Kafka's In the Penal Colony is probably not a reference you'd expect to lead off a piece by the regulator about capital markets.
This odd little tale, involving the operator of a machine being consumed by the creation he loves, contains a salutary lesson all regulators should heed: If you ignore the purpose of your existence and treat what you are doing as purely an end in itself, you will end up in the dustbin of history.
Financial markets regulation should promote confident, informed participation of businesses, investors and consumers in fair, efficient and transparent markets. It should facilitate activity in capital markets.
However regulation is designed, it must work for both the suppliers of capital and those who seek it. It must be relevant, agile regulation.
At the Financial Markets Authority we work with a comprehensive, coherent and flexible system of financial regulation -- the Financial Markets Conduct Act.
This Act, just three years old, provides a "fit for purpose" regime that is aligned to the Government's Business Growth Agenda, and this gives us the opportunity to help right-size regulation.
Our focus, alongside the Ministry of Business, Innovation and Employment, is on effectively implementing this Act and ensuring it remains relevant, sensible and does not lead to "Maginot Line" regulation. Being agile enough to sensibly respond to what the market is actually doing, as opposed to what it might have done five years ago, is key for us.
Happily, one of the explicit purposes of the Financial Markets Conduct Act is "to promote innovation and flexibility in financial markets".
We have a facilitative approach to innovation generally, as shown by our approach to the peer-to-peer lending and equity crowdfunding space, the approval of the NXT market and a variable annuity retirement income product.
In looking to facilitate responsible innovation in the financial sector, a focus for us will be ensuring that the risks of new technology or products are appropriately mitigated, and not passed on to investors in ways they don't understand.
Regulators hate surprises. We want the industry to understand our approach and engage with us proactively. Talk to us at the hammer and chisel phase, not just before the cover is whipped off the new product at a public launch.
We are interested in helping make markets work and we are not here to stop businesses succeeding.
Be open. Explain your business and your product to us. Help us understand how your product is going to work; we don't know your business like you do.
We will probably have questions to ask you. But this is because we want products in our markets that are fit for purpose, not because we think effective regulation means saying no.
If you want to know the type of questions we might ask, our Strategic Risk Outlook and Guide to Conduct, both published earlier this year, are a good place to start.
Some regulators have adopted what's known as a sandbox model to manage Fintech.
Our counterparts in the UK, Australia, Singapore and Canada use this model to exempt firms from rules and regulations for a limited time. This is seen as encouraging innovation and enables companies to bring products to market.
We are an active member of the international body of securities regulators, IOSCO, and take a keen interest in how the policy of our peer regulators develops. However, we do not see the sandbox model as the silver bullet and we are not currently planning to adopt this policy. We consider that the Financial Markets Conduct Act contains enough flexibility to make it unnecessary.
More important is a culture of collaboration and facilitation, especially for new entrants. We are working hard to create such a culture internally.
Capital markets matter, and how our capital markets perform is a key part of New Zealand's prosperity. This simple proposition underlies everything we are trying to do.
Regulation is a cog in the capital markets infrastructure. The point of its work is to keep capital markets humming. When businesses can get the capital they need and people can achieve their financial goals, the machine is working as it should.