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2009 Annual Report

Chairman's report

The last 12 months have been tumultuous ones, at home and abroad. If we are inclined to forget during good times how tightly interconnected the world economy is, there is no escaping the fact during hard times like these.

The signs are that we are turning the corner. But the growth of capital markets is fundamental to expanding the economy, and investor confidence is vital to that growth. Much recent harm has stemmed from a shocking loss of faith in the markets and their intermediaries, making it clear that good market conduct is crucial to recovery.

Government reforms have aimed at strengthening investor protection in areas that were underregulated. The Reserve Bank is now the prudential regulator of finance companies and other non-banking deposit takers, setting and enforcing minimum financial and governance standards; law was passed to regulate financial advisers; and, Government is looking at the supervision of trustees.

The year has been dominated by the aftermath of the finance company collapses. We had no power to prevent these, neither is it our job to make investment bullet-proof: risk is inherent in any investment and cannot be removed. Some collapses, though, raised serious questions about directors' behaviour. The Commission is committed to doing everything in its power to encourage good conduct.

Enforcement is a Commission priority, and, as well as carrying out our own investigations, we have been working with the Registrar of Companies, receivers and other agencies to determine whether legal action is called for. In December the Commission laid civil and criminal charges against nine directors of failed finance companies Bridgecorp and Nathans Finance, alleging that untrue statements in their companies' offer documents misled investors.

Surveillance is also important, and the Commission has published reports on two more cycles of its Financial Reporting and Surveillance Programme, covering a total of 84 financial reports. The programme, which now includes corporate governance disclosure, is designed to encourage high-quality reporting that will enhance the credibility of those providing information and, therefore, encourage investor confidence.

The Financial Advisers Act was passed in September, and its successful implementation will be another vital plank in rebuilding investor confidence. The Act makes the Commission the industry's main regulator, bringing New Zealand in line with international standards. It requires financial advisers to attain specified standards of competence, professional conduct and disclosure, and makes them accountable for the quality of their advice. We embarked in April on an intense 18-month programme, alongside other government agencies, financial advisers, industry bodies and financial and educational institutions, to put in place the systems and training needed for the Act to be fully operational by the end of 2010.

Our ongoing monitoring of NZX is another aspect of building and maintaining investor confidence. The Commission's fourth annual NZX review is well underway. It covers the 2008 calendar year and focuses on the effectiveness of NZX's risk-based approach to supervision of market participants.

The need to protect investors must, of course, be continually balanced against business needs. Companies have reported difficulties in raising and rolling over finance, and we have been working with the Government and the Capital Market Development Taskforce to make it easier and less costly for companies to raise capital. The Commission has exemption powers that may allow immediate implementation of some Taskforce recommendations, and companies have taken advantage of these to seek public money. In December we published a consultation document seeking feedback on a proposal to extend the existing class exemption for share purchase by increasing the amount that can be raised from existing shareholders. The Securities Disclosure and Financial Advisers Amendment Bill, introduced in February, is a direct result of that consultation. It removes unnecessary impediments to raising capital while ensuring prospective investors can access the information they need. NZX-listed businesses will be able to use a simplified disclosure prospectus when offering securities to the public, thus reducing duplication and expense.

The Securities Commission remains absolutely committed to enhancing global regulation and supervision. Financial stability is everyone's business: we cannot expect to once more enjoy global financial good health until consumer confidence is restored everywhere. New Zealand is a geographical island but does not exist in economic isolation. We are, of course, affected by the crisis, but also have an important role to play in re-establishing world-wide financial stability.

Along with 108 others, New Zealand is a member of the International Organisation of Securities Commissions (IOSCO). This body is the recognised global standards setter for securities regulation, and its international reach covers more than 95% of the world's securities markets. Through my chairmanship of IOSCO's executive committee, New Zealand has the opportunity to directly influence the setting of standards that will bring about world financial recovery.

As that committee's chairman, I am also a member of the Financial Crisis Advisory Group. The group reports to the International Accounting Standards Board and the US Financial Accounting Standards Board on implications of the financial crisis for standards setting, and on potential changes to global regulation. It also informs the G-20 group of finance ministers and central bank governors of its progress.

A cornerstone of IOSCO's 2005 strategic direction was securing the signatures of all member nations to the Multilateral Memorandum of Understanding (MMOU), which is founded on key regulatory and supervisory principles. This goal will almost certainly be achieved by 2010. In the meantime, IOSCO is laying foundations for the strategic plan that will take it through to the post-crisis world in 2015.

My IOSCO role has direct benefits for New Zealand. The Commission understands how important it is for our markets to attract offshore as well as domestic investors. I will continue to take the opportunity, when abroad, of speaking to key business and investor audiences, and working with the Ministry of Foreign Affairs and Trade and New Zealand Trade and Enterprise to promote New Zealand as a sound investment destination. As I emphasised to the Summit on Employment, ensuring potential offshore investors have confidence in our regulatory environment is vital to full employment.

An important part of the Commission's role is improving public understanding, and we continue to take seriously our obligation to educate and inform investors via the media and the internet. With better awareness many investors will eventually be in a position to benefit from the inevitable recovery. This in turn brings a wider benefit: the consolidation of investor confidence that will hasten the rebuilding of the economy that all New Zealanders depend on.

This last year has been a very demanding one for Commission Members and staff who have had to cope with an increased workload, particularly in the areas of enforcement and supervision, and implementing new law. I would therefore like to thank them all for their continuing individual commitment that expresses itself in enthusiasm, professionalism, cooperation and hard work, and that bears fruit in the Commission's ongoing achievements.

Jane Diplock AO
Chairman

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