A capital markets regulator is welcome, but the hard yards still need to be done
The announcement of a new capital markets' super regulator comes a staggering 21 years and 28 days after it was first recommended by the Russell Committee. The new Financial Markets Authority will not guarantee the safety of investors' money but it should help restore confidence in the country's capital markets.
There has been a positive response to Commerce Minister Simon Power's announcement at the New Zealand Herald INFINZ Awards dinner but most of the detailed information has yet to be released. This includes the role and composition of the establishment board, funding and, most importantly, the chairperson and chief executive of the new organisation.
Market participants are hoping that there are plenty of wise decisions made between now and early next year, when the new regulator is expected to be up and running.
The Russell Committee, which was officially called the "Committee of Inquiry into the Sharemarket", released its report on March 31, 1989. The committee was named after chairman Sir Spencer Russell, a former Reserve Bank governor. The other members were Frank Pearson, Ian Farrant, Martin Harriman and Frank Riley.
The committee concluded that there was "a major loss of confidence by market participants in the rule-making structure, in the observance of ethical standards and in the general integrity of the sharemarket". It believed that "unfettered reliance on market forces in isolation will not generate the required improvement in the overall performance of the market".
The report identified most of the problems that are still in existence today, including the difficulties in successfully pursuing offending parties through court action and overlapping legislation.
Its main recommendation was the establishment of a new Supervisory Authority that would "absorb the present Securities Commission and have supervisory, surveillance enforcement, reform and educational functions".
None of the Russell Committee's recommendations were implemented and investors have shunned our capital markets as follows:
* The total value of the domestic sharemarket has fallen from 32 per cent of GDP in March 1989 to just 30 per cent at present.
* The total value of residential property has surged from 159 per cent to an estimated 327 per cent of GDP over the same period.
* The number of listed companies has declined from 295 to 150.
* A large number of our major companies including Bank of New Zealand, ASB Bank, media, food and alcohol companies have been taken over by overseas interests.
* Our companies have found it difficult to expand offshore because of a shortage of capital.
* The collapse of a huge number of unregulated finance companies has had a devastating impact on retirement savings.
Meanwhile the total number of ASX companies has risen from 1381 to 1952 and there is a better balance between the sharemarket and residential property across the Tasman with the market capitalisation of the ASX currently equivalent to 112 per cent of the country's GDP and housing 281 per cent of GDP.
The strength of Australia's capital markets, particularly compared with ours, is a major contributor to our neighbour's superior economic performance in recent years.
Power is the first Cabinet minister with the determination to introduce the regulatory agency reforms first proposed in 1989. However his plans are different from the 1989 recommendations as virtually all the regulatory agencies will be folded into the proposed Financial Markets Authority. In contrast the Russell Committee recommended that most of the existing oversight agencies, with the notable exception of the Securities Commission, remained as they were while "the Statutory Authority should be principally a supervisory body (over these agencies) with reserve powers of enforcement".
In other words the new authority will be all powerful whereas the originally proposed Statutory Authority, which was less attractive than Power's new model, was to have more of an oversight role.
The next important move is the appointment of the establishment board because this will have a major impact on the new authority. This columnist has been a member of two Government appointed establishment boards, the Forestry Corporation and the Guardians of the New Zealand Superannuation Fund, and they give some guidelines as far as the new super regulator is concerned.
The Forestry Corporation establishment board was announced on February 19, 1986 and was asked to report on the form, function and staffing of the corporation by June 30, 1986. The brief from Forests Minister Koro Wetere was remarkably brief and broad as follows:
"Dear Mr (Alan) Gibbs, I would like to appoint you chairman of the establishment board of the Forestry Corporation to look at how it should be set up with specific reference to the terms and conditions of employment of staff.
Yours sincerely, Koro Wetere."
The board met every two weeks, often for two or three days at a time, appointed the chief executive and reported to the minister on 15 May. The importance of this structure, particularly the role played by Gibbs, cannot be over-emphasised as it meant that the new corporation was crafted by private sector directors instead of public servants.
The original board of the Guardians of New Zealand Superannuation started with a blank piece of paper although its role was more clearly defined under the New Zealand Superannuation Act 2001. The board established the fund's investment strategy, appointed the chief executive and determined it should be based in Auckland rather than Wellington.
The governance skills of chairman David May, and his relationship with Finance Minister Michael Cullen, played an important role in putting the Super Fund on a sound footing.
The appointment of the Financial Markets Authority establishment board is probably the most important step, particularly the position of chairman. Ideally the appointees should have extensive experience of capital markets and/or have been members of a regulatory body.
A number of names come to mind including present or former Securities Commission members Simon Botherway, Stephen Franks, Cathy Quinn and Mark Verbiest.
Candidates from the Takeovers Panel include Colin Giffney and David Jones, while Rob Cameron, Mary Holm, Adrian Orr, Grant Spencer and Mark Weldon from the Capital Markets Taskforce are obvious candidates. Craig Stabo would also be a good candidate as would individuals with accounting standards experience or an involvement with offshore regulators and capital markets.
The choice of chairperson will be absolutely critical.
Depending on the mandate the establishment board will have a huge influence on the authority as it will probably appoint the chief executive, determine its staffing levels, set priorities and decide whether it should have its head office in Wellington or Auckland.
The Auckland versus Wellington debate is again critical because there is a strong argument that if a regulator is focused on recommending law changes, as the Securities Commission used to be, then it should be based in the political capital. If it has an enforcement role, which the new authority will have, then it should be close to where most of the market participants and crooks are based.
On that basis there is a strong case for Auckland as this was the source of most of the unethical practices in the 1980s sharemarket boom and recent finance company debacles.
Past experience also indicates there are a larger number of applications for key positions if a job is based in Auckland rather than Wellington.
It is early days yet but Power is commended for his determination to clean up the country's capital markets. But this is just the first stage with the appointment of the establishment board, and the mandate it is given, a key process in the formation of the super regulator.
Disclosure of interest: Brian Gaynor is an executive director of Milford Asset Management.
bgaynor@milfordasset.com
