Speeches: Meet the Market


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Meet the Market

Jane Diplock AO

Chairman, Securities Commission New Zealand

& Executive Committee, IOSCO

19 November 2009, Auckland

I'm delighted to welcome you all this evening.

I would like to thank our hosts Minter Ellison for their generosity in allowing us to have another party at their house. For a bunch of austere public servants from Wellington, it's a treat to be in such salubrious surroundings.

I'd like to extend special thanks for engineering our use of this venue to Minter Ellison partner Cathy Quinn. Cathy has been a member of the Commission for the past nine years, and her term is up at the end of this year. Her energy, intelligence and wise counsel will be missed.

As will Colin Beyer's. Colin will also leave the Commission at the same time after his nine-year term. His considerable commercial acumen and wise advice will also be missed.

Both have acted as Chairman at times during their term and I have greatly appreciated their support.

I'd like to publicly acknowledge the work of Cathy and Colin over the past nine years. The public good has been well-served by these very able minds - and will continue to be for the next few months.

As Cathy and Colin leave, we will be joined on the Commission by other fine minds - Mark Verbiest, Simon Botherway and David Mayhew.

Mark is here this evening. He's been on the Commission since October. Mark is a lawyer, consultant to Simpson Grierson and member of a number of Boards. He's a former Chief Counsel at Telecom.

In January, David Mayhew will join the Commission as Commissioner for Financial Advisers. David is a partner in Herbert Smith, one of London's leading law firms. He's a New Zealander returning home who was formerly the UK's Financial Services Authority's Leading Advocate and then its acting Director for Enforcement. He is an internationally recognised for his work in contentious financial services regulatory work.

Our third appointment in the current cycle will be Simon Botherway, who joins the Commission in February. Simon was a founder of Brook Asset Management where he fashioned a reputation as a smart activist investor. Simon's a member of a number of Boards and we look forward to adding his perspective to our table.

The purpose of this evening is dialogue. I want to update you on our work at the Commission, and then offer you the opportunity to continue the conversation with me, the other Commissioners and Commission staff informally over a drink. I hope that any conversations we begin can continue after this evening as well.

There's a lot to discuss. Quite apart from the specifics of our day-to-day regulatory work, there are big questions to discuss right now about the right shape of regulation for the New Zealand market. The Capital Market Development Taskforce is considering the big issues, and we're about to enter a review of the Securities Act.

We see open communication with the markets we regulate as absolutely critical to the way we work - and that doesn't require canapes and wine. We also do email and coffee. So let's keep talking.

I like to begin any discussion of our work by restating what we exist for.

The Commission exists to encourage investor confidence in the New Zealand markets, and to encourage depth and liquidity in the market.

Part of that involves punitive action, part of it involves working with the market to encourage the behaviour we're after. The carrot and the stick.

Our tool kit

Surveillance and enforcement takes up a third of the Commission's resources. Much of this work is largely invisible to the public. It's painstaking, un-dramatic, and going on steadily behind the scenes. We also work with other agencies, so that when proceedings are brought by the Register of Companies or the Serious Fraud Office, these are quite often based on investigative work done by the Commission.

Finance companies continue to be the focus of enforcement efforts. So far the work of the three agencies has resulted in more than 270 criminal charges laid against 21 directors and one principal officer of nine finance companies, and against one finance company. The charges involved the Crimes Act, the Securities Act, the Companies Act and the Financial Reporting Act. The company and two of the directors pleaded guilty and have been convicted.

The Commission has also filed civil proceedings under the Securities Act against nine directors of two companies.

Other surveillance and enforcement action wrapped up in the July-September quarter involved:

the Police laying fraud charges in one case
one company correcting misleading or illegal disclosure and offering to refund investors' money
three companies withdrawing their offers altogether
one company providing additional disclosure to correct misleading information
two companies being warned about disclosure obligations
10 cases closed with insufficient or no evidence of any breach
one company agreeing to institute improved procedures to ensure compliance
two issuer applications to the Court for orders validating illegal allotments concluded
three occasions where overseas regulators were given assistance.

Enforcement not always appropriate

Enforcement is vital to our work but it's only part of what we do. A fact sometimes forgotten is that in most areas of human activity, including capital markets, a critical mass of people wants to behave well.

When thinking about this I call to mind Braithwaite's Pyramid which best describes the psychology of enforcement of market rules.

At the peak of the pyramid is the very small minority whose attitudes and behaviour are beyond reason and dialogue. These are the sharks who must be incapacitated by enforcement. Some finance company directors fell into this category.

Occupying the middle of the pyramid is a bigger group who will behave well when there's a good reason for doing so. These are the people who would speed if they knew there were no speed cameras. They act according to the rules because they know they'll get jumped on by the regulator if they don't.

Finally, the base - and by far the biggest - section of the pyramid. This is the majority who are quite happy to drive at the speed limit. These people might occasionally be guilty of mistakes or oversights, but they are not malicious in their intent. This is where dialogue comes in. Once it's been pointed out how they might do better, they take steps to put things right.

To come down hard on this largest group - certainly in the first instance - would be to use a sledge-hammer to crack a nut. Not merely unreasonable from a judicial point of view, but a highly inefficient use of Commission resources.

Bear in mind that our mission is building confidence in capital markets. Enforcement is one means to this end; it should never be an end in itself.

Exemptions and education

Encouraging business and educating both investors and offerers are two other vital tools in our kit. We strive to instil in capital-market participants the desirability of good governance, and, where appropriate, draw attention to poor governance and how to improve it. Here, the carrot is more productive than the stick.

Some work straddles several areas. Recently, for instance, we warned company directors about the danger of signing off financial statements that fail to comply with the New Zealand International Financial Reporting Standards (NZ IFRS). To do so would be to fail in their duty to provide investors with the full information to which they are entitled.

Our warning was based on findings from the latest surveillance cycle of 20 public companies' statements. It showed a widespread lack of transparency. NZ IFRS have been mandatory since 2007; companies have had long enough to put their houses in order by complying.

Most companies were not actually breaking the law. It was not an enforcement situation; people were not being "let off". If investigations had revealed a company's behaviour to have materially influenced investors, enforcement steps would have been taken.

For large numbers of well-intentioned directors, CFOs, senior managers and auditors, this is feedback on their performance - an education process most are willing to engage in. The smart company knows the way to attract investment is to up its game. Sound business conduct increasingly means sound business.

Where appropriate, we exempt certain issuers from the law so they can raise capital quickly and at minimal cost.

So far this financial year, we have completed work on 13 exemptions, including one that was withdrawn and another that was declined, and four authorisations. We have reviewed and reissued two class exemptions. This included amending the class exemption for listed share purchase schemes to allow shareholders to participate in them more fully.

I'd like now to bring you up to speed on what we've been doing to implement the financial adviser reforms, and the anti-money laundering legislation.

Financial adviser reforms

I'm sure you all know how important the financial adviser reforms are. You can imagine, perhaps, the massive job it is to implement them by the end of next year. The heart of the legislation is building industry professionalism, and there's an encouraging level of industry support and enthusiasm for this goal.

Guidance for businesses wanting to become qualifying financial entities (QFEs) is nearly completed. The Commission is working closely with the Code Committee and the industry training body ETITO. We are in the process of recruiting new staff, some of whom will be based in Auckland - at shared government agency premises. We will be guiding industry participants, and provisionally monitoring how changes are being effected, particularly in relation to QFEs.

Again, you can see the importance of dialogue. We'll help the majority of the industry who want to comply to do so, and encourage that middle section of the pyramid to get qualified and put the right systems in place. This will allow us, from 2011 onwards, to focus on the minority - determined non-compliers.

Getting the reforms working by the end of next year is critical to the reputation of New Zealand's financial sector, both here and overseas.

Anti-money laundering

Equally important to our international standing is implementation of the anti-money laundering and countering the financing of terrorism legislation passed in October.

All financial institutions and casinos will have to have a compliance programme, and conduct risk assessment and rigorous customer due diligence. They will have to continually monitor accounts and transactions and systematically report suspicious transactions to the Police Intelligence Unit.

Supervision responsibilities are divided between the Commission, the Reserve Bank and the Department of Internal Affairs. We will supervise issuers of securities, trustee companies, futures dealers, collective investment schemes, brokers and financial advisers.

The Commission will consult with the industry to determine money-laundering and terrorism-financing risks across the entities we supervise.

The Act will be implemented in stages to give supervisors and entities time to develop compliance systems and procedures.

International

I've referred a couple of times to our international standing. It's worth noting that our international work is ongoing and based on our determination to be standard-makers rather than merely standard-takers. We are keen to continue influencing the international regulatory framework from the driver's seat, rather than being merely passengers.

On the trans-Tasman front it is satisfying to see mutual recognition of securities offerings is working well. Since it was implemented in June 2008, more than 300 offers have been made under this regime - and the source of those offers is proportionate to the relative size of our two markets.

Conclusion

As you will know, an in-depth review of the Commission's effectiveness was released in October. It found us to be carrying out our responsibilities effectively and professionally, and that our high-calibre Commission and staff process a large volume of work efficiently and well, according to good standards of practice.

The review also suggested several areas for improvement in meeting market expectations. We are working through the implications of this, including exploring opportunities for greater dialogue with our stakeholders.

Nothing stands still. We are a changing organisation, determined to move with the times.

Thank you for your attention. I hope to meet as many of you as possible this evening. Please do raise with me or the other Commissioners or Commission staff any issues you may have, any ideas you may have or any questions you'd like answered.

And as I said, let's continue our conversation this evening and beyond.

Thank you.

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