Power's confidence boosting agenda plays out

Simon Power at the NZ Herald INFINZ industry awards, where he introduced the super-regulator plan. Photo / Richard Robinson

The most important move so far has been to establish the Financial Markets Authority, writes Commerce Minister Simon Power.

The main focus of a Minister of Commerce should be on ensuring that effective policy and regulatory frameworks are in place to improve confidence and participation in capital markets, promote competition, support efficient business transactions, and give companies access to other markets.

And with the dark clouds of the global financial crisis and the collapse of finance companies hovering low overhead when the Government came to office, my focus on these matters was even sharper than it might usually be.

That focus centred on three issues to help create an environment that boosted productivity:

* Improving confidence and participation in capital markets through regulatory amendments.

* Progressing the single economic market agenda through the alignment of business laws to make it as seamless and costless as possible for businesses to operate on both sides of the Tasman.

* Helping create dynamic and trusted markets which strike the right balance between incentives to innovate and the effective management of risk.

The Government made it clear from the outset that its priority was to re-balance the economy, and last year's Budget introduced measures to do just that. In conjunction with those decisions, we recognised that our financial market's regulatory architecture was old and inconsistent in places through a piecemeal approach to amendments over its 30 years.

Our first moves to address this included:

* Requiring financial service providers and financial advisers to be registered and belong to a disputes resolution scheme.

* Implementing the financial adviser regime to encourage public confidence in the industry.

* Prudential regulation of non-bank deposit takers.

* Licensing of auditors by a professional accounting body.

* A licensing regime for trustees to strengthen the quality of the supervision provided by trustees.

* Changes to securities legislation and regulations to make it easier for businesses to raise capital, while ensuring timely and accurate disclosure of information to prospective investors.

But though these changes are important components of the new regime, the most important, in my view, has been the establishment of the Financial Markets Authority (FMA).

It was clear very early on that if we were to broaden and deepen our financial markets so companies could more easily raise capital, our financial sector must be subject to clear rules, and visible, proactive, and timely enforcement. Change was needed and we have delivered.

The FMA, which opened its doors just last week, has the powers and duties to do all that and to keep financial markets working for both mum and dad investors and business.

Its objective is to promote the development of fair, efficient and transparent financial markets. We wanted it to have an interest in the development of our markets in ways that are beneficial to society. The idea was for it to work with industry on new products and initiatives, something that is consistent with having a strong focus on enforcement where wrong-doing is undermining confidence in our markets.

And, after a great deal of consultation with industry, we've given it powers that the regulator has not had before. And they promise to make a big difference: being able to exercise another person's right of action against a financial market participant; enhanced warning powers and a regulation-making power to better regulate unsolicited ("low-ball") offers; an improved oversight regime for registered exchanges, including the ability to undertake real-time surveillance of market activity and enabling regulations to help ensure financial instruments cannot be structured to avoid securities legislation.

An additional tool is a dedicated market intelligence unit, which will enable the FMA to proactively monitor the marketplace. It will also have more investigation and enforcement capability.

The FMA board has a crucial role in establishing a culture of visible, proactive, and timely enforcement, and we have put the people in place to achieve that.

The chair, Simon Allen, is one of New Zealand's most experienced investment bankers, with more than 23 years' experience in trans-Tasman capital markets development, while the other board members, together with CEO Sean Hughes, ensure there is the right mix of skills and experience. The presence of three associate, or part-time, members will also help ensure the FMA maintains closeness to the market.

The fact the FMA issued a warning around low-ball offers on its first full day of operation suggests the culture change the industry has been craving for so long has arrived. To those who might have their doubts I would say let's wait and see. All of this means the Government can turn its mind more fully to the once-in-a-generation opportunity to modernise our securities law. This work has been progressing in the background, and I expect to release an exposure draft of the new legislation later this year.

Currently, the regime makes small capital raisings by growth companies difficult. The new legislation will contain regulations that allow these so businesses and investors can get on with sensible activity to help companies grow. I'm confident these can be achieved while minimising the risk that rogues will abuse these provisions.

Looking further ahead, I expect we will have much better disclosure documents in future. The combination of short, prescribed documents - such as those we are increasingly seeing in other countries - and the flexibility of the electronic securities register should lower costs for issuers while making it easier for investors and analysts to compare products and make informed choices.

Another focus of the Government is the single economic market agenda and the alignment of business laws. Progress is being made on delivery of the 27 outcomes identified by the Prime Ministers of Australia and New Zealand and now incorporated in the Memorandum of Understanding on Business Law Co-ordination

That progress includes harmonising financial reporting standards for listed issuers and other publicly accountable businesses (to be in place by July 1), mutual recognition of auditors and financial advisers, and a single examination process for patents.

Another priority is the creation of dynamic and trusted markets which strike the right balance between incentives to innovate and the effective management of risk.

For example, I intend to soon release an exposure bill on the potential of criminalising cartel behaviour, as Australia has recently done. I'm also reviewing the financial reporting framework with the aim of reducing compliance costs associated with the preparation and publication of financial statements, and I'm working on amendments to the Companies Act to tighten requirements around company directors.

The changes this Government has implemented will go a long way toward creating an environment that supports our goal of increasing productivity and the financial well-being of New Zealanders. We're conscious of the fact that though healthy markets require effective regulation, they do not need so much that they will grind to a halt.

We certainly don't want to squash innovation. The trick is to strike the right balance, and I believe the Government has done that.