The Financial Markets Authority (FMA) has had a tough task on its hands since it was set up in 2011 to restore confidence among New Zealand investors.
After the multimillion-dollar finance companies collapse, investors lost confidence in the Securities Commission's prowess as a financial watchdog.
The FMA - under chief executive Sean Hughes - has since set about reshaping the landscape of the financial environment. A major focus has been the introduction of the Financial Markets Conduct Bill - which Minter Ellison's Lloyd Kavanagh cites as "a once in a generation re-write of New Zealand's securities law."
Though the bill's genesis lay in the work of the Capital Markets Development Task Force, the new legislation is not expected to be finally in place until 2014. "It is important that we get the detail right, but waiting until 2014 to put the new regime in place may seem an inordinate delay," Kavanagh says. "There is a risk of unintended consequences [in relation to more recent changes to the bill], but it is also important that a line is drawn at some point and the bill enacted."
The FMA appears to be taking a very calculated approach to the new legislation.
"Our impression is that the FMA has been working hard to get out and meet financial markets participants and discuss concerns in an open and frank way," says Russell McVeagh partner John-Paul Rice.
Minter Ellison chairman Cathy Quinn agrees, citing the open, consultative nature of the FMA as a key strength of the governing body. "The FMA has kept the positive aspect of the Securities Commission culture, being willing to engage with the business community, give feedback and work constructively to assist business to comply. That is really valuable to all investors as well as those seeking capital."
The conviction and sentencing of directors of failed finance companies has become a recurrent theme in national media as the FMA has responded to investors' call for blood by launching litigation against those deemed responsible for the collapse.
Quinn says the FMA is viewed by the market as having done a good job carrying on the litigation which had been instigated by the Securities Commission. "It's all ugly," she concedes. "But the law has not changed. It's reminded directors they cannot be asleep at the wheel, they must be financially literate, they can't abdicate to advisers or management - they are there to do a job. I personally think the litigation in New Zealand and Australia has lifted standards across the director and company community."
The general sentiment appears to be that the FMA is making good progress towards a restructuring of New Zealand's regulatory environment to restore investor confidence in capital markets. However, the danger of chilling company and director action through excessive punishment cannot be understated.
The collapse of several notable finance companies exposed significant aspects of corporate governance that cried out for attention. Wails from mum-and-dad investors in the aftermath of the collapse were clear; the complex and lengthy nature of information provided by issuers rendered it almost impossible to make an accurate assessment of the level of risk posed by an individual investment.
Confronted with a maze of disclosures, often punctuated by the strictest of legal jargon, small-scale investors felt issuers must have something to hide.
Under the Financial Markets Conduct Bill, disclosure will be governed primarily by the proposed regulations, as outlined in a discussion paper.
Simplification, it can be argued, brings significant benefits in accessibility of the average small-scale investor to capital markets. But the bill imposes a delicate balancing act. If it goes too far and compels issuers to cut substantial detail from disclosure statements, investors may lack the information they need.
"Those documents will need to work for both issuers and investors and there will always be a balancing act in disclosure documents: balancing the need for clear, concise and effective disclosure to create better informed investors and, from an issuer's perspective, ensuring no information is omitted that may result in future liability," says Russell McVeagh partner John-Paul Rice. "That balancing act frequently raises difficult questions and issuers tend to err on the side of caution; include more, rather than less, detail."
The recent release of Mighty River Power's supporting documentation for its IPO is a prime example, with the combined investment statement and prospectus reaching a length of nearly 100 pages, without financials.
Heightening directors' thirst for caution is the flood of litigation instigated by the former Securities Commission, and continued by the FMA. "Recent finance company litigation has had a chilly effect on directors when considering disclosure issues in relation to recent offers of securities," says Joe Windemeyer of Russell McVeagh.
"This approach sits somewhat at odds with the stated aim of the Financial Markets Conduct Bill, and the related Financial Markets Conduct Regulations, to simplify disclosure.
"The test, and the difficulty in the application of the requirements of the Bill (once enacted) and the Regulations, will be how directors' concerns regarding disclosure can be reconciled with the aim, particularly in the context of disclosure documents with, in some cases, prescribed content and, likely in all cases, of a restricted length."
In seeking to restore investor confidence a fine line exists between necessary regulation and overzealous supervision by authorities.
Any reasonable investor seeking to enter capital markets is aware of the presence of risk as a necessary reality. Inquiries into the failures of finance companies must be made, and blame laid where appropriate. But the thirst for retribution by investors cannot be allowed to cloud judgments to a point where capital markets may become tainted by excessive caution.