Statement of Intent 2006 - 2009

Chairman's overview

Over the last five years New Zealand's securities regulatory framework has evolved significantly as the Government has carried out its programme of reforms. The first of the changes was the introduction of the Takeovers Code on 1 July 2001. The Code is administered and enforced by the Takeovers Panel, a body separate from the Commission. However, in 2000 the Commission was given the additional function of providing administrative and support services to the Panel. We have a Memorandum of Understanding with the Panel and we report on this function each year.

In 2002 new law gave the Commission a civil enforcement role for insider trading, and introduced new rules for regulation of stock exchanges, continuous disclosure by issuers, and disclosure of dealings by directors.

The following year the Commission entered into an memorandum of understanding with the NZX on regulatory co-operation and recommended that the Minister of Commerce approve the NZX Conduct Rules. We also took the lead on corporate governance and, after wide public consultation, published our Principles of Corporate Governance which heeded the strong public desire to avoid a rules-based approach.

The Securities Legislation Bill, currently before Parliament, further strengthens the regulatory framework with reforms relating to insider trading, market manipulation, investment adviser disclosure and substantial security holder disclosure. There are also changes relating to the application of securities trading law, penalties and remedies.

New laws have increased the Commission's enforcement powers and we have put these to good and appropriate use. Our aim is to get the best regulatory outcome for investors at a reasonable cost. We have flexibility in the enforcement options available to us. Not only do we have power to take insider trading cases to court, as we have done in the Tranz Rail and Provenco cases, but we have also made good use of our power to accept enforceable undertakings whereby a breach of the law can be put right swiftly and satisfactorily for investors. Each case is different, and fine judgments have to be made on how far to pursue a matter and when to settle. These are not easy decisions and we will not always get them right. However, we always strive to achieve the best outcome for shareholders.

A milestone along the way of this development was the 2003 assessment of New Zealand's financial sector, including the regulatory framework, by the IMF and World Bank. The FSAP team of experts measured our regulatory framework and its operation against the Objectives and Principles of Securities Regulation published by the International Organisation of Securities Commissions (IOSCO).

In general New Zealand was given a good report but a number of shortcomings were noted. One of these was the lack of regulation of financial intermediaries, and another was that the legislative process for registration of an exchange did not establish standards for an exchange which has the functions of a self-regulatory organisation. The FSAP team recommended that the Securities Commission have an oversight plan for regulated exchanges, and that the plan and key findings of review under the plan are made public.

Progress has been made on these and other identified gaps. Work continues on how financial intermediaries should be regulated in this country. The Commission is reviewing the NZX's performance of its regulatory role, and has published the terms of reference of this review. Various legislation currently before the House is addressing other matters.

The Minister of Commerce and the Australian Treasurer recently signed a revised MOU reaffirming both countries' commitment to coordination of trans-Tasman business law and reducing impediments to trans-Tasman commerce. This sets new priority areas for trans-Tasman business law coordination and acknowledges the objective of a trans-Tasman single economic market.

The Ministers also signed an agreement underpinning a regime for mutual recognition of securities offers. This removes regulatory barriers for issuers wanting to offer in both New Zealand and Australia. Only one prospectus will be needed in most cases. The Commission welcomes this regime which will encourage investment between Australia and New Zealand, reduce costs for business, and increase the choice for investors.

On the regulatory front, the Commission and the Australian Securities and Investments Commission (ASIC) have instituted regular joint meetings and have long had a close relationship at an operational level.

During the last few years the Commission has become more actively involved on the international scene, particularly in the work of IOSCO. Chairman Jane Diplock also chairs the Executive Committee of IOSCO which takes all decisions and actions necessary to achieve the objectives of the Organisation. This has served to put New Zealand on the world financial map and to promote our securities markets as markets in which investors can have confidence.

We are a signatory to the IOSCO Multilateral Memorandum of Understanding (MMoU) on sharing information for enforcement purposes between regulators. This has been of direct assistance to New Zealand in taking enforcement actions, and has also increased our workload as we fulfil our obligations to other regulators seeking information from this country. This cooperation is vital as financial markets and international fraud no longer have boundaries or borders.

New Zealand also supports IOSCO in its programmes to encourage countries to adopt the IOSCO Principles of Securities Regulation (which will raise the standard of regulation world-wide) and to increase the number of jurisdictions that have signed the MMoU (which enables exchange of information to counter cross-border fraud).

Much has been achieved in the past five years. The regulatory framework in New Zealand has been strengthened and legislation will be passed soon to fill more of the identified gaps, so that it can become a system of world class. More work is required to bring us to international standards in various areas, particularly the regulation of financial intermediaries.

Work is progressing on the co-regulatory arrangement between the Commission and the NZX.

New Zealanders have yet to fully recognise that the law is only the minimum when it comes to the behaviour of companies and their directors. As a country we need to create a culture in which business strives to operate in line with international best practice, not merely to not breach the law. We also have to rise to the challenge of adopting international financial reporting standards over the next few years. The Commission will continue to seek to raise standards of corporate governance and financial reporting in the future.

On the international scene it is important to continue, and to hasten, the work of IOSCO in bringing a consistent standard of regulation of securities markets and building a network of jurisdictions that can cooperate to combat international fraud.

Another area where New Zealand and most other jurisdictions fall short is financial education. The investing public is a vital part of the securities markets. We need to increase our efforts to build a generation of well-informed investors who feel confident about becoming involved in the securities markets.

The aims of all the Commission's work are to benefit investors and business alike by the existence of vibrant securities markets that are transparent, well-regulated, and attractive to investors.

The past five years have seen a great deal of work done to establish the legal basis on which to build a securities regulatory framework that is equal to the best in the world, and is recognised internationally, while being appropriate to the New Zealand situation. Important steps have been taken to develop that framework but much more needs to be done.

To build on the work to date, the Commission has developed a strategic plan for the next three years. The plan is based on six key result areas - enforcement, monitoring and market oversight, law and practice reform, exemptions and authorisations, international cooperation and recognition, and public understanding of the law and practice of securities and the Commission's presence in the markets.

The first purpose of the Commission's statement of intent is to set out the results to be achieved over the next three years, and how we will measure our achievements. It describes the environment we operate in, the people we work with, and the particular challenges we face. It also explains the main strategies we have adopted to achieve our stated objectives and thereby contribute to the outcomes, and how we will measure our achievements.

The second purpose is to present publicly our forecast financial statements and forecast statement of service performance for the next 12 months.

This statement of intent sets the broad parameters and measures for our work for the next three years. Supporting this we have a detailed strategic plan developed under our key result areas.

Progress is monitored continually and reported monthly to the Commission, and quarterly to the Minister of Commerce and the Ministry of Economic Development. Each year we report against the forecast financial statements and forecast statement of service performance in our annual report to the Minister of Commerce which is tabled in the House of Representatives.

The Commission will report against this statement of intent in its annual report for the year to 30 June 2007.

Jane Diplock AO
Chairman