Rob Everett: Regulation helps financial sector grow

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Licensing needs to go hand-in-hand with supervision, writes Rob Everett.
It's clear how important KiwiSaver - and its good reputation - is to the industry, and the importance of KiwiSaver for growing individual and national wealth. Photo / Getty Images
It's clear how important KiwiSaver - and its good reputation - is to the industry, and the importance of KiwiSaver for growing individual and national wealth. Photo / Getty Images

The funds management industry represents an increasingly important part of the NZ economy. More than half the population relies on the funds management sector to grow and protect their wealth and grow individual household balance sheets.

The sector is responsible for around $100 billion of funds under management. KiwiSaver is a third of that total, and is now worth over $31 billion with over 2.5 million members. The flow of funds into KiwiSaver has been a massive injection for the industry over the last decade.

The broader economic benefits are most apparent when these funds are invested in capital markets and other productive assets to help drive efficient capital flows and foster business growth.

Following the Capital Markets Development Taskforce report, Parliament recognised the increasing scale and importance of the sector by introducing the requirement for managed investment scheme managers to be licensed under the Financial Markets Conduct Act.

This reflects the closely linked needs for consumers to be protected, for the industry's reputation to be upheld, and for New Zealand's sector to reflect what has occurred offshore when fund management sectors have passed key milestones for maturity, size, significance and therefore systemic risk.

Licensing is about instilling confidence in the industry by introducing regulations that help to manage provider conduct and risks across the sector. The bigger picture behind this is the Government's business growth agenda and the longer-term goals of the taskforce report which looked to near-double the capital available for New Zealand businesses by 2025.

The lack of a licensing regime in this sector has left New Zealand an outlier in terms of regulating financial services, and this was not helpful in attracting investment flows.

Since larger, better and more sustainable capital markets are the game, then for fund managers, licensing is now the ticket to the game. For the first time, from December 1, anyone wanting to offer a managed investment scheme will need to be licensed.

That's a big change for a major part of the economy and we're working hard to ensure providers understand what's required to come through the licensing gate.

Licensing is about instilling confidence in the industry by introducing regulations that help to manage provider conduct and risks across the sector.

Besides the more easily recognised fund managers there are also property schemes and forestry fund schemes coming into the regulation framework for the first time.

For a risk-based regulator needing to carefully prioritise our resources, licensing gives us direct access to monitor the market and the behaviour of providers, giving us early warning signs of where to focus our attention.

The Financial Markets Authority has been licensing some existing and new services under the Financial Markets Conduct Act. That includes equity crowdfunding and peer-to-peer lending platforms, derivatives issuers and discretionary investment management services and now managed investment schemes. Funds management will become the most significant part of our new responsibilities.

The licensing process has shown us there's no one-size-fits-all in the industry. The new regime is designed to ensure that businesses of all shapes and sizes can get through the gate, as long as they meet required standards and can demonstrate they're capable of providing the services.

For us to be an effective conduct regulator, licensing and supervision powers go hand in hand. Licensing tells the public that there are hurdles for the industry to be able to offer their services. But while licensing is a major step, it's only the beginning of a transformation in the relationship between the regulator and the industry.

Through the licensing process we establish our expectations with providers about the role that conduct plays in the new regime. The final piece in the licensing framework is our continuous role in supervising the conduct of providers, to ensure they are putting the interests of their customers at the centre of their operations.

It's clear how important KiwiSaver - and its good reputation - is to the industry, and the importance of KiwiSaver for growing individual and national wealth. The industry has a huge role to play in helping New Zealanders get ahead and plan for their futures with confidence.

This shows the vital links between a new focus on regulation based on supervising conduct and the bigger goal of improving the access and flow of capital for New Zealand businesses. For this to work successfully, at the heart of well-functioning markets there need to be well-informed consumers wanting to participate and invest their money.

Fair, efficient and transparent financial markets have a major impact on the cost of doing business across the entire economy. A strong, well-regulated funds management sector is a critical part of that engine for strong, sustainable economic growth.

The work we are doing in licensing this year is all part of building confidence in properly functioning markets.

Total value retail managed funds

Source: RBNZ, September 2015 (Excludes wholesale and private individual portfolios)

KiwiSaver funds: $28.1 billion

Retail funds/unit trusts: $24.2 billion

Superannuation funds: $19 billion

Cash management trusts/cash PIEs: $11.5 billion

Life insurance funds: $8.5 billion

Total: $91.3 billion

Rob Everett is chief executive of the Financial Markets Authority.

- NZ Herald

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