strategies, the development of future products and services, changes in market and industry conditions, the outcome of contingencies, changes in management, changes in law or regulations. Oliver Wyman accepts no responsibility for actual results or future events

§ For enquiries regarding this report please contact:Jacob HookPartnerOliver WymanSydney, AustraliaTel: +61 (0)2 8864 6569Email: [email protected]

SYD-NZF00111-003

Progress assessment

Appendix

SYD-NZF00111-003

Progress against Proposed Actions of Capital Markets Development Taskforce

Compiled by the Ministry of Economic Development November 2010

Appendix A


Retail investors – Promoting trustImprove governance of managed funds

Recommendation Response Proposed action Timetable Responsible ministers Progress update

1. Fund managers and supervisors should explicitly disclose the duties that they owe to individual investors and any restrictions on these, and should annually declare (e.g. in their statements to individual investors) that they have not breached their duties

Support the recommendation

Consider details of disclosure of duties as part of the Securities Act Review

Discussion document on potential changes completed April 2010

Potential changes to be implemented by October 2011

Minister of Commerce

The discussion document was released in June 2010 and submissions are being considered by officials. Legislation will be introduced in 2011


Retail investors – Promoting trustImprove governance of managed funds (cont’d)


2. Entry, exit and unit pricing rules that are fair to all investors should be established and disclosed to investors


Consider how best to achieve this in the Securities Act Review





3. Provide regulatory certainty for wrap accounts or other one-to-one products/services competing in the managed funds area


Consideration will be provided to this issue once resources permit

Report back by no later than December 2011


MED is still intending to consider the issue when resources become available. Resources have not yet become available, owing to other policy work on securities law


Retail investors – Promoting trustImprove governance of managed funds (cont’d)


4. Improve and standardise periodic statements to managed funds investors so that asset holdings and performance are clear and comparable


Consider as part of Securities Act Review




Cabinet agreed to fast-track the implementation of this recommendation with respect to KiwiSaver schemes. The Financial Markets (Regulators and KiwiSaver) Bill was introduced on 14 September and is expected to be passed in early 2011The disclosure requirements for other products are being considered by the securities law review


Retail investors – Promoting trustDisclosure – make it meaningful for investors


1. Replace the investment statement and prospectus with a new two-part disclosure document that aids understanding and comparability. The first part should be 1-2 pages long, and much more standardised than the investment statement in content and presentation


Intend to introduce new disclosure documents, with work underway in the Securities Act Review






Retail investors – Promoting trustDisclosure – make it meaningful for investors (cont’d)


2. Include a warning label on disclosure documents where products are particularly risky or complex to encourage investors to exercise caution and seek independent advice

Support Consider details of disclosure documents as part of Securities Act Review






Retail investors – Promoting trustDisclosure – make it meaningful for investors (cont’d)


3. Create a centralised website for disclosure documents that allows for easy comparison between products

Support in principle

Consider how this should be done as part of Securities Act Review




Cabinet has agreed to fast-track the implementation of this recommendation. The Financial Markets (Regulators and KiwiSaver) Bill was introduced on 14 September and is expected to be passed in 2011


Retail investors – Promoting trustFinancial advisers – strengthen regime


1. Restrict the use of the words “independent adviser” and impose a clear fiduciary duty on those that use this title

Further consideration required

Both issues are currently being considered by the Code Committee for Financial Advisers, and MED officials as part of their work on financial adviser disclosure regulations

Committed to report back on this issue in June 2010 once the Code of Professional Conduct has been completed


Completed. On 21 September 2010 the Code of Professional Conduct was approved. This includes a rule restricting use of the word “independent”

2. Regular monitoring the quality of financial advisers (e.g. through a “mystery shopper”programme)


Financial Advisers Act evaluation plan is being set up. Will consider this recommendation in the evaluation plan

Committed to back on this issue by 30 June 2010 once the evaluation plan is complete


Development of the evaluation plan has been delayed owing to amendments to the Financial Advisers Act


Retail investors – Promoting trustImprove product range for investors


1. Partial stock market listing of central and local government-owned companies

Partial stock market listing of local government-owned companies should be a matter for local government to decide. Government policy was not to sell any state-owned company during this term in Government

Partial stock market listing of local government-owned companies should be a matter for local government to decide. Government policy was not to sell any state-owned company during this term in Government

Minister of State Owned Enterprises

N/A


Retail investors – Promoting trustImprove product range for investors (cont’d)


2. Work to encourage agriculture co-operatives to access public capital markets for equity


Review in 2011 subsequent to outcome of co-operatives tax review and taking into account the status of Fonterra’s capital structure discussions

Will be considered as resources allow

Minister of Finance, Minister for Economic Development, Minister of Agriculture

On track. Fonterra is still finalising the detailed design of their capital restructuring proposal. Officials are working alongside Fonterra to develop options for a regulatory regime to accompany the new structure




3. Investigate whether there are prudential impediments to foreign-controlled financial services businesses undertaking partial listings of local subsidiaries


No action required Committed to report back to Government by April 2010

Minister of Finance

Minister of Finance briefed May, 2010. The RBNZ advised that there are no material NZ prudential regulatory impediments to financial institutions undertaking partial listings of their NZ subsidiaries




4. Increase retail debt issues from Debt Management Office (DMO) and government-owned companies


Investigate why there is a lack of participation in existing government debt products already available to retail investors. Increased debt issuance by government-owned companies should be a matter for the companies to decide

Committed to report back by December 2010

Minister of Finance

DMO provided the Minister of Finance with background information on the Government’s existing retail debt offerings. Further work to be done on investigating why there is a lack of participation in these debt products. Potential inflation-indexed bond will allow for retail participation




5. Government should support the development of the annuities market


Review the tax treatment, and then assess what, if any, further changes are required

Will consider after the tax treatment has been considered as part of the Government’s tax policy work programme

Minister of Finance Minister of Commerce

Review of the taxation of annuities will be done when resources allow

6. When the provision of KiwiSaver default schemes is next tendered, change from conservative schemes to schemes better tailored to long-run investment needs


Will revise the default KiwiSaver schemes as part of next tender

The next tender for KiwiSaver default schemes will take place in 2015


On track


Retail investors – Promoting trustFinancial literacy


1. Assign a formal coordination role in financial and investment literacy to a government agency, with appropriate resourcing

Support Minister Power will have oversight of Government’s work on financial literacy

Minister Power committed to having his first meeting with relevant agencies by April 2010


The Minister of Commerce met with officials from the Reserve Bank, Securities Commission, CFLRI, Ministry of Consumer Affairs and Ministry of Education in 2010

Joint agencies will report to the Minister of Commerce later in the year


Retail investors – Promoting trustFinancial literacy (cont’d)


2. Employ initiatives to help raise investment literacy amongst New Zealanders, including a campaign targeted at promoting key investment messages


Under further consideration, and will report back to government

Committed to set out next steps to help raise investment literacy by September 2010


The Minister of Commerce received a report on financial literacy on 1 September 2010

The Financial Markets (Regulators and KiwiSaver) Bill proposes that FMA will have a function to provide, or facilitate the provision of, education about financial markets and investing. FMA is expected to decide how best to perform this function




3. Include investment literacy concepts in the school curriculum and resolve the issues preventing approval of the Personal Financial Management unit standards

New Zealand’s schools are self-managing and are therefore able to design programmes for learning to meet their students’needs and aspirations. Schools are able to include investment literacy concepts where they consider this appropriate

Personal Financial Management Standards are now approved and available on the National Qualifications Framework

No further action required for this recommendation

Minister of Education

Complete




4. Develop improved data on household financial assets to allow for better informed policy-making around household saving and investment choices

There are a number of initiatives underway that will improve information on savings and wealth. The development of balance sheets as part of the system of national accounts is seen as a priority but is not currently funded

Will continue to progress development of priority statistics including:– An

experimental household income and outlays account

– Statistics on Institutional Sector Accounts

– Consultation on need for a second households savings survey

Already publishedJune 2010June 2010

Minister of Statistics

Issues with significant data source and methods issues are being progressed. The scope of what will be published and timeframes for the release of the accounts have been reviewed in consultation with, and on the advice of, key stakeholders. The first suite of Accounts will be published in mid-December 2011Consultation on a second household savings survey (wealth collection) was completed as planned. Development was due to start in the latter part of 2009/10 but was deferred due to fiscal and resource prioritisation. However, some scoping work progressed in 2010/11


MarketsImprove the “birth rate” of companies on to public markets


1. Allow NZX (as a registered exchange) to own and operate registered and exempt exchanges – so that NZX capability and expertise is available to help develop the pipeline of companies coming through to fully public markets



Discussion document on potential changes due by April 2010.





MarketsImprove the “birth rate” of companies on to public markets (cont’d)


2. Create an environment in which unregistered and exempt exchanges can develop their own rules with a lower regulatory burden than on NZX (e.g. without continuous disclosure), so that companies can attract capable directors and quality intermediary resources with the ability to help companies develop business plans and raise capital for growth



Discussion document on potential changes due by April 2010. Potential changes implemented by October 2011




MarketsIncrease investor involvement


1. As part of the Single Economic Market programme with Australia, work to have Australian funds treating New Zealand-listed equities as part of an Australasian mandate (as New Zealand funds typically do)


Investigate further and consider as part of the SEM agenda

Will report back by December 2010


On track


MarketsIncrease investor involvement (cont’d)


2. NZX, Treasury and MED to develop a proposal for an analyst research scheme to extend coverage to small (and particularly newly listed) firms


Develop proposal Will report back by August 2010

Minister of Finance Minister for Economic Development

Delayed. Officials and NZX are considering the results of a study that outlined the design of a scheme and provided some costings. Officials expect to provide advice in 2011


Public debt marketsA proactive approach from Debt Management Office (DMO)


1. Encourage DMO to expand the range of government debt securities on offer, including longer-term debt, inflation-indexed bonds and foreign currency debt. These should include publicly listed, retail issues


DMO will consult with market participants with a view to recommencing issuance of inflation-indexed bonds. Ongoing consideration of longer-tem debt and foreign currency debt as options for generating cost-effective funding as part of the Government’s debt programme

Market consultation in Feb 2010 with a commitment to recommencing issuance of inflation-indexed bonds by May 2010.

To report back on long-term debt and foreign currency debt by May 2010

Minister of Finance

The Government's 2010/11 debt programme, released with the 2010 Budget, noted that the reintroduction of inflation-indexed bonds are being actively considered. In September, the NZDMO appointed a syndication panel to assist with the potential issue of a 15-year inflation-indexed bond. Subject to favourable market conditions, the bond could be issued in November

In addition, a new nine-year maturity government bond was introduced in September, following the introduction of a new twelve-year bond in 2009. Both bonds are available to retail investors


Public debt marketsDeepen and broaden debt markets


1. Continue to co-ordinate the development of a local government bond bank until it is firmly established


Work is underway with local government to design and assess a single debt vehicle

Decision by local government scheduled for end March 2010

Minister of Finance

Officials are preparing advice on enabling legislation. The Government appropriated $5 MM capital in Budget 2010 to help “establish a single debt vehicle for local government borrowing”. This is expected to become a minority equity stake in the vehicle


Private marketsClarifying boundaries with public market


1. Review Securities Act and revise current Securities Act exemptions to provide a set of clearer, broader exemptions –registered investors; the existing exemption for “those who invest money as a principal business activity”; other professional investors with a clear, quantified set of criteria; investors who have obtained a recommendation from a conflict-free authorised financial adviser; a more clearly defined exemption for relatives and close business associates; wealthy investors; and small offers


Agree with the need to clarify the public/private distinctions. Consider details as part of the Securities Act Review

Discussion document on potential changes scheduled for April 2010. Potential changes to be implemented by October 2011




Private marketsClarifying boundaries with public market (cont’d)


2. Those advising investors who are outside the scope of the Securities Act to also be excluded from the obligations of the Financial Advisers Act


Work is underway to tailor obligations to recognise the special circumstances of wholesale advisers (but not all advisers to sophisticated investors) in disclosure obligations, in the Code of Professional Conduct, and in dispute resolution schemes. A more fundamental assessment of this issue should wait until the Securities Act Review is further progressed and the boundaries between public and private markets are clearer

The draft Code of Professional Conduct is due in March for feedback from the public. Regulations for disclosure obligations scheduled to be issued in early April 2010. Exemptions from dispute resolution schemes are under consideration. Committed to report back on the more fundamental assessment in February 2011


Completed. Financial advisers who provide advice to wholesale clients were largely carved out under the Financial Advisers Amendment Act 2010


Private marketsClarifying boundaries with public market (cont’d)


3. Implement changes to the Takeovers Act around thresholds for its application as recommended by the Takeovers Panel


Will seek to progress the amendment in the Regulatory Reform Bill

Intended to introduce bill by August 2010


These proposals are contained in the Regulatory Reform Bill. As of November 2010 the Bill was being drafted by Parliamentary Counsel Office. The Bill was proposed to be introduced in late November 2010


Private marketsImprove commercialisation of research and government funding of firms


1. Consolidate commercialisation activities of Crown Research Institutes (CRIs) and universities to create a critical mass of specialist commercialisation expertise


Being considered by CRI Taskforce

CRI Taskforce scheduled to report early in 2010

Minister of Finance Minister of Research, Science and Technology

An appropriation was made in Budget 2010 for establishing a few commercialisation centres to take advantage of economies of scale. A briefing paper is now with joint Ministers including MoF to obtain agreement on the operating parameters for these centres. A Request for Proposals is due to be issued this month. Centres are expected to be established in April 2011


Private marketsImprove commercialisation of research and government funding of firms (cont’d)


2. Explore the scope for replacing some business assistance grants with investments of equity, convertible debt, and other more commercial instruments delivered by a commercially-focused organisation (such as New Zealand Venture Investment Funds - NZVIF)


Consider as part of ongoing discussions on access to capital and value for money issues

Report due back by April 2010

Minister for Economic Development

Delayed. These issues are now being considered in the context of improving access to capital under the Economic Growth Agenda’s Science, Innovation and Trade driver


Private marketsImprove commercialisation of research and government funding of firms (cont’d)


3. Continue to support the venture capital market through the commercially focused NZVIF model of government and private sector co-investment


Support is contingent on outcome of evaluation of VIF and persuasive business case for more capital

Due to be addressed as part of Budget 2010


Completed. Cabinet has approved a capital underwrite of $40 MM for the Venture Investment Fund

4. Encourage NZVIF to look for innovative ways to attract further private sector investment, especially institutional funding


MED to engage with NZVIF and INZ on how to attract offshore VC funding

Report back by end of June 2010


NZVIF is consulting key capital market participants and investors on the design of new investment products that will attract new capital. NZVIF will report back to the Government early in 2011 on investment products and mandate changes that will assist in attracting international/ institutional investors


Derivatives markets


1. Improve regulatory clarity for derivatives products


Consider details as part of Securities Act Review




2. The NZX and Reserve Bank work together to assess options to develop a joint clearing and settlement infrastructure for New Zealand


NZX and the Reserve Bank currently involved in discussions on the provision of clearance and settlement services

To be confirmed following the completion of discussions

Minister of Finance

Completed. The Reserve Bank and NZX have agreed to maintain separate competing systems but with full interoperability between them. The agreement is formalised in a Memorandum of Understanding which sets out joint objectives for the Bank and NZX with regard to the clearing and settlements infrastructure


Derivatives markets (cont’d)


3. Investigate opportunities for government issuance of new and novel securities that take advantage of its unique role in the economy, e.g. liquid GDP-linked bond and long-term currency hedges


Investigate whether there is likely to be any significant demand for these securities and any cost-effective opportunities for DMO to supply them

Due to report back by May 2010

Minister of Finance

Completed. No opportunities have been identified, and the focus has been on progressing bond issues

4. Work with NZX to facilitate the development of traded soft-commodity derivative products (e.g. dairy futures)


Work is underway Due to report back by September 2010

Minister of Finance Minister of Economic Development Minister of Agriculture

Completed. NZX launched a whole milk powder derivatives market on 8 October 2010. The process has been supported by the authorisation of NZX’s market, the designation of NZX’s clearing and settlement system, and regulatory change to insider trading rules




5. Actively develop energy derivatives market to facilitate the development of different business models in the energy sector


Covered in the Ministerial Review of the Electricity Market

By 1 June 2010 an open, transparent hedge market to be established with a 1 June 2011 target of 3000 GWh of unmatched open interest contracts. The new Electricity Authority will have the ability to mandate the detail of the hedge market if the industry does not deliver on these objectives

Minister of Energy and Resources

Completed. The Minister of Energy and Resources wrote to the five largest generator-retailers in February requesting that they implement the Government's objectives for a liquid exchange-based electricity derivatives market. In June 2010, the companies (via a jointly owned company – Energy Hedge Ltd) signed an MOU with ASX to meet the Government’s objectives. ASX launched trading of NZ electricity futures and options in July 2009, and in June 2010 established a users’ group to provide input into ongoing product and market development




6. Investigate how to ensure that New Zealand can develop financial products based on the information advantages we have (e.g. around agricultural export prices). Statistics New Zealand should work with the market to help develop the sort of information required


There are varying ways in which Statistics New Zealand can assist markets, Statistics New Zealand will engage with industry and other stakeholders to understand more specifically what is required and what the nature of their contribution might be. Statistics New Zealand will participate in the dialogue between industry and government and proposes that any forum discussion include information and other infrastructure as one stream

To report back to the agency coordinating Taskforce recommend-ations on the outcomes of industry discussions by 30 June 2010

Minister of Statistics

This recommendation was originally underpinned by a requirement to identify a reference price for the proposed NZ dairy futures market. This issue has been resolved with Fonterra's online auction price being chosen. INFINZ have put in place protocols for further discussions with industry and have worked with MED to organise future forums as necessary. Statistics NZ will provide input to these forums as required


Regulatory agenciesClarify objectives of regulation


1. Set of objectives to focus on healthy vibrant capital markets, which includes protecting and enhancing our reputation for transparent and ethical behaviour


Will progress as part of Securities Act Review.

Discussion document on potential changes due by April 2010. Potential changes to be implemented by October 2011




Regulatory agenciesDesign of regulators


1. We believe that any ongoing drive for greater international capital market integration needs to be measured against clear long-term benefits for New Zealand’s capital markets, such as a better allocation of capital, improved risk management, and increased competition


Will consider further as part of Securities Act Review





Regulatory agenciesDesign of regulators (cont’d)


2. Review and clarify roles and scope of regulatory agencies to reduce duplication and conflicts of interest, build capability and scale around centres of excellence, and ensure that the focus of regulatory agencies is on facilitating capital market activity

Support Consider the regulatory landscape as part of Securities Act Review



Cabinet agreed to fast-track the implementation of this recommendation. The Financial Markets (Regulators and KiwiSaver) Bill was introduced on 14 September and is expected to be passed in early 2011


Regulatory agenciesTarget enforcement


1. Greater emphasis on monitoring and enforcement capability and activity


Securities Act review is considering how to shift the balance of Commission activities in this direction



Cabinet agreed to fast-track the implementation of this recommendation. The Financial Markets (Regulators and KiwiSaver) Bill was introduced on 14 September and is expected to be passed in early 2011


Regulatory agenciesTarget enforcement (cont’d)


2. Give regulators the power to have an ongoing monitoring role of all public securities – whether listed or not – and to deem products to be securities where products appear to be securities


Consider this change as part of Securities Act Review



Cabinet agreed to fast-track the implementation of this recommendation. The Financial Markets (Regulators and KiwiSaver) Bill was introduced on 14 September and is expected to be passed in early 2011. The other part of this recommendation, the ongoing monitoring role for all securities, will be considered by the securities law review


Regulatory agenciesTarget enforcement (cont’d)


3. Give the regulator the power to seek civil remedies on behalf of investors and to initiate and coordinate class actions

Support Consider how best to implement this change as part of Securities Act Review





Tax


1. Broadly endorse the current company tax system including imputation as being a relatively neutral and efficient way of allocating capital into debt and equity investments

Nil Nil Nil Minister of Finance Minister of Revenue

N/A


Tax (cont’d)


2. Endorse the New Zealand Government’s position in seeking a mutual recognition of imputation and franking credits agreement with Australia


N/A

3. Not endorse unilateral recognition of Australian company tax credits (nor of any other country’s) as this would subsidise offshore investment when it is not in New Zealand’s economic interest


N/A


Tax (cont’d)


4. Not endorse streaming of imputation credits as it would undermine basic goals of the tax system (viz., source taxation of non-residents and foreign-sourced income taxation of residents)


Imputation streaming issues were canvassed in a discussion document released in 2008. Officials are to progress work around reporting on submissions and possible recommendations for legislative change as part of the current tax work programme. Any legislative solution will need to be considered in the light of progress on mutual recognition with Australian


Tax (cont’d)


5. Reduce any tax biases between different investments –including PIEs. Potential solutions identified are: a risk-free return method tax (in the case of housing or buildings), denial of depreciation deductions for buildings, specific capital gains taxes (on any under-taxed asset) and a general capital gains tax



Due to report back in the first half of 2010

Minister of Finance Minister of Revenue

Completed. Removal of depreciation for most buildings announced in Budget 2010. Effective from the 2011/12 income year


Tax (cont’d)


6. Clarification of the tax treatment for profit distribution plans (PDPs) should be enacted as soon as possible to remove uncertainty. We consider that PDPs and other share reinvestment plans should have the same tax treatment as they are largely substitutable



Due to report to Ministers in 2010


On track. Report likely to be in late 2010, for possible legislation in 2011


Tax (cont’d)


7. Review the thin capitalisation safe harbour for non-resident controlled companies with a view to reducing the safe harbour threshold from 75% to 60%. The 110% of worldwide debt-to-assets ratio alternative test should remain to ensure that legitimate debt financing is not disturbed



Due to report to Ministers in first half of 2010


Completed. Reduction of inbound thin capitalisation safe harbour to 60% announced in Budget 2010. Effective from the 2011/12 income year


Tax (cont’d)


8. Endorse the government’s proposal that the approved issuer levy of 2% be reduced to nil for some public issues of debt by New Zealand residents. This should encourage the development of a domestic corporate debt market and improve the efficiency of attracting debt investment from non-residents


Consider submissions on proposal. Possible inclusion of proposal in a tax bill in second half of 2010

Due to report back in the second half of 2010


On track. Legislation to implement the recommendation was introduced in October 2010


Tax (cont’d)


9. Inland Revenue should provide guidance to reduce uncertainty in how non-resident partners of New Zealand limited partnerships are taxed on the partnership’s offshore income in certain circumstances



Due to report back in the second half of 2010

Minister of Revenue

On track


Tax (cont’d)


10. Consider options that would tax annuities in a similar manner to other substitutable investments to remove a tax distortion that may discourage the development of a domestic annuities market


Consider as part of Government’s tax policy work programme when resources allow

As resources allow


Not currently on the tax work programme. This review will be considered when resources allow

11. Reduce the disparity between tax treatment of equity capital raising costs and debt capital raising costs by allowing the cost of raising equity capital to be deducted over the lesser of the life of the equity or 20 years



Due to report back in 2010


On the tax policy work programme and will be considered as resources allow. Report back may be in first half of 2011 rather than in 2010


General


1. Better coordination to capital market policy development through the designation of a Minister for Capital Markets, or through a group of Ministers (supported by joined up advice from officials) that meets to actively consider capital market policy issues as they arise


Appoint Minister Power as the lead and coordinator of the group of Ministers (English, Brownlee and Dunne)

Ministerial Group has been established

Minister of Finance, Minister of Economic Development, Minister of Commerce, Minister of Revenue

Complete


General


2. Work with the Institute of Finance Professionals (INFINZ) to organise a forum for continuing the dialogue between industry and government


Details will be considered over next few months

Due to report back in April 2010


INFINZ has put in place protocols to set up discussions with broader industry, and is working with MED to organise forums as required

3. Provide greater clarity and certainty around the Overseas Investment Act regime to protect property rights.


A review of the Overseas Investment Act is already underway

Cabinet decisions due to be sought by the end of February 2010

Minister of Finance

The review of the Act has been completed. The changes are expected to come into force in December 2010


General


4. Allowing employers in the sector to more easily obtain work visas for offshore staff they wish to hire


There is a policy that enables employers to seek accreditation with the Department of Labour and that supports them to more easily obtain work visas/permit for offshore staff they wish to hire. The Department will review this policy to identify if any enhancements can be made

Review complete by July 2010

Minister of Immigration

The Department of Labour is currently working with employers in the sector to review how immigration service delivery mechanisms can best support employers in the financial services sector. This operational review is expected to be completed in November 2010


General


5. Pursue opportunities for New Zealand to develop as an exporter of high-value middle and back office services for funds management companies


Business case under development

Advise on implementation and government role in Asia Pacific funds domicile by 31 May 2010


The International Funds Services Development Group (IFSDG) delayed its report to Ministers to include more extensive domestic and international consultation and to allow time for the proposal of the Australian government to support the funds management industry to be announced. The IFSDG submitted its final report to Ministers in September. The report will be publicly released after Ministers have had time to consider its recommendations. The next steps in this initiative will be developed following confirmation of how the Government wishes to respond to the IFSDG’s recommendations

SYD-NZF00111-003

Proposed actions against recommendations of Report on the Effectiveness of NZ Securities Commission

Compiled by the Ministry of Economic Development May 2011

Appendix B


Prada-Walter recommendations and suggestions

Recommendations Action§ That the review of New Zealand’s securities law

be aimed at moving legislation to a higher level, principles-based model which sets out clearly and succinctly the key objectives, principles and coverage of market regulation

§ The new securities law will have a clear purpose section, and its scope will be clarified by redefining both the products covered by the law, and which offers of those products require compliance with regulatory requirements

§ That in framing this new legislation careful attention be paid to New Zealand’s close economic ties with Australia and the importance of maintaining and strengthening regulatory alignment within the trans-Tasman relationship

§ That the review of New Zealand’s securities law give the Securities Commission more extensive powers, including: the power to issue rulings (binding in law but subject to appeal by the Courts); stronger investigative and enforcement powers throughout the life cycle of a security; the ability to supervise trustees, asset managers and auditors; and a closer monitoring role over directors’ activities

§ The review of securities law, Financial Markets (Regulators and KiwiSaver) Bill, Securities Trustees and Statutory Supervisors Bill, and Auditor Regulation and External Reporting Bill will give FMA a range of new powers not currently held by the Securities Commission. These include the ability to exercise an investor’s civil right of action (including enforcement of directors’ duties) and licensing and supervision of trustees, fund managers and auditors. It will also have enhanced investigative and enforcement powers such as the ability to obtain search warrants, freeze assets in a wider range of circumstances, the ability to undertake real-time surveillance of market activity on registered exchanges. FMA will not have the power to issue “binding rulings”, but it will have enhanced powers to create certainty in the market, for example by designating novel financial products as falling within a particular category of financial products for regulatory purposes. It also has an express function to provide guidance to the market.


Prada-Walter recommendations and suggestions (cont’d)

Recommendations Action§ That, as its powers expand, the Commission

establish mechanisms to ensure appropriate separation between its supervision and investigation/enforcement roles

§ This has been considered by the FMA Establishment Board

§ That the Commission be given statutory responsibility for monitoring, and advising government on, the overall effectiveness of the regulatory system as it pertains to market conduct and the state of New Zealand’s capital market. This “future watch” role will require the establishment of a small market intelligence unit working to the Commission

§ FMA’s functions include “to keep under review the law and practices relating to financial markets, financial markets participants, and other persons engaged in conduct relating to those markets” and “to monitor, and conduct inquiries and investigations into any matter relating to, financial markets orthe activities of financial markets participants or of other persons engaged in conduct relating to those markets”. FMA will have a dedicated market intelligence unit

§ That the roles of the various conduct regulatory bodies be reviewed with a view to consolidating functions. This covers supervision, investigation and enforcement. Where consolidation and streamlining is not possible, roles and responsibilities should be clarified and co-ordination strengthened

§ FMA will be a new, consolidated market conduct regulator. It will perform functions currently fragmented across the Securities Commission, and parts of the Ministry of Economic Development

§ That consideration be given to ways of speeding up the judicial process as it applies to criminal actions in the securities market, including the possibility of establishing a separate Court to deal specifically with these matters



Recommendations Action§ That the governance and management functions

of the Commission be separated by the re-designation of the Chair position as non-executive and the appointment of a Chief Executive Officer with day-to-day responsibility for management of the agency

§ FMA will have a non-executive chair and board, with a separate full-time chief executive

§ That an inter-agency taskforce (involving inter alia the Ministry of Economic Development, the Treasury and the Securities Commission) be established with some urgency to assess and report on the Commission’s funding and staffing requirements for the coming two or three years

§ The Commission took on a large number of new staff to deal with the processing of financial adviser licensing applications.

§ FMA’s budget and staffing will be substantially larger than that of its constituent agencies including the Commission

§ That priority be given to the establishment of an Auckland office of the Securities Commission with a broader representation role as well as functional responsibility for the implementation of the Financial Advisers Act

§ The Securities Commission established a presence in the multi-agency Auckland Policy Office



Suggestions Action§ That the Commission consider how it can play a

more proactive role in keeping the media, the markets and the public informed about investigations and other actions taken against market abuse, taking into account the need to balance regulatory and market outcomes against the principles of natural justice and due process

§ This approach is reflected in the Commission’s 2009/10 Communications Plan. The Commission has begun publishing a page on its web site that sets out the status of all 51 finance company investigations and its process

§ That the Commission take a more proactive approach in deeming whether particular offers are within its remit and be prepared to test the boundaries of legislation in cases of doubt

§ The Commission has recently used corrective order powers and sought injunctions to test “general dealing misconduct”provisions of Securities Markets Act – still before Court

§ That the Securities Commission and NZX continue their efforts to develop a more constructive and positive working relationship under the co-regulatory regime

§ NZX has indicated that its relationship with the Securities Commission is much improved. In particular, a new procedure and approach developed for the Commission’s oversight review of NZX is resulting in a smoother and more thorough review. Better communication has also been established on the status of cases referred to the Securities Commission by NZX

§ That the Commission work towards securing real time access to full trading data

§ Under the Securities Markets Amendment Bill (No 2), a registered exchange must now, if requested by FMA, give to FMA the information that is necessary to enable FMA to carry out real-time surveillance of the operation of the exchange’s registered markets



Suggestions Action§ That consideration be given to filling the current

vacant position on the Commission and when selecting new members particular emphasis be placed on recent or current commercial and technical securities market experience in such areas as capital raising and the issuing of securities

§ The new FMA Board has recently been announced. Selection was made with due consideration to meet the spectrum of governance skills required of a financial and securities markets’ regulator

§ That, if the recommendation to give the Commission a formal monitoring and “future watch” role over the securities markets is accepted, consideration be given to the establishment of a small market intelligence unit to support the Commission and to cross membership between the Commission and Reserve Bank Board

§ FMA will have a dedicated market intelligence unit. The FMA Board will include Arthur Grimes, the current chair of the Reserve Bank board, as an associate member

§ That the Commission consider appointing a suitably qualified independent person to its Audit and Risk Review Committee

§ That consideration be given to changing the Commission’s designation to emphasise the importance of its role in protecting investors and to mark the changes envisaged in its role and mandate.

§ The name “Financial Markets Authority” was one of the suggestions made by the Prada-Walter report



Suggestions Action§ That a dedicated working group be established

to work with the relevant Division on planning and preparations for the structural and other changes facing the Commission in the next 18 months to 2 years. This could include consideration of how the current financial management system might best be adapted to the Commission’s new role and responsibilities

§ An FMA Establishment Board was set up a year in advance of FMA’s creation. This has nine members, including three current Commission members

§ A Transition Committee was established to implement the structural and other changes required in the establishment/ disestablishment process. This comprises representatives from the Commission’s senior staff, the MED transition team and MED BSB

§ That the Commission be given the power of pre-vetting offer documents in order to assess whether risks are appropriately disclosed. We note that this power would need to be exercised carefully and that any findings would need to be communicated in such a way as to avoid moral hazard. The staff concerned would need to have commercial experience and knowledge to discharge this function, either through bringing in staff with recent securities market experience and/or arranging training attachments for existing staff in key sectors of the securities market

§ The Securities Amendment Bill (No 3) (2010) replaces the current pre-vetting system with an Australia-like system of selectively examining offering documents after they have been registered. (However, an optional pre-vetting service will be operated temporarily on establishment of FMA.) The examination of offering documents will shift from MED to FMA

§ That the Commission’s operating procedures and instructions be brought together in a consolidated manual



Suggestions Action§ That the Commission’s communications section

be equipped to take responsibility, under the relevant Division, for implementing the Commission’s communications strategy and monitoring progress in the strengthening of the Commission’s relationships with business, investors, the media and other important stakeholders

§ A Communications Manager has been appointed and more emphasis has been placed on a pro-active communications strategy

§ That priority be given to putting the Commission’s relationships with the news media on a better footing and to making more use of press briefings, if necessary on- and off-the-record basis, on matters before the Commission which are of concern to investors when this would serve the public interest

§ The Commission has made efforts to proactively engage with business and other media to raise awareness of work and issues of concern to investors

§ That, where an activity is judged to be inappropriate but is beyond the Commission’s powers to act, press releases go beyond matter of fact interpretation of the law to state an opinion. It is also important that press releases should be worded in such a way as to have the desired impact on target audiences

§ Messages sharpened in press releases, such as warnings on unsolicited offers



Suggestions Action

§ That all staff be reminded of the importance of maintaining a strong client focus and observing a high standard of communication with the business world and other stakeholders, with senior managers to be responsible for enforcing this requirement. This would include responding as helpfully as possible to requests for guidance on the interpretation of securities law, timely acknowledgement of complaints or requests, keeping an eye on the tone of correspondence, and keeping people regularly informed of progress

§ That a programme of public speaking and attendance at relevant meetings by Commission members and senior staff members be developed to support the outreach work being done by the Chair. This would both help make the Commission and its work better known to investors, businesses and the media, and give Commission members and senior staff opportunities to listen to the market

§ The Commission has increased market engagement work, including roadshows with relevant industry bodies by financial advisers and AML teams

§ That the section in the earlier Securities Commission annual reports describing the securities market, including recent trends and developments, be reinstated

§ Annual Report 2010 included an overview of New Zealand’s securities markets



Suggestions Action§ That formal responsibility for coordinating

financial literacy education be vested in one agency, with the Securities Commission continuing to have a major input in order to ensure that full use is made of its actions and activities to support public education goals. A close relationship should be encouraged with other privately funded groups involved in financial literacy education

§ The CFLRI is the secretariat to NZ’s National Strategy for Financial Literacy, which has a five-year action plan underway. As a key stakeholder, the Securities Commission is one of the agencies/groups involved

§ That the Commission be given a greater measure of independence in making the case for legislative or regulatory improvements and, once changes are in prospect, be responsible for formulating and making public a defined law reform process that includes appropriate consultation with market participants

§ The Securities Commission continues to advise MED Investment Law policy team on legislative and regulatory improvements. MED will continue to lead in this area

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