Overseas, post-mortems of the global financial crisis (GFC) on its 10-year anniversary point to the failure of banks, the failure of regulators, and the credit crunch that followed.
In New Zealand, it wasn’t investment or high-street banks that went under, but finance companies. Kiwis lost NZ$3 billion in finance-company failures, and it’s believed 150,000 to 200,000 people lost some or all their savings.
Out of the ashes of this national disaster, the government decided to overhaul the way financial markets were regulated. In 2011, the Financial Markets Authority (FMA) was formed to promote fair, efficient, and transparent markets, and to restore the confidence of mum-and-dad investors.
Why finance companies failed
The finance companies failed for many reasons:
- Haphazard governance.
- Risk management was sometimes weak.
- Poor disclosure meant investors often didn’t know the full story.
- They were operating in a regulatory gap. The previous regulator, the Securities Commission, had limited powers.
- Some investors simply didn’t understand the risks they were taking on.
- At its extreme, there was also poor conduct and criminal behaviour.
The FMA inherited 45 investigations from the Securities Commission, which led to 12 criminal cases (only just winding up now).
All completed cases have ended in either guilty pleas or convictions.
Change was overdue
The finance-company debacle showed an overhaul of legislation was overdue, so a Capital Markets Development Taskforce set to work. The Financial Markets Conduct Act 2013 was one of the results.
The regulatory gaps were closed, with the Reserve Bank of New Zealand supervising non-bank deposit-takers, and the Act introduced a system of licensing and supervision, overseen by the FMA.
Licensing means a business has to meet minimum standards. Its managers and directors need to be ‘fit and proper’ persons who have shown they have the infrastructure and skills to operate the business effectively. But getting a licence is just a start.
Companies are monitored
The new regime is based on disclosure – plus ‘conduct’. Conduct is about higher standards of professional behaviour, and boardroom and senior executive governance. The FMA checks to see if companies are meeting their obligations.
Monitoring and supervision teams visit businesses regularly to see how they’re complying with the terms of their licence. They’re looking for proper management of conflicts of interest and how providers report customer outcomes, because these areas can have the biggest impact in leading change and improvement.
At the early stage following the new Act, it wasn’t expected that providers would reach high standards straight away, but the FMA’s annual report in September was positive. It showed it’s already ‘marking harder’ when evaluating providers.
Investors get more detail
Consumers are also benefiting from learning more about the facts affecting their investments.
From next year, all KiwiSaver providers will have to tell members how much they’re paying in fees in dollar terms.
Providers should be able to explain why their fees are reasonable. The FMA says, if you don’t like what you hear, shop around, or walk away.
The FMA has also been working on the data providers disclose on fees and performance, to find ways to make it easier to understand.
Taking a hard line
Where it sees poor conduct, or breaches of the law, the FMA acts to protect investors and preserve the integrity of the markets – and sometimes that means going to court, when that’s the best way to meet its goals.
With new tools in the FMA’s arsenal, the courts are usually a fallback option for resolving breaches or conduct issues.
However, the FMA is active in enforcement. Last year, it brought a successful civil case against trader Mark Warminger for market manipulation.
This year, it’s started two criminal insider-trading cases. These cases are about protecting the integrity of the market for businesses operating here and for New Zealand investors. It’s also about our reputation internationally.
Investors need to play their part
It’s not enough to create a system of licensed, regulated businesses in response to the GFC and the collapse of the finance companies. Investors from all walks of life need to understand how the system works and have confidence in it.
That’s why the FMA keeps repeating the message: ‘Use a licensed provider.’
Despite everything, remember, not every investment will do well. Some investments lose value. Companies fail.
Investors have a layer of protection from FMA oversight through licensing, but they should still do their own homework.
The scars remain
The scars of the finance-company collapses will be with New Zealand for a long time, just as the scars of the ’87 crash remain for an older generation.
However, as the FMA continues to bed down, it’s encouraging that surveys show investors again have confidence in New Zealand markets and services. The FMA’s job is to grow that trust.
MARKET MANIPULATION: A central element of trade-based market manipulation is that trades have, or are likely to have, the effect of misleading the market. The market is entitled to assume that any trading activity is for a legitimate purpose. Trades without a legitimate purpose are likely to be illegal.
By Paul Gregory, FMA
First published 20 November 2017
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