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2005 Annual Report

From the Chairman

Janet Diplock AO The Commission is charged with promoting the efficiency and integrity of New Zealand's securities markets. This is a significant responsibility with implications for investors, issuers, and the securities markets generally.

The annual report offers an opportunity to reflect on why the Commission's work is important, and to present its achievements over the past year.

During the year we worked to increase market integrity and investor confidence by:

educating investors so that they can make better investment decisions;
using our enforcement powers to act against unacceptable and illegal market activity; and
taking a leadership role in the International Organisation of Securities Commissions which is working to create well-regulated global securities markets and combat cross-border fraud.

Investor education is important because New Zealanders need to be able to make wise investment decisions at all stages of their lives. It is also important to empower people so that they can participate fully in the capital markets to the benefit of the markets and investors. We aim to address both short term and long term educational needs in areas where the Commission has expertise.

In the short term we made people aware of current scams which devastate individuals and have a detrimental effect on the integrity of our markets. We undertook a public education campaign, Protect yourself from fraud, in Tauranga and Western Bay of Plenty in late 2004. This work was carried out jointly with the Serious Fraud Office. A survey after the campaign showed people had a greatly increased awareness of fraud and good recall of how to recognise and avoid particular investment scams. In June 2005 we targeted small businesses with a campaign to raise awareness of international fraudsters who telephone New Zealanders with bogus share deals. These persistent conmen have defrauded many people with the consequent loss of millions of dollars from the New Zealand economy.

In the longer term young people need to learn investment skills at school so that they can participate in the capital markets throughout life. To this end we continued our financial support of Enterprise New Zealand Trust's financial literacy education in schools, sponsoring the investment modules of their programmes. We are delighted with the recent decision of the New Zealand Qualifications Authority to develop unit standards relating to financial literacy, which will include standards for investment education. This will make these courses more attractive to schools, students and their parents.

Our work in enforcement is important because it helps generate confidence in our securities markets.

New Zealand's securities markets need to be seen to have a world-class regulatory system so that investors, both international and domestic, are attracted to them. Such a regulatory framework can only be achieved if there is fair and appropriate enforcement of securities law.

In October the Commission filed proceedings in the High Court against six defendants relating to share trading in Tranz Rail Holdings Limited. These proceedings seek compensation which can ultimately be distributed to shareholders who may have been disadvantaged. The proceedings also seek pecuniary penalties. Two defendants have subsequently settled the case with the Commission. We also filed insider trading proceedings relating to share trading in Provenco Group Limited in the High Court in December 2004. Provenco was known as Advantage Group Limited until March 2003.

These actions were made possible by the Commission's increased powers and the determination and hard work of Commission Members and staff. The filing of these proceedings, together with our increased activity in other aspects of securities markets supervision and surveillance, are important steps in the ongoing development of the Commission's enforcement capacity. The enhancement of our enforcement capability and bolstering of the enforcement team contributed significantly to the Commission's ability to bring these proceedings.

Margarite Papple and Tina West were convicted in Rotorua for the Lakeland Wealth and Wespap fraud where they collected some $14.6 million from the public. They were each given sentences of five years, the maximum available to the District Court. The Commission was the first to take action in the matter by initiating an inspection and making a prohibition order. We issued a public warning and referred the matter to the Serious Fraud Office.

We continued to use our powers to accept enforceable undertakings from market participants who have acknowledged non-compliance with securities law or other matters of concern and agreed to take specific steps to address the situation. This remedy provides the opportunity for important regulatory results without the costs and time needed for court action.

We commenced an inquiry into the regulatory and market issues arising from the failure of Access Brokerage including the role of New Zealand Exchange Limited as the front line regulator of the broking market.

We began a financial reporting surveillance programme. The aim is to encourage issuers to improve the quality of their financial reports so that investors can have confidence in the credibility of financial information provided by issuers. The first stage, a review of the financial reports of 40 issuers, revealed some shortcomings but overall the quality of reporting was reasonably pleasing. We are continuing this programme.

We reviewed how listed companies report on their corporate governance. Again initial efforts are reasonably encouraging but we consider that some companies could more fully disclose their corporate governance practices. We will continue to identify trends in corporate governance reporting and comment publicly on both good and poor practices. We also urge investors, particularly institutional investors, to encourage companies to report fully on their corporate governance practices.

We will continue to comment on market behaviour which may not breach the law but which falls short of good practice. The law is the minimum standard. When we see practices that are inappropriate we will make public comment if we consider the market, particularly investors, should know about it.

We believe our work on the international scene is important. New Zealand is part of a global economy which, although it offers new prospects and choices for issuers and investors, also provides opportunities for cross-border fraud. The need for international regulators to work together to create well-regulated securities markets and to enforce securities law has never been greater. New Zealand needs to be regarded internationally as a well-regulated and attractive securities market. We also need to work constructively with Australia towards a single economic market that will bring benefits to business and investors on both sides of the Tasman.

During the year New Zealand played a significant role in the development of the International Organisation of Securities Commissions. IOSCO's members regulate more than 90 percent of the world's securities markets and IOSCO is recognised as the international standard setter for securities regulation by the Financial Stability Forum, the World Bank and the International Monetary Fund. IOSCO is a truly remarkable organisation which, despite its diverse membership, has achieved consensus on the way ahead for international securities regulation. The ability and willingness of securities regulators to work together through IOSCO to combat international securities crime is vital in the global marketplace.

The election of New Zealand to chair IOSCO's Executive Committee recognises this country as having a world-class regulatory framework. As Chairman of the Executive Committee this year I have been honoured to lead the development and implementation of IOSCO's new strategic direction, a first for the organisation. The strategy is two-fold. The first part is to encourage and assist member countries to adopt IOSCO's Principles of Securities Regulation so that consistent standards and practices apply in all countries. The second is to increase the number of countries joining IOSCO's Multilateral Memorandum of Understanding which enables regulators to exchange information across borders. This is vital for controlling financial crime. The criteria for being accepted as a signatory requires countries to change their legislative framework if banking secrecy or other constraints limit the ability to exchange information.

After rigorous scrutiny the Commission was accepted as a signatory to the IOSCO MMOU in October 2003 and we have reaped the benefits of this in obtaining information and evidence from overseas. We have also assisted other regulators to gather information in this country. IOSCO has programmes to help all member countries meet the criteria to become signatories to the MMOU. It is very encouraging to see the progress IOSCO has made. Of particular significance is the recent decision made by all IOSCO members, as part of the strategic direction, to accept a deadline of 2010 by which to join the MMOU.

We progressed our relationship with the Australian Securities and Investments Commission this year with joint meetings and cooperation in enforcement action. We will continue to work with the New Zealand and Australian business communities through the Australia New Zealand Leadership Forum, and with ASIC, on initiatives to bring benefits for investors on both sides of the Tasman and to remove obstacles for issuers in both countries. These are significant contributions to the overall goal of a single economic market.

Our successful year's work has only been achieved through the professionalism, enthusiasm and commitment of the Members and staff of the Commission. I thank each of them for their efforts which contribute to vigorous and well-regulated capital markets in this country. The Commission was rated as one of New Zealand's 20 best places to work. I am delighted that our staff feel so positive about our working environment and culture. It is even more impressive when we reflect on the considerable achievements in our regulatory work over the past year.

I look forward to another year of achievement in 2005-2006.

Jane Diplock AO
Chairman

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