Inside Money: Regulator urges KiwiSaver trustees to be more nosy

Can a regulator be friends with the regulated?

Not really, but in its latest guidance note to the investment industry the Financial Markets Authority (FMA) makes a case for cordial relations between the parties.

"We would like to develop a mutually supportive relationship with an emphasis on our joint role of investor protection," the FMA says in note 'Monitoring Investment Risk in KiwiSaver Schemes'.

The document itself is aimed at trustees and fund managers involved in KiwiSaver, which is just about the entire New Zealand industry, but it describes how the regime is supposed to protect ordinary members from 'investment risk'.

"For many New Zealanders, KiwiSaver will be the first investment they make and may represent a large part of their retirement savings and ultimate financial security," the FMA note says. "Many of these investors are inexperienced in investment matters and vulnerable as a result."

Many of those first-time investors probably would have trouble distinguishing between 'market risk' - ie the chance that investments drop in value - and 'investment risk' as defined by the FMA.

Investment risk, in this instance, refers to the appropriateness of what the KiwiSaver managers say they are going to do with their members' money and whether they actually do what they say they're going to do.

In the note, the regulator lays out the responsibilities of trustees overseeing KiwiSaver schemes in some detail. And based on a review of KiwiSaver trustees last year the FMA concludes they could "provide more comprehensive and robust monitoring" of the underlying investment management risks, including "a proactive approach to monitoring Managers".

How 'proactive' a stance trustees take, however, also depends on the investment structure of the KiwiSaver scheme in question.

For example, the FMA says KiwiSaver schemes that operate as multi-managers (ie they farm out day-to-day investing decisions to underlying fund managers) should face greater scrutiny from trustees.

"Investment risk may be increased if the Manager has inadequate oversight of investments made by their sub-manager(s)," the FMA says.

Given that most KiwiSaver assets (if not most schemes) are managed under multi-manager structures, this friendly warning from the regulator is reasonably significant.
Elsewhere, the FMA notes the circumstances where the trustee might refuse, politely, to carry out the investment instructions of the KiwiSaver manager - more likely, the regulator says, when the scheme is involved in less "orthodox" strategies "such as ethical investment or investment involving complex derivative instruments".

In entirely unrelated news (but in the interests of robust monitoring), Tyndall NZ, which is an underlying fund manager for several KiwiSaver schemes, has lost one of its key staff with the departure of head of equities, Rickey Ward. Ward, a long-time Tyndall-ite, is understood to have decamped to the BNZ-owned investment business, JB Were.