'Big changes' could be on the way for our financial bureaucrats

Tim Rainey believes the Securities Commission already has broad investigative powers but lacks resources. Photo / Brett Phibbs

If burglars nick the contents of your house, you're likely to call the police - if only because your insurance company requires it.

But when it is your savings that disappear, whom do you turn to? For many Kiwis there is no easy answer, given the multitude of organisations whose job it is to help prevent investors being ripped off.

Even people in the finance sector seem confused about who does what, and some believe it's time to reconsider the role of the Securities Commission, in order to restore confidence in the entire investment sector and the integrity of our capital markets.

According to commission chairwoman Jane Diplock, that debate has already taken place. "Quite a long and intense discussion" was held a couple of years ago, she says, about whether we should adopt Britain's model of a one-stop-shop Financial Services Authority (FSA).

The prevailing view was New Zealand should stick with its "twin peaks" approach - the Reserve Bank overseeing prudential regulation and the Securities Commission overseeing conduct.

However, she concedes there are probably too many agencies whose jobs overlap. "Maybe there needs to be some rationalisation of that."

Diplock notes that various models have failed all over the world. "I don't know that the model matters that much as long as you get proper communication around the regulatory table - and that is the important thing."

People who lost money in finance companies, she says, were victims of a "perfect storm".

"Here we have front-end regulation on the prospectuses, and as soon as the allotment finishes then it's the trustees' responsibility. The trustees are not regulated; financial advisers who were mis-selling people into these companies were not regulated; and there was no prudential regulation, so they didn't have to have a capital buffer if times were bad ... So quite understandably, the investor says to the Securities Commission, 'Well, if it's not you, who is it?' and the answer is: 'No one.' And I think that's an understandable mystification for the investor. I think that's a real problem."

Lawyer Tim Rainey doesn't entirely swallow that argument. He believes the law already gives the commission "very broad" investigative powers, and the real issue is insufficient resources.

"They had the power to do it - it's just they weren't really resourced to proactively investigate the sorts of issues that were coming up in the sector ... One has to ask the question whether that was oversight on the part of the commission or just a deliberate choice not to get involved."

The commission's staff has more than doubled - from 17 to 44 - since Diplock joined in 2001, and she is making the case for numbers to be doubled again to cope with its new role as the regulator for financial advisers, and as the agency that would oversee new anti-money-laundering measures.

She is also arguing for a new office in Auckland, and to be given the job of overseeing corporate trustees.

Then there is the question of who should oversee auditors.

Such issues will almost certainly come up for debate later this year, when Parliament is expected to carry out a wide-ranging review of the 31-year-old Securities Act.

However, the commission's critics are hoping for something more radical.

One suggestion is for a new organisation, similar to Britain's FSA or the Australian Securities and Investment Commission, to merge much of the work now done by the Securities Commission, Companies Office, Takeovers Panel and maybe even the Commerce Commission.

Another is for a new ombudsman, incorporating the current roles of the Banking Ombudsman and the Savings and Insurance Ombudsman. This would prevent, for example, the bizarre situation where people who invested in ING's dud managed funds could lodge an official complaint and seek compensation only if they were sold the product by the ANZ, but not by independent advisers.

Some believe the new ombudsman, or commissioner, should also be given the job of helping educate the public about financial matters - now carried out by both the Retirement Commissioner and the Securities Commission.

The Retirement Commissioner recently noted the introduction of government-funded "general advice" organisations in Britain, which will provide simple, generic financial counselling to consumers.

In February last year, National's commerce spokesman, Simon Power, was reported as saying he believed a shake-up of the Securities Commission was "long overdue". Now, as Minister, he is understandably coy about exactly what he has in mind.

"There are going to be some relatively big changes," he confirms.

Is he prepared to consider an entirely new structure?

"It's a really interesting question. All I'm saying at this point is that I'll be very interested to see what sort of responses we get to the discussion document."

Power expects some initial proposals to be ready for public consultation by the end of this year.

Laws tightening up the supervision of corporate trustees and preventing companies from shopping around for a trust deed that suits their requirements have already been fast-tracked.

However, Power says he does not intend "squeezing the markets tighter" with more regulation. In fact, he has already heeded an early recommendation of the Capital Market Development Taskforce by introducing legislation that would allow listed companies to raise money by giving existing investors even less information than currently required.

The reasoning behind the change, which the commission supports, is that it will make it easier for companies to raise money in the current tough environment, without depriving investors of information they should still receive through continuous disclosure.

The bill has been supported by every political party except the Greens.

There is a valid argument that more disclosure won't solve anything, as most investors either ignore such information or don't understand it. But Green MP Kevin Hague insists the bill is the "absolute reverse" of what is required.

"Given the dynamics that led to the credit crunch, we have to wonder whether the Government has been seeking guidance from the Red Queen in Alice in Wonderland in bringing this bill forward," he told Parliament in March.

Power acknowledges the move appears to contradict MPs' other attempts to increase disclosure - by financial advisers, for example - but is unrepentant.

"When you look at those two together they appear not to sit well, but they don't if you put both under the arc of investor confidence," he argues.

"What I'm looking for ultimately is a market where an individual or a couple with $100,000 sits in the middle of that spectrum, and whichever way they decide to invest that $100,000, that we devise a regulatory environment which gives them confidence to go either way.

"That's how I've been explaining it to business around Auckland and Wellington."

WHERE TO TURN?

Banking Ombudsman: Handles complaints about banks. Can award compensation.

Insurance and Savings Ombudsman: Handles complaints about insurance and savings organisations involving up to $200,000, or $1000 per week for disability benefits. Unable to fine, prosecute or award compensation.

Retirement Commissioner: Helps the public prepare for retirement. Monitors retirement villages. Provides policy advice, and financial education.

Commerce Commission: Investigates anti-competitive behaviour, and misleading or deceptive conduct. Can set prices for some goods and services, and authorise mergers. Regulates telecoms, dairy and electricity industries.

Companies Office: Registers prospectuses, and bodies such as building societies, companies and charitable trusts. Investigates poor governance, and bans directors and managers.

Securities Commission: Regulates investment sector. Investigates breaches of securities laws, such as insider trading, or misleading or deceptive prospectuses. Grants exemptions, bans advertisements and prospectuses, and enforces continuous disclosure laws. Will regulate financial advisers.

NZX: Runs the sharemarket, and a debt market. Provides market data, manages funds, and has a funds management services business.

Ministry of Consumer Affairs: Provides consumer information, education and policy advice. Warns the public about scams. Monitors product safety, and weights and measures.

Serious Fraud Office: Investigates and prosecutes serious and/or complex fraud, or cases in the public interest, generally involving more than $500,000.

Takeovers Panel: Enforces the Takeovers Code relating to company takeovers, and reviews takeover laws. Can also grant exemptions.