Capital Markets: Doing the right thing by the customer

After the finance company debacle, New Zealand securities regulation has concentrated on enlivening the capital markets and building renewed customer confidence, writes Jim McElwain
Infinz executive director Jim McElwain with Maree Webster (left) and Lady Deborah Chambers at the 2015 Infinz Awards.
Infinz executive director Jim McElwain with Maree Webster (left) and Lady Deborah Chambers at the 2015 Infinz Awards.

The International Monetary Fund (IMF) is making two visits to New Zealand this year -- the first in August to assess the banking and insurance sectors and the second in November to check out our securities regulation.

The visits are part of the IMF's Financial Sector Assessment Programme.

This process was last undertaken in 2003, well before the Global Financial Crisis transformed the world's regulatory landscape.

The IMF will be looking at international best practice. New Zealand was offered a "two paths" moment when we sat down to write the Financial Markets Conduct Act (FMCA), hard on the heels of our own version of the GFC -- the finance company debacle.

We could have gone the way of the North, writing thousands (or, in the case of America, literally millions) of pages of heavily prescriptive regulatory code, overseen by an alphabet soup of regulatory agencies.

INFINZ Fellow and Chair of our Advocacy Committee, Ross Pennington, notes that we have opted for a new approach, based on enlivening the capital markets and attracting confident participation in them. This new law is principles-based and the guiding principle is conduct (translated basically as doing the right thing, especially by your customers).

The sort of novelty adopted in our approach to securities regulation isn't particularly new in New Zealand. We have lent against the tide in establishing central bank independence; Crown fiscal transparency; the world's only traded interbank benchmark; listed debt and equity issues off terms sheets; Open Bank Resolution; the New Zealand Debt Management Office and New Zealand Local Government Funding Agency; and macro-prudential restrictions to quieten asset bubbles while keeping policy rates low. This is all part of an approach which is focused on preventing harm, rather than pursuing miscreants after the event.

So what does good conduct and culture look like?

Liam Mason, Director of Regulation with the Financial Markets Authority told last year's INFINZ Conference: "For financial services firms, embedding a strong culture that puts customer interests at the heart of the business is crucial to ensuring conduct that benefits both the business and consumers."

Sir John Anderson. Photo ./ Ross Setford
Sir John Anderson. Photo ./ Ross Setford

And leadership is crucial. Liam added: "We expect boards and directors of financial service providers, both big and small, to set a strong tone-at-the-top -- to ensure that customer outcomes are central to organisational strategy, culture and conduct."

This probably starts with product design, then disclosure, and is the customer fully informed? Then marketing, including considering who the product or service is not suitable for. Service providers will need to consider how sales incentives are balanced with customer outcomes, and how does this balance bear out in sales and advice practices?

It's about doing the right thing.
Sir John Anderson

In a submission prepared by INFINZ Fellow Sue Brown, INFINZ has advocated in the context of the review of the Financial Advisers Act that there should be a clear separation between those providing personalised financial advice versus those who are in a sales function. This approach would provide greater clarity and therefore confidence to the consumer.

INFINZ is focused on raising standards in the industry, with finalists in tonight's INFINZ Awards judged against the extent to which they have assisted in achieving the client's objectives and contributed to development of the capital markets and the wider economy.

To assist the market in establishing better practice in conduct and culture, INFINZ has partnered with the Financial Markets Authority and the CFA Society (an association of investment professionals) to hold an afternoon seminar on June 28 -- see

Even greater focus on improving customer outcomes should improve confidence in the markets and mean a better performing economy all round. As INFINZ Fellow Sir John Anderson would say: "It's about doing the right thing."

• Jim McElwain is Executive Director of the Institute of Finance Professionals NZ Inc (INFINZ).

• Financial Markets Authority chief executive Rob Everett is the keynote speaker at tonight's INFINZ Awards in Auckland.

- NZ Herald

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