 |
|
 |
|
Auckland District Law Society
President's Breakfast
Wednesday 2 April 2008
What's ahead for the Securities Commission?
Jane Diplock AO
Chairman
Good morning and thank you for inviting me to speak to you today. These are challenging times for securities markets around the world. The extent of the fallout from the US sub-prime situation is still uncertain. Conditions are tightening in markets everywhere, with New Zealand no exception.
Our domestic markets are in a process of reform and are adjusting to the effects of finance company failures and the slowing of the housing market. These changes may have profound effects on the investment landscape for New Zealanders. They bring challenges and opportunities for the markets and for investors.
The Securities Commission, like any investment regulator, cannot and does not seek to remove investment risk. We do seek to promote a regulatory environment in which investors can have greater confidence that risks are properly disclosed and that the market operates with integrity. This allows investors to choose their investments on the basis of appropriate information.
The Commission has a number of statutory functions, all of which contribute to this goal.
Today I should like to outline for you some of the Commission's priorities for the coming year in our enforcement work, in the reforms that are underway, and in our work with international regulators.
Surveillance and enforcement
The two highest enforcement priorities for this year are our investigations into finance companies and an enforcement programme for the new securities trading law, in particular investment adviser disclosure.
Everyone here will be well aware of the high profile collapses of a number of finance companies over the past 12 months. These collapses have, in part, added momentum to law reform initiatives that will strengthen the regulatory environment for deposit takers. I will speak more about that shortly.
For now, however, our regulatory regime for these companies continues to rely principally on disclosure. It relies on the directors of finance companies to ensure that offer documents contain all information material to the securities being offered, and that advertising does not mislead, deceive, or confuse investors.
This regime also relies on investors making use of the disclosure provided, and even more on investment advisers reading and understanding disclosure documents so that they can give professional advice that is in the interests of their clients.
Last year we took preventative action to give formal consents to the Registrar of Companies (under the Corporations (Investigation and Management) Act) to secure assets of several companies in distress. We required directors of all deposit takers to provide us with signed statements certifying that their prospectuses were up-to-date and not misleading. We required several companies to close their public offers, in order to preserve existing funds to the greatest extent possible.
This year we will continue to carry out surveillance in respect of current offer documents as issues come to our attention. However, a key priority for us is to investigate all of the finance companies that have collapsed in the past year.
Where companies had offer documents registered or advertisements distributed after October 2006 the Commission has powers to take civil enforcement action. The Commission is investigating to determine whether there are grounds to take actions against some companies.
These could include pursuing civil actions to claim compensation for investors if they have been misled when they relied on advertising or offer documents, seeking civil penalties in serious cases, or taking criminal prosecutions should be taken against directors.
Our team has been working with the receivers and liquidators appointed to these finance companies. Where necessary we have used our inspection powers under the Securities Act to obtain information. Our work and that of the receivers is complementary. Their first function is to accurately identify and trace assets that might be available for investors.
We analyse the information obtained from this work, along with the offer documents and advertisements used by the directors to procure investments. We also undertake our own investigations. We will assess whether the public disclosures made by the company and its directors in fact matched up with the true state of affairs of these companies, and with all the information available to directors.
This work is well advanced, but is still ongoing, and I cannot speculate on the outcome. However, I can say that on the information we have at present it seems likely that proceedings will be laid relating to several finance companies in the coming months.
The second enforcement priority for us this year concerns the new securities trading law that came into force at the end of February. We welcome the new market manipulation law, which will be a focus on the secondary markets side of our work.
Manipulative disclosures and trading activities directly damage the integrity of a securities market, and our surveillance, together with that of NZX Regulation, will be closely examining market disclosures and suspicious trading patterns. The penalties for market manipulation are severe, including the possibility of up to 5 years in prison on criminal conviction.
The new investment adviser law arises from recommendations made by the Commission in 2002. We had been concerned that the "on-request" disclosure under the Investment Advisers (Disclosure) Act was difficult both for investors and advisers to understand. It did not achieving its goal of giving investors the important information they need to help them choose an investment adviser or investment product. By some it seems to have been interpreted as "if they don't ask, don't tell".
We were also concerned that the law should place some basic responsibilities on professional investment advisers not to recommend that their clients invest in scams and illegal offers of securities. This change came from experiences we had seen of incompetent advice that lost millions of dollars for investors - incompetent advice given by people who held themselves out as investment professionals.
The new law places an onus on an adviser wherever he or she knows, or ought to know, that an offer is illegal. This doesn't require every investment adviser to become an expert in securities law, but it does say that where investors seek advice relying on a person's expertise and professionalism, it falls on that adviser to be reasonably able to spot an illegal scheme.
Perhaps the most important distinction between the old investment adviser law and the new is its enforceability. The new law includes powers for the Commission to take both administrative and Court action against breaches of the law.
This element of public enforcement seems already to have provided a strong incentive to the industry to raise their standards of disclosure.
I say this from our experience in the past 12 months as we have worked to raise market awareness of the new law. A large number of the queries we have received have concerned aspects of the law that have not changed at all since 1996. Presumably they were previously seen to raise so little risk of sanction that the institution or adviser did not devote any effort to compliance. The possibility of real enforcement has already served as an incentive to advisers to pay due attention to what is required of them.
The new investment adviser law was passed by Parliament in 2006. Regulations were made late last year, and the law came into force at the end of February. The Commission is taking its enforcement responsibilities under this law seriously. We warned advisers in mid-February that we would be taking a proactive approach to enforcement in this area. In our view there has been ample time to prepare.
Once the law was in force we sought disclosure documents from a range of people who we believed to be investment advisers. As there is not yet any registration or licensing requirement for this profession we have no easily accessible or comprehensive database of people who practice in this industry. However, we have been gathering information from a variety of sources over the past year to build a list of investment advisers.
We contacted over 1400 individuals and advisory firms. We have received well over 2000 disclosure documents. We are taking a triage approach to our assessment of the responses we have received so that our resources are well targeted. We will review a sample of disclosure documents for compliance with the law, and will take action where appropriate to enforce the law.
The new the disclosure regime for advisers is an important step in the right direction, but it is only a first step. There are now proposals for more comprehensive regulation of this industry that I will talk about later.
Other work
While we work on these priority areas, our other surveillance and enforcement work continues. We investigate suspected insider trading and continuous disclosure violations, and are carrying out our annual review of NZX's oversight functions. Our financial reporting surveillance programme is also ongoing, and has received very positive feedback for its use as a training tool for directors and auditors. We are pleased to be able to report on the generally good standard of financial reporting by our listed companies.
I should mention that orders have now been made by the High Court for distribution of about $19 million of the $27.5 million dollars from the Tranz Rail settlement. This first distribution goes to pay the Commission's costs, of just under $2 million, and to compensate those who bought the shares sold by the defendants and who made a loss on their purchases. We will be back in Court later this month to set out our proposal and seek directions for the distribution of the remainder of the settlement money.
Law reform
One of the functions of the Commission is to make recommendations to the Minister of Commerce on law reform concerning securities and bodies corporate. This means we work closely with officials and the government to alert them to issues that we think need to be addressed, and to provide independent advice on reform proposals.
The government has, over recent years, undertaken a series of reforms affecting securities markets, intended to bring New Zealand's regulatory environment up to the standard that is increasingly needed in order to attract investment and to build confidence in the market.
I have already mentioned some of the changes that have already come into force. Several important reforms are still underway. Some of the current reforms are before select committee at present, or in policy stages. As the Commission is providing advice to the government on some matters I cannot go into detail today, but I would like to outline some of the priority areas from the Commission's point of view.
Deposit takers
We welcomed the decision taken last year to strengthen the regulation of deposit takers and finance companies, and to clarify and strengthen the responsibilities and powers of trustees. The Commission itself took steps last year to recommend changes to the trust deed regulations for finance companies to ensure that trustees have access to the information they need to properly carry out their duties.
A Bill is now before Parliament that proposes reforms that will go further than can be achieved under current rules. This Bill provides for compulsory ratings for finance companies. They will also require comparable and consistent minimum standards for trust deeds on matters such as capital adequacy, minimum capital, liquidity, and governance.
This Bill divides responsibility for regulating deposit takers among three agencies. The Reserve Bank, as the main prudential regulator, will formulate and enforce prudential requirements and will be responsible for monitoring the sector. Trustees will continue to be the frontline supervisors of deposit takers, enforcing compliance with trust deeds, and taking action in cases of financial distress. The Securities Commission will administer and enforce the disclosure rules.
Our first task in this role, when the new prudential measures are underway, will be to propose disclosure regulations to match these, including rules for disclosure of credit ratings, capital adequacy levels, and governance matters.
Under a further step approved by Cabinet last year, the Securities Commission will be licensing and supervising trustee companies. This will improve transparency and accountability in this area our regulatory system, and will help to give confidence that trustee capacity and performance is of a high and consistent quality.
Financial Advisers
One of the main criticisms of New Zealand in the IMF's 2003 Financial Sector Assessment Programme report was lack of regulation for financial advisers.
A Financial Advisers Bill is now before Parliament. The direction for reform signalled in this legislation as particularly important for retail investors and consumers.
Try as we may to encourage simple and plain-English disclosure, for many retail investors securities disclosure documents are daunting, full of technical and legal jargon. These investors should be able to rely on an investment adviser to guide them through the range of investments available and to recommend investments that suited their needs.
With research constantly throwing up new challenges to improving financial literacy and further doubts on the use of disclosure documents for retail consumers, it is worthwhile remembering that Securities Act disclosure documents are not written only for investors.
In 1981, when the Commission published its first discussion document on proposed securities regulations, it noted that the focus on disclosure might have its sceptics, largely because very few investors would read a prospectus. However, we went on to say that while we could not expect every retail investor to read a prospectus, we hoped that an investor's adviser will read and understand it, and be able to translate the information in the prospectus into meaningful advice for the client.
We continue to expect that anyone who claims to be a professional investment adviser will be able to read and understand prospectuses, and will have a detailed knowledge of the products on which they advise clients. Investors should be able to have confidence that this is the case whenever they see a financial adviser.
Retail investors should be able to approach any financial adviser with confidence, knowing that this person has attained a level of proficiency and competence, and is subject to ongoing professional conduct standards and proficiency requirements.
The Financial Advisers Bill now before Parliament is intended to foster consumer confidence in financial advisers; and confidence that those who claim to be professionals in this important area are held accountable for their performance, integrity and competence.
We have all seen stories in the news media in recent months that demonstrate why this confidence may be lacking at present. We hear of advisers apparently motivated by high and undisclosed commissions, advisers who recommend a client places their entire savings into one or a few finance companies, advisers who make misleading comparisons between products and poor assessments of investment risk. We see too many similar stories at the Commission.
For this reason we see a particular priority for reform in this area to meet the objectives of this Bill.
The Minister of Commerce, in her speech introducing this Bill into Parliament, noted that the select committee would need to look carefully at the scope of the definitions in the Bill to ensure that it provided certainty and met its purpose.
She also invited the committee to look carefully at submissions about approved professional bodies and the roles they have been given under the legislation. Whatever changes there may be in design and detail, we strongly support the purpose of these reforms, which we believe can contribute to greater overall confidence in our markets.
Other work
As well as these priority areas the Commission will be involved this year in further policy work on deposit takers and reforms to the regulation of collective investment schemes. We are also considering the framework and disclosure laws for securities and financial products, and proposals for reform of New Zealand's anti-money laundering laws. Our aim is that these reforms will give New Zealand a world-class regulatory environment that provides confidence to both retail and institutional investors.
The various reforms that are underway will have a significant effect on the Commission. We seem likely to take on an increased supervision of financial advisers, trustees, and fund managers. Our enforcement reach will again increase.
Early in 2007 we did a planning exercise to estimate the possible changes and the resource requirements for the Commission if various policy choices were taken. We have updated this work as policies have firmed up and evolved.
In this way we have been able to advise the government of the likely public cost implications of choices it make take. This information, together with work on compliance costs associated with reforms, will enable us to design regulation that is cost-effective and proportionate.
We also use this information for our own planning. We need to think about our future resource, staff, and location needs, so that the Commission is ready to implement reforms made by Parliament.
Implementation includes market awareness work like the education project we recently completed about the securities trading law reforms. Industry feedback on this was very positive. We see benefits, as a regulator, in helping market participants get to grips with new obligations as early as possible, reducing uncertainty and assisting with transition costs.
International
I'd like to conclude with a few words about the Commission's international priorities this year. Our aims in performing this statutory function are to raise awareness of the New Zealand market and to promote cross-border co-operation, which benefits our own law enforcement work.
We are a small capital market, distant from many financial centres. Our markets benefit from greater international participation, which brings increased opportunities for New Zealand investors and for capital raising by local firms.
As a small market New Zealand is very exposed to trends and events affecting world markets. The latter half of the financial year has seen uncertainty in global capital markets following the sub-prime mortgage crisis in the United States.
Our markets are inevitably affected by this as they are by other economic trends and events. While we have had a few products affected, the New Zealand market has not had a large direct exposure to the sophisticated collateralised debt and asset-backed financial instruments that are of concern to market participants in the United States in particular. The indirect exposures, of course, cannot be ascertained easily.
Securities regulators internationally are assessing the lesson to be learnt from the sub-prime situation. This work is being lead by the Technical Committee of the International Organisation of Securities Commissions (IOSCO).
The New Zealand Securities Commission, as a member of IOSCO's Executive Committee, is supporting this work and will assess any findings for relevance to the New Zealand market. These findings may or many not require a regulatory response in New Zealand.
This country has undertaken significant reforms in the past decade.
These changes have brought our regulatory regime and market infrastructure closer to international best practice. They address shortcomings identified by the IMF in 2003. It is important that these changes are communicated to key institutions and investors internationally, especially in times of market uncertainty.
Since 2005 I have had the privilege of chairing the Executive Committee of IOSCO. New Zealand's position in this regard has significantly raised our profile in the international regulatory community. We work to maintain our good standing through continuing contributions to many aspects of IOSCO's work, internationally and regionally.
We use these opportunities to promote New Zealand to a wider international audience as an attractive and well-regulated place to do business and to invest. The Ministry of Foreign Affairs and Trade and organisations such as NZTE help us identify opportunities to raise awareness about developments in the New Zealand markets. This helps inform overseas investors and firms of the high standards of regulation and compliance in New Zealand.
Our second priority is to promote co-operation and information sharing among regulators, to the benefit of our law enforcement efforts here in New Zealand.
The global nature of the securities markets creates opportunities for investors and capital raising, but also increases opportunities for international financial crime. To combat this, regulators must be able to work together across traditional jurisdictional boundaries. These issues are being addressed by IOSCO, particularly through the IOSCO Multi-lateral Memorandum of Understanding on Cooperation and Exchange of Information (IOSCO MMoU), to which the Commission is a signatory.
In our role on the Executive Committee of IOSCO the New Zealand Commission has sponsored the development of IOSCO's strategic plan which sets specific targets for members to join the IOSCO MMoU. Under the plan all member countries are committed to signing on by 2010. For many jurisdictions this requires changes to domestic laws to permit and facilitate cooperation with other regulators.
The IOSCO strategy was agreed in 2005. There are now 62 countries signed on, or committed to signing. This brings the total to more than 50% towards the 2010 goal.
Facilitating cross-border co-operation among regulators is very much in the interests of New Zealand's markets, and the Commission has always had a statutory function to co-operate and share information with overseas regulators. As securities markets have become more global the tangible benefits of this international co-operation for New Zealand have become clear.
Cross-border information flows and assistance have been vital to several major enforcement efforts, including the Tranz Rail and Provenco insider trading litigation. This international co-operation is only going to become more important in the years to come.
In summary
We at the Commission have a busy year ahead. We are fully committed to our investigations of failed finance companies and expect that we will take actions using our new powers in relation to some of those.
We are also committed to using our enforcement powers to raise the standard of disclosure by investment advisers. This is addressing a serious flaw in our regulatory framework and we welcome its advent.
We will continue to give advice to Government and officials on law reforms that will raise standards and bring New Zealand into line with similar jurisdictions. It is imperative that we do this in order to attract investment to this country.
We will continue to carry out education campaigns to make the market aware of law changes and new obligations. On the other hand, we also support educational work in schools that aims to introduce teenagers to the financial markets and investment.
Finally, we are developing our capacity so that we can make significant advances on all these fronts in the interests of markets with integrity and well informed investors.
Thank you.