Call for more cash to help unleash watchdog

Jane Diplock says the Government hasn't provided the funding to pay for the Securities Commission's broadening responsibilities. Photo / Martin Sykes

Funding for the Securities Commission has fallen short of what is required for it to execute its expanding range of duties and the situation is set to worsen with new responsibilities, says chairwoman Jane Diplock.

But Commerce Minister Simon Power says because of fiscal constraints the Government will look at improvements to the current regulatory framework and the commission's roles and powers "in the first instance" to improve oversight of New Zealand's investment markets.

A report on the effectiveness of the investors' watchdog released yesterday found that "within the limitations of its powers and resources", it discharged its responsibilities "efficiently and to a high professional standard".

Nevertheless, the authors, former head of the commission's French counterpart Michel Prada, and former Secretary of Foreign Affairs and Trade Neil Walter, identified a number of issues and made a series of recommendations and suggestions to address them.

They concluded that the main constraints on the commission's effectiveness lay outside its direct control.

"They stem from weaknesses in the current legislation; the commission's narrow mandate and lack of powers; the proliferation of regulatory bodies; inadequate resourcing; and bottlenecks in the judicial process."

Among their recommendations, the authors said an inter-agency taskforce should be established with some urgency to assess and report on the commission's funding and staffing requirements for the coming two or three years.

The commission has copped criticism, particularly regarding its perceived lack of action around the finance company meltdown.

Rumours have surfaced, downplayed by the commission itself, that it lacks sufficient funding to properly execute its duties. But yesterday Diplock acknowledged there was some foundation for that speculation.

"In previous years we've been given new functions but not fully funded for them," she told the Business Herald.

"That's not uncommon, we understand, for a Government department, but it hasn't necessarily allowed us to put in place the infrastructure that is really required to carry out the required level of workload and now we're going to step up again in a fairly major way."

The commission is readying itself for additional duties including supervision of financial advisers and finance company trustees, and in the last Budget received an extra $17.4 million over the next four years to help cover this.

However, Diplock indicated this was unlikely to be enough.

"This is a time of great fiscal restraint and we understand that, we obviously agree that there needs to be further consideration of the resourcing of the commission particularly for this step-change in size and magnitude of the way we're going to have to operate."

The report also recommended priority be given to the establishment of an office in Auckland "with a broader representational role as well as functional responsibility for the implementation of the Financial Advisers Act".

Diplock said this was "very important on a range of levels" but would likely prove costly.

However, Power said yesterday there was always going to be tension between what was seen as an ideal regulatory environment and what could realistically be funded.

"As we head into the Budget round I'll be having discussions with the commission about how their resourcing sits but we're in very tight financial times.

"I would be inclined to look more at the regulatory framework and the [commission's] roles and powers in the first instance, because every organisation and regulatory authority in an ideal world would make a claim [for more funding]."

The report found scope for the commission to lift its game within current constraints, "primarily through exploring ways of using its existing powers more proactively but also in its communication with the market, the media and the public".

Perhaps most crucially, the authors believed a comprehensive overhaul of New Zealand's system of market regulation was required.

The report found existing securities law was "uneven in its coverage, heavily prescriptive and in many areas badly out of date".

Power pointed out that the Securities Act was under review and he hoped yesterday's report would "inform" that work.

But even under the status quo, the report found "the Securities Commission lacks the teeth to give full effect to the legislation and regulations".

The authors recommended the commission be given more extensive powers, including the power to issue rulings, stronger investigative and enforcement powers, the ability to monitor the conduct of financial intermediaries such as trustees, asset managers, auditors, and directors.

Other recommendations included consideration of ways to speed up the judicial process relating to criminal actions in the securities market, possibly even the establishment of a new separate court to deal with such matters.

But Power suggested that was a remote possibility and as Justice Minister he hoped current work aimed at improving the overall efficiency of the court system would benefit the commission.

Diplock welcomed the report as "a great opportunity" and "a good report card".

"But it does tell us constructively that there are some things we can do better and we're taking it very seriously.

"It's very important at this time in our history to be thinking very strategically about where we go from here, how we organise ourselves and how we can better communicate with our various stakeholders, and that's a theme that has come through."

STRONGER POWERS

Recommendations from the Report on the Effectiveness of the New Zealand Securities Commission include:

* The review of New Zealand securities law should give the Securities Commission more extensive powers, including the power to issue rulings, stronger investigative and enforcement powers and the ability to supervise trustees, asset managers and auditors.

* The commission should be given a "future watch" role to monitor and advise the Government on the overall effectiveness of the regulatory system relating to capital markets.

* The roles of the various regulatory bodies should be reviewed with a view to consolidating functions.

* Consideration should be given to ways of speeding up the judicial process relating to criminal actions in the securities market, including the possibility of establishing a separate court.

* An inter-agency task force should be formed to assess the commission's funding and staffing requirements.

* The Securities Commission should establish an Auckland office, responsible for implementing the Financial Advisers Act.

Full report at: www.sec-com.govt.nz