Articles on investing

April 2009

Regulating to protect investors and support business

The run of finance company failures and the international financial crisis have highlighted the need for regulatory changes to better protect investors and underpin economic growth. A number of regulatory improvements have already been made and more are in the pipeline.

These reforms aim to give investors confidence to invest in the New Zealand market so they will be able to take advantage of the market upswing. What they won't do, however, is remove risk, which is inherent in investing.

Reforms in response to the finance company collapses are aimed at increasing protection for investors, while the response to the international financial crisis has been focused on ensuring New Zealand companies continue to have ready access to funding.

Even before the finance company sector started to come unstuck, the Government and the Commission had been working to address the regulatory gaps.

Last year significant laws were passed to increase regulation of finance companies, trustees and financial advisors.

The Reserve Bank was made the 'prudential regulator' of finance companies and other non-bank deposit takers. It will be able to set and enforce minimum financial and governance requirements on finance companies. The bank will also make them provide important information, such as credit ratings from independent ratings agencies.

The second big change is to make financial advisers accountable for the quality of the advice they give to clients. Advisers will also have to meet standards for competence, professional conduct and disclosure, bringing New Zealand into line with international standards for the regulation of financial advisers. These changes are expected to be in place by 2010.

Financial service providers will also be required to belong to independent dispute resolution services for consumers and to be on a national register.

More reforms are being considered. The Government is currently reviewing the role of trustees who are appointed to look after investors' interests. It is considering fast-tracking changes that would increase the supervision of trustees by the Securities Commission. This work is part of a broader review of the Securities Act by the Ministry of Economic Development.

The international financial crisis affected access to credit for many New Zealand companies as the flow of funds from banks dried up or became more expensive. This created a 'credit crunch' that compelled some companies to seek alternative sources of funding, such as share and bond issues.

The Government's deposit guarantee scheme was one response to the 'crunch' and aims to give confidence to New Zealand investors.

The Commission is also working with the Government and the Capital Market Development Taskforce on ways to make capital raising easier for companies, and to reduce associated costs.

A Bill is currently before Parliament which aims to remove unnecessary impediments to capital rising, while ensuring prospective investors have access to the information they need. It would allow businesses listed on the New Zealand Exchange to use a simplified disclosure prospectus when offering securities to the public, reducing the duplication of information.

The Commission has granted exemptions to allow greater participation by retail shareholders in share purchase plans.

Other proposals being considered include streamlining listing rules and rules relating to raising additional money from existing investors.

These regulatory changes are an important step forward. But they are not the only changes the Commission would like to see in response to the events of the last two years.

Improvements in corporate and boardroom behaviour are also needed to support investor confidence in our securities markets. In particular, investors want to see high quality reporting and strong corporate governance.

Changes in investor behaviour are also needed. In particular, investors need to learn more about investing and to inquire in detail about risks and returns.

These improved behaviours, allied with reforms already in place, and underway, will help strike a balance between protecting investors and encouraging innovation and growth in our economy. To benefit from the recovery to come New Zealanders need to continue to invest in the New Zealand capital markets.

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