Sean Hughes: It pays investors to take a closer look at capital markets

Many commentators colloquially refer to the FMA as the "watchdog", says chief executive Sean Hughes. Photo / Mark Mitchell
Many commentators colloquially refer to the FMA as the "watchdog", says chief executive Sean Hughes. Photo / Mark Mitchell

Could 2013 be the year in which our local capital markets shake off their past fragility and see the return of hard-working Kiwi investors? I hope so.

But let's make sure they come back armed with information, alive to the risks and tolerant of normal volatility.

There are encouraging signs of such a return to the market, although a re-balancing of household wealth to asset classes outside property is a fundamental change which still seems overdue.

The present debate over housing affordability, as well as on-going issues to do with the Government's proposed mixed-ownership model programme, will expose New Zealanders to the workings of capital markets.

Even if they choose not to invest directly, I hope the media coverage around it will grow public awareness.

For interested potential investors, read carefully the disclosure materials and consider seeking professional advice.

Many commentators colloquially refer to the FMA as the "watchdog".

In fact, Parliament established the FMA in May 2011 to promote and facilitate the development of fair, efficient and transparent financial markets. Investigating and prosecuting misconduct is just part of our broad portfolio.

One of our first tasks in 2011 was to complete the new licensing regime for financial advisers. There are now almost 2000 authorised financial advisers, or AFAs, who can advise on investment decisions, including securities.

We've been busy communicating to AFAs, and the market, the FMA's role and function and our vision for increasing confidence and integrity in our markets.

We do need to keep a constant eye on advisers, because they are the highway between the market and investors.

Most are doing a great job, but where advisers fail, such as with David Ross or others where the FMA takes enforcement action, then investor confidence is dented.

Necessarily the FMA is looking to focus resources on advisers posing higher risks.

Last year we indicated to both the Minister of Commerce and Ministry of Business, Innovation and Employment that we had identified some opportunities to improve the financial adviser regime, before the proposed 2016 review.

Another development under the FMA has been the delivery of market guidance - a process where we share our interpretation of the 23 laws we enforce.

Issuers have a responsibility to present information in a clear, concise and effective way, making it easier for investors to understand.

And changes to predatory or low-ball offers, which came into force on December 1, mean shareholders should have greater protection and more rights.

This is important work. And feedback tells us many think we're doing a good job. But for our capital markets to really prosper in 2013 and beyond, we need well-informed investors who understand financial risk and return. Decide what your risk profile is and then make decisions accordingly.

Talk to a financial adviser, ask questions, read the documents. Be wary of "friends" or relatives who offer you an "inside tip". You wouldn't trust your child to a baby sitter without checking their references, so why would you invest your money without doing your research?

Until Kiwis confront the crisis in our appalling levels of financial literacy, and try to improve our understanding of how markets work, and how to manage risk, we will continue to see failed schemes, convicted fraudsters and angry investors.

The FMA is not the silver bullet for this challenge - nor are the many other public- and private-sector bodies in this area.

Investors need a clear understanding that higher-risk, more speculative stocks may well promise higher returns and capital growth, but there is also more risk of a sudden fall and the dividend stream may not be as predictable or certain. Are you just for growth, or income, or both?

Another cause for optimism is KiwiSaver. As it continues to grow, so too will the amount of money being invested into our capital markets.

Now more than two million people belong to KiwiSaver schemes, and funds under management exceed $14 billion.

A recent report found the long-term commitment of KiwiSaver savings is enabling funds to invest in fast-growing and unlisted companies that have the potential to boost exports and jobs.

The next step is to get Kiwis thinking about investing in capital markets directly as well as through KiwiSaver. I am convinced if people spent the same amount of time researching equities and bonds as they do on housing or even the All Blacks, they would have the confidence to invest.

For most investors, a mix of asset classes is the best hedge against risk, so for most people, some exposure to shares is a good idea. But go in with your eyes open. There is no such thing as a guaranteed return, nor is capital guaranteed once invested. Stories about owning investment property go down well around the BBQ, but talking about your share portfolio seems to make people feel a little uncomfortable.

We have to ask ourselves why that is, when shares are a more productive asset class and can provide much needed capital to support NZ businesses.

The move to capital markets requires a fundamental change in the way we think and act but, if done properly, there are gains to be made for investors, companies, and the economy as a whole.

A vibrant market of informed investors is a great indicator of a successful economy - one which is attainable if we get our regulatory settings right, our community engaged and educated, and our players respecting the rules.

Capital markets aren't just for the wealthy or for experienced investors.

Healthy and transparent markets ought to be accessible for anyone who cares about their long-term financial health - and that of their community and country.

Market focus
In part two of a series looking at the resurgent stock market FMA chief Sean Hughes looks at financial literacy and risks for investors.

Tomorrow: Fonterra chief executive Theo Spierings

Sean Hughes is the chief executive of the Financial Markets Authority.

- NZ Herald

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