In 2009, not very long after the onset of Global Financial Crisis, the Capital Markets Development Taskforce (CMDT) delivered their report to Government with a diagnosis of, and recommendations to improve, New Zealand's capital markets.
The taskforce's diagnosis highlighted deficiencies in our capital markets. They can be summarised as follows. Our markets frequently produced poor results for investors, including low quality information, uneven quality of financial advice, uncertain levels of investor protection and a limited range of product choices.
As an "engine of growth" they exhibited shortcomings - the public equity market (NZX) lacked size, depth and breadth relative to the size of the economy, the debt markets offered a limited range of quality securities, the derivatives market was failing to provide an adequate range of risk management products, fast growth companies faced significant funding gaps, and private capital markets were not well linked to our public markets.
The regulatory settings for our markets were inadequate, reflecting a lack of clear objectives, a number of agencies with overlapping roles, shortcomings in enforcement and uneven application of rules throughout capital markets. Tax and regulatory policy settings distorted saving and investment choices and constrained supply of talent and capability to our capital markets.
Almost five years on, it is timely to examine the Government's response to the taskforce report, identify what has changed and assess how well our capital markets are performing.
The Government's response has been extremely positive.
It made capital markets one of the six focus areas in its Business Growth Agenda, introduced tax changes in the 2010 budget (recommended by the taskforce and the Tax Working Group) and set about implementing the 60 recommendations of the Capital Markets Development Taskforce Report.
They include establishing the Financial Markets Authority (FMA), licensing Trustees and Capital Supervisors, enacting important changes to the regulatory regime for financial advisors, facilitating the development of the Local Government Funding Agency (LGFA), improving support for innovative and early stage companies (including establishing Callaghan Innovation), developing and launching the "mixed ownership model" (MOM) for selected large SOEs, legislation to facilitate Fonterra's capital structure proposal, enabling NZX to develop a dairy futures market and introducing the game changing(FMC) Act.
The Financial Markets Conduct Act:
• Sets out standards of conduct expected for financial market participants
• Removes unnecessary compliance burdens on capital raising for small, private and listed companies
• Promotes innovation by providing for crowd-funding and lower cost public markets
• Decriminalises conduct except where there is recklessness involved (providing instead for pecuniary penalties and a range of protective tools)
• Ensures that activities within the regulatory net are properly regulated through disclosure
• Establishes governance requirements for managed funds and licensing of fund managers and enables more user-friendly information to be made available to investors (through the use of an Investment Statement in public offerings).
The past five years have therefore been a period of huge change for New Zealand capital markets.
Equity capital markets developments include: the introduction of a new clearing system by NZX; the IPO of the Fonterra Shareholders fund and launch of the Trading Among Farmers market; the IPOs of Mighty River Power, Meridian and Genesis as part of the Government's MOM programme; and the emergence of an expansion capital market through the facilitation of public listing for young, fast growth companies.
Debt capital markets developments include: the near disappearance of the finance company sector and the development of a new regulatory regime for non-bank deposit takers; a more active Debt Management Office and Government stock market; the resurrection of Inflation Indexed bonds; the re-emergence of the Kauri bond market; and the establishment and rapid growth of the LGFA (with new bond issuance of around $2.5 billion in its first 18 months of operation).
These changes have produced significant improvements in our capital markets - a healthier environment for retail investors, markets which function more effectively as an engine of growth, significant improvements in the regulatory architecture and more sensible taxation policies from the perspective of savers, investors and the companies which use capital.
The period since the beginning of 2013, in particular, has seen major gains.
Around $7 billion of new capital was listed on the NZX and eleven companies have become publicly listed (the largest number of public company "births" for more than a decade).
The total number of trades has jumped by more than 30 per cent, the number of new investor accounts on the NZX has increased by around 25 per cent and the market capitalisation of NZX listed companies has grown to $87.4 billion, a 24 per cent year on year increase.
The Government's MOM programme has been an important contributor to these gains. It has added significantly to the size and breadth of our equity market, increased the number of retail investors participating in the market (it is estimated the programme has been responsible for 111,000 new shareholder numbers), helped provide retail investors with a better range of good quality equity product choices and has stimulated international interest in our market.
Many local authorities will be examining the MOM programme to see whether and how its principles and approach might be applied to their own business assets and activities.
The other major contributor has been the emergence of an expansion capital market through listings for young fast growth companies. Xero was an early pioneer but it has been followed by a number of others including Pacific Edge Biotech, SLI Systems, Wynyard and GeoOp. This is playing a major role in closing the funding gap for smaller, fast growth companies. The NZX is now proposing to launch a new market better tailored for these companies with modified rules, and measures designed to improve liquidity.
There are further improvements to make to New Zealand's capital markets.
But the changes outlined above are producing markets that are working better as a system.
They are generating more liquidity, higher quality information flows, better capital market disciplines and are attracting more capital and capability.
Tasks at hand
The 60 recommendations of the Capital Markets Development Taskforce Report include:
• Establishing the Financial Markets Authority (FMA), licensing Trustees and Capital Supervisors
• Enacting important changes to the regulatory regime for financial advisors, facilitating the development of the Local Government Funding Agency (LGFA)
• Improving support for innovative and early stage companies (including establishing Callaghan Innovation)
• Developing and launching the "mixed ownership model" (MOM) for selected large SOEs
• Legislation to facilitate Fonterra's capital structure proposal
• Enabling NZX to develop a dairy futures market
• Introducing the game-changing Financial Markets Conduct (FMC) Act.