Ministerial Committee of Inquiry into the sharemarket


	Advanced Search

Print this page.

13 April, 1989

News release

Ministerial Committee of Inquiry into the sharemarket

Statement by the Chairman of the Securities Commission

The report of the Ministerial Committee of Inquiry into the Sharemarket (Sir Spencer Russell, Chairman, and Messrs Ian F. Farrant of Dunedin, Martin I. Harriman of Auckland, and Frank S. Pearson and Frank Riley of Wellington) provides, independently from the Securities Commission, unimpeachable confirmation of policies that have motivated the Commission since it was established.

I would like to mention the features of the report that I regard as important.

First, there are findings of fact which can, I think, fairly be summed up in the following proposition:-(Chapters 3 and 4)

The sharemarket has failed in its fundamental role of providing, on terms agreeable to investors and fund raisers, the risk capital that productive enterprises need.

Please reflect on the enormity of that proposition. It affects the employment and welfare of all New Zealanders. One can, as the Committee does, indicate causes. I wish to emphasise the crucial proposition. We have a grave case of what the economists call "market failure". (The Accountant's Journal, November, 1985 30-37). It is no comfort to me to say that I predicted this some years ago. I said that, left to its own devices, the free market would destroy itself.

We still have a market of sorts, but those who enter want high want high returns to compensate for the risks of entry. Shares in a farming company issued at 50 cents can now be bought for 20 cents. Shares in New Zealand's premier bank, issued at 1.75 cents, can be bought for 1.09 cents. Shares in an insurance conglomerate that carried our flag around the world have fallen from 2.12 cents to 45 cents.

The fact is plain, the problem is to choose a remedy. This is, I think, the most interesting part of the Committee's report. On analysis, I think the Committee's proposals fall into three groups.

First, there are proposals to improve the operational efficiency of the sharemarket (page 22)

The Government recognised the need for this some time ago by abolishing stamp duty on share transfers and expressing to the New Zealand Stock Exchange its willingness to consider proposals to reform the Securities Transfer Act 1977. The Russell Committee rightly emphasises the need to take full advantage of electronic technology. This could reduce transaction costs and increase the certainty that buyers will receive their purchases and sellers will receive their money. The Stock Exchange is well aware of the possibilities, but the need for caution is indicated by the money wasted on computer technology that proves inappropriate for the business. Nevertheless, I agree with the Committee that deliberate speed should be adopted in bringing to the market the full benefit of modern technology.

From my point of view, these technical niceties seem to be remote from the problem. Efficient mechanisms are futile if people do not wish to use them.

So, I turn to the second set of measures which the Committee describes as designed to give investors "equality of action opportunity"(page 13)

The Committee notes (I believe with approval) the measures the Government has taken, on the advice of the Securities Commission, about nominee disclosures and prevention of insider trading, as well as the pending reforms of the Takeover Code, financial reporting and company law. Here, the Committee seems to me to move closer to the substance of the problem. All of it is directed to ensure that legitimate expectations of investors will not be defeated by illegitimate means. But the Committee emphases, again I think rightly, that it is not enough to adopt better rules. The paramount need is to see that the rules are observed (page 47).

So the Committee has indicted a third set of measures. They relate to the methods of obtaining observance of the rules.

Fundamental to the Committee's recommendations in this respect is the conclusion that:-

"unfetted reliance on market forces in isolation will not generate the required improvement in the overall performance of the market." (page 25)

The Committee concludes with recommendations for the creation of a self-regulatory structure within a statutory framework (page 29).

The Committee's policy is similar to, but not identical with, the scheme established in England under the Financial Services Act 1986. The Committee notes (again, I believe, with approval) the measures the Government has already taken on the recommendations of the Securities Commission to apply that policy to the futures markets and the marketing of life insurance. Similar steps had previously been taken under the Securities Act to apply that policy to financial advertising through the Committee of Advertising Practice, and to the important business of the equine bloodstock industry, under codes agreed with the Securities Commission. Accordingly, I see the Committee's major recommendations as calling for the extension of that policy to the sharemarket, indeed to all securities markets (page 30).

The Committee examines ways and means. It proposes:

"One statutory body responsible for the oversight of all laws and rules which have relevance to the New Zealand public securities markets".(page 32)

This body should be developed, the Committee recommends, by re-constituting the Securities Commission as a Supervisory Agency with jurisdiction over self-regulatory organisations of market participants (page 34). On the important question of funding, the Committee recommends a mixture of Government and participant funding on the "user pays" principle (page 41).

The Committee concludes with recommendations for implementation. It proposes the formation of an Establishment Unit to undertake further necessary investigative work and manage the transition process (page 60).

To sum up, the Russell Committee has confirmed some principles for a policy, with which I thoroughly agree, and has indicated some lines of approach to the application of them.

But now, everyone interested must pause to reflect upon the Committee's warning against "the risk that self-regulatory agencies may be captured by entrenched interest groups within securities markets". That risk must be eliminated. I think that will be the major problem with the Russell Committee's recommendations (page 26).

Return to archive index