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Demystifying the Securities Commission - our role, what we do and what it means for investors

Jane Diplock AO
Chairman, Securities Commission New Zealand
& Executive Committee, IOSCO

Hutt Valley & Districts JPs Association
8 September 2009

Introduction

I'm very pleased to be here today to speak to you about the Securities Commission - what we do, what we don't do, and what our work means for investors.

Our over-riding purpose might, if you're not already aware of it, surprise you - we work to enhance investor confidence. This is nothing more or less than the confidence each one of you might feel - or fail to feel - when considering investing in the securities market. In an important sense, then, you are the focus of our work.

You could be forgiven for wondering, though, how a body like the Commission could hope to influence such an ephemeral, irrational, individually experienced phenomenon like confidence. In fact, it can.

All of you will be aware of the difficult times we are experiencing, not just in this country but around the world. A few of you may have been personally hit by the financial crisis; others will know people who have. All around us we can see the evidence of what happens when public confidence in markets drastically diminishes.

Its loss prompted an acute haemorrhage of value in every country in the world. It - and the behaviour it prompted - was individually experienced, but, when tens of thousands of individuals react in the same way, the implications can be shocking. The private manifests as a powerful, public, measurable and far-reaching force.

Luckily for us all, the reverse of the current situation also applies - investors confident that everyone is playing by the same rules, and acting without fear, do what we need them to do: they invest. Their investments produce a vibrant securities market, and that, in turn, produces a healthy, growing economy.

When capital markets wither, so do economies, bringing an avalanche of concomitant miseries. I had occasion to point out this link earlier in the year to the Job Summit. Economic constriction can lead very quickly to decisions to cut jobs.

The G-20 acknowledges that growth won't return to world economies until domestic lending and international capital flows are restored. Every country's economy relies on a well-functioning financial system. One that allows businesses to borrow and raise capital by issuing securities; that allows markets to trade securities in a fair, transparent and efficient manner; that allows investors to have confidence in the rules of the game.

The last two decades have seen New Zealand move from quite a light-handed regime to one close to international best practice. So what have we achieved so far?

What the Commission doesn't do

I think it's important - before I explain what the Commission does - to clarify what it doesn't do.

We do not and cannot prevent companies collapsing. In the wake of the finance company collapses, some people were mistakenly claiming it was our responsibility to have prevented the collapses occurring. It wasn't and it never has been. We cannot intervene to stop a company from failing. That is entirely outside our mandate.

We can never make securities market investment bullet proof, either. Nor should we. A degree of risk is inherent in any investment and cannot be removed. However, investors are entitled to know they are playing the game on a level playing field.

The Commission's task is to ensure all relevant information is properly disclosed so that the prudent investor can assess their own risk in light of the offered return. Our powers - which I'll go into in more detail - extend to investigating whether or not offer documents, such as prospectuses, investment statements and moratorium proposals, are misleading. Once the offer is allotted, oversight of the product passes to trustees for the life of the investment, and we have no other role.

Something that does lie within in our mandate in this area is investor education. Our education programme is based on the premise that knowledgeable investors will be better placed to look after their own interests than those with little understanding of what they are buying into. Knowledgeable investors will also be well-placed to benefit from the eventual economic recovery.

Who we are

The Commission was set up under the Securities Act 1978. It has 10 members. They represent an impressive range of experience, skills and insight from the fields of industry, commerce, economics, law, accountancy, public administration or securities.

Members are appointed by the Governor-general on the recommendation of the Minister of commerce. They hold office for up to five years, but may be reappointed.

What we do

In light of what I've said about the Commission's overall purpose and philosophy, I'd like to expand on the main aspects of our work. It falls into six categories:

1. Surveillance and enforcement

2. Oversight and supervision

3. Law reform

4. Exemptions and authorisations

5. International cooperation and recognition

6. Public understanding

1. Surveillance and enforcement

A major part of our work is surveillance of the domestic securities market, and investigation and enforcement, when there's evidence laws and regulations have been breached. This work is often invisible to the public, yet it accounts for more than a third of our resources.

Its rationale is that good laws and regulations alone are not enough. If they are not enforced and enforced promptly, they do nothing to generate investor confidence and can even undermine it.

It's important that justice be done, but, as we all know, just as important that justice is seen to be done. Not merely as a deterrent to those who might be tempted into misconduct, but to assure investors and potential investors that their rights will not be ridden over roughshod.

Not surprisingly, our work in this area over the last year has been dominated by the aftermath of the finance company collapses. Within a couple of years, 29 finance companies either collapsed or froze repayments. Together they held around $1.5 billion of investors' money. That's only a small proportion of the capital market, but entailing shocking individual losses and having serious implications for general investor confidence.

The collapses occurred in what was then an under-regulated sector of the securities market. They were entirely a home-grown phenomenon. Not one for which blame could be laid on overseas factors beyond our control. A good deal of our recent work, then, has been investigating and, in some cases, prosecuting, those whose actions - or inactions - led to the collapses.

Last year, Registrar of Companies prosecutions arising from our investigations amounted to more than 160 charges laid against 13 directors of eight companies. The Serious Fraud Office also achieved a recent conviction on the basis our investigation. The Commission itself has laid 71 charges against nine directors of two companies - Bridgecorp and Nathans.

A snap-shot of our work in July this year shows that we wrapped up a total of 12 enforcement cases. In that one month this involved:

• a successful prosecution by National Enforcement Unit for various securities-related reaches
• fraud charges being laid by Police
• four companies correcting misleading or illegal disclosure and offering to refund investors' money
• one company withdrawing its offer altogether
• one company providing additional disclosure to correct misleading information
• one company being warned about disclosure obligations, and
• three cases closed with insufficient or no evidence of any breach.

These were all formal actions requiring the opening of a file. They didn't include work like dealing with investor inquiries, minor surveillance activities, issue inquiries and liaising with other regulators.

As I noted before, markets cannot thrive on the basis of regulation and enforcement alone. So we balance these activities with development work in several other areas, the biggest for us by far right now being implementation of two new Acts.

2. Oversight and supervision

One of our statutory functions is reviewing NZX's performance of its regulatory role, and advising the Minister of Commerce on its rules.

A new supervisory role will be in place by the end of next year. In 2003 this country's financial sector was thoroughly reviewed under a programme developed by the IMF and the World Bank. The aim here, as in other countries, including Australia, was to examine our regulatory framework in order to determine key vulnerabilities. New Zealand received what was basically a good report. However we were recommended to do further work on regulating financial intermediaries.

Two related reforms now underway are a direct outcome of that assessment carried out six years ago. Financial advisers are many people's first point of contact with securities markets. The public needs to be able to have faith in their knowledge, abilities and ethics; the financial advice industry as a whole needs the public to have that faith.

The Financial Advisers Act was passed late last year and will be operational by the end of 2010. The law makes the Commission the industry's main regulator. Advisers will have to meet specified standards of competence, professional conduct and disclosure. They will also have to be responsible for the quality of their advice to clients.

A second law, also passed late last year, requires financial advice providers to be on a national register and to enrol with an independent resolution services. This ensures that, should things go wrong, consumers will have access to low-coast redress.

Our programme over the next 18 months as we work alongside the industry and others to implement this new regime will be intense. The results, though, will pay huge dividends in investor confidence.

3. Law reform

Another of our functions is recommending improvements in securities law to the Minister of Commerce. We also advise and assist government and the Capital Market Development Taskforce on legislation.

The last two decades have seen New Zealand move from a light-handed regime to one close to international best practice. We have law dealing with insider trading and market manipulation, which are now criminal offences.

We have the power to compel entities that have breached security laws to rectify the breach, in writing. Before 2002, our only option was enforcement, usually via legal action.

Law that came into force last year subjects investment advisers to fuller disclosure and obliges listed companies to continuous disclosure. The market must be fully and immediately informed about company ownership and control.

We have been working on a Ministry of Justice-led project to strengthen New Zealand's law on anti-money laundering and countering the financing of terrorism. We expect appropriate legislation to be passed by end of the year. It will make the Commission responsible for supervising some institutions for anti-money laundering compliance.

In other legal developments, Parliament last year passed The Reserve Bank of New Zealand Amendment Act. This made the Reserve Bank the prudential regulator of non-bank deposit takers, which include finance companies.

The Commission continues to be responsible for formulating, administering and enforcing deposit takers' disclosure requirements and authorising some trustees, who will in turn continue to be deposit taker supervisors.

The Reserve Bank can now require information from deposit taker trustees in order to develop and enforce minimum prudential and governance requirements and administer credit rating requirements. It is working to develop and introduce new regulations that will introduce consistent standards for key risk areas such as financial strength (capital), access to cash (liquidity) and lending to associated parties. These new rules are expected to be introduced in 2010.

Also underway is a wide review of the Securities Act, which is the Commission's establishing law. This will look at the way forward for the Commission and related organizations in the context of the entire regulatory landscape.

4. Exemptions and authorisations

I said earlier that we work in the public interest. In its widest, most useful sense this public interest must include business interests.

Exemptions are a customisation of law, based on its policy while also meeting the needs of the market. We can allow issuers to reduce the costs of attracting new and overseas investment to our markets by exempting them from certain regulations, subject to certain conditions.

This has become more important with the recent tightening of credit. Companies have been reporting difficulty in raising and rolling over finance, and are more likely to have to turn to capital markets to raise debt, and particularly equity. By carefully exercising our power to exempt from the law certain issuers of securities, we can allow companies to reduce the costs of bringing onto the market new and overseas investment products.

If their difficulty in attracting funding were allowed to become insurmountable, no one would benefit - not the companies themselves, nor potential investors or the market, nor the economy as a whole. We must be sure that in regulating the market we do not stifle business energy.

Last financial year, we received 50 applications for exemptions, and granted 42.

5. International cooperation and recognition

That was a high-speed tour of some of the Commission's work on the home front. It would be a mistake, though, to see this as work done in isolation, with our back turned on the rest of the world. Global securities markets are highly interconnected, and achievements here have important ramifications overseas. Just as progress made - or not made - in other jurisdictions has implications for New Zealand.

New Zealand is one of 109 members of the International Organisation of Securities Commissions (IOSCO). This organisation is the world's recognised standards setter for securities regulation. Its reach extends to more than 95% of the world's markets. It leads the thinking on how securities regulators can rise to the challenges of today's capital market instability.

IOSCO's Objectives and Principles of Securities Regulation states that the three objectives of good securities market regulation are (1) investor protection, (2) ensuring markets are fair, efficient and transparent, and (3) reducing systemic risk. The work the Commission does at home is closely aligned to these broad objectives, as is the work of all the national regulators who are IOSCO members.

I have the privilege of chairing IOSCO's executive committee. This gives New Zealand a valuable opportunity to influence the setting of standards that will bring about world financial recovery and maintain it. It means we are punching well above our weight in the international arena; and that rather than being merely a standards taker, we are a standards maker.

It's important to understand that IOSCO is not a global super regulator. Its members formulate and develop regulatory principles but it's up to each member country to implement these on their home turf. This allows them to adapt their particular laws and regulations to national circumstances, rather than having them unilaterally imposed

I'd like to mention here a local success story that illustrates how countries might work together to develop this kind of international network. In June 2008, New Zealand and Australia agreed on a landmark regime that allows issuers to offer securities in both countries using the same offer documents, with minimal additional obligations. This promotes investment between our two countries, enhancing competition in capital markets, reducing business costs and increasing investor choice.

While I'm talking about overseas work, it shouldn't be forgotten that one of its important benefits is the opportunity to leverage overseas investment. Whenever I can, I talk to key business and investor audiences, letting them know that we're open for business and soundly regulated. We work with the Ministry of Foreign Affairs and Trade, and New Zealand Trade and Enterprise to promote this country as a sound investment destination.

6. Public understanding

The last aspect of our work I'd like to mention is promoting public understanding. Well-informed investors are an essential ingredient of robust capital markets so our aim is to encourage investors to be as savvy as possible about how they invest in the securities market. We want, too, to help people gain an appreciation of their own appetite for risk.

We issue scam warnings from time to time, but cannot possibly warn investors about every risky securities market product. Nor do we aim to scare investors - only to give them information with which they can look after themselves and their money.

We promote investor knowledge and confidence via our websites, publications and media releases, and speaking engagements like this one. We publish topical articles in major newspapers on various aspects of investing. A recent article, for instance, explained some of the potential fishhooks in proportionate property ownership schemes.

You can find this and other articles on the Commission's website. You might also be interested in visiting our website that's designed to help you become a smart investor - that's LookLearnInvest.org.nz

We have also funded a three-year financial studies course for older secondary students, with the aim of encouraging greater financial literacy in our next generation of investors.

Conclusion

Investor confidence is crucial to every well-functioning national and international securities markets. New Zealand is a small market and, in order to encourage healthy economic growth, we must attract off-shore investors here.

These days, markets are vitally interconnected. No longer is there such a clear-cut entity as an individual market - not in an age when money moves around the world at the touch of a mouse, unheeding of geo-political borders. No country - not even New Zealand - is an economic island.

The Commission's approach to its work acknowledges this. We strive to build confidence in the New Zealand securities market in order to make it attractive to New Zealand and to foreign investors, in the best interest of everyone in this room.

Thank you.

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