David Chaplin 's Opinion

A personal finance columnist for the NZ Herald

Inside Money: Corporate cops costed - leveraging the FMA way

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Sean Hughes, head of the Financial Markets Authority. Optimising efficiencies and leveraging. Photo / Paul Estcourt
Sean Hughes, head of the Financial Markets Authority. Optimising efficiencies and leveraging. Photo / Paul Estcourt

"The task before us," announces Financial Markets Authority (FMA) chief, Sean Hughes, in the regulator's inaugural 'Statement of Intent'
"is to leverage the systems, cases and people that we inherited."

Elsewhere Hughes promises the FMA will "optimise efficiencies from the outset".

"Wherever possible, FMA will leverage off whole-of-government initiatives...," he says.

That's a bit too much leveraging for my liking - this piece of corporatese does have unfortunate links to many of the failed financial products that sparked the FMA's formation.

With recent history clearly in mind the FMA Statement of Intent lays out its plan to monitor and deflate "unrecognised significant emerging market risk".

"The emphasis here will be on understanding the economic substance as opposed to the legal form of investment products," the FMA says. "This activity will also help FMA by providing input into the decision-making process on the use of 'call-in' or product reclassification powers."

The historical example most likely in mind here would be Bluechip, a company whose activities (leveraging and whatnot) fell out of everybody's regulatory ambit.

As well, the FMA will create what it describes as a "market intelligence hub" designed to keep the regulator's staff abreast of "macro and micro, local and global developments that may affect capital markets or investors".

The ultimate aim of all this leveraging and hubbing is to help the FMA more effectively police the four deadly financial market sins it has identified:

misuse of material non-public information

• inadequate, untimely, misleading or false disclosures

inappropriate governance practices

incentive misalignment, and poor advice and support from financial advisers and other intermediaries.

On that last point the FMA has already been fairly active, rummaging through client files of financial advisory offices throughout the country.

I have heard several tales of searched advisers who claim FMA investigators has been heavy-handed in their approach, where the operation felt like a criminal investigation rather than a friendly sharing of information between regulator and regulatee.

As a new regulator, the FMA probably does feel the need to act, or be seen to act, tough. It's also true that financial advisers haven't faced such close scrutiny from regulators previously and may not be used to the attention. Perhaps when they get to know each other better...

FMA regulation (including leveraging) will cost an estimated $27.5 million in the year to June 30, 2012, of which about $14 million will be divided (unequally) between 105 full-time equivalent employees.

Or thereabouts:

"The expanded role of FMA has caused some uncertainties in the precise cost structure of the new organisation and the estimated operating expenditure is based on the best available information," the statement says.

David Chaplin

A personal finance columnist for the NZ Herald

David is a freelance journalist who has covered the financial services business on both sides of the Tasman for over 15 years. David has edited magazines and websites for the financial advice, investment and superannuation industries. Today, he contributes to various publications in Australia as well as his bi-weekly blog for the NZ Herald under the 'Inside Money' banner.

Read more by David Chaplin

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