The price of financial security: Who should fund the Securities Commission?

Commerce Minister Simon Power is committed to giving the Securities Commission new responsibilities. Photo / Mark Mitchell

The Securities Commission recently received an exceptional budget boost from the Minister of Commerce.

Arguably, the impetus for the boost came from criticism levelled at regulators worldwide for being 'asleep at the wheel' before the global financial crisis and inadequate Government resourcing of its market watchdogs.

Few would disagree that more funding for the Commission was appropriate but the boost came solely out of public coffers. The Government ought to consider more efficient funding models.

Minister of Commerce Simon Power is committed to tasking the Securities Commission with new responsibilities and deliverables. But with serious new costs loaded onto the public balance sheet it is timely that new thought be given to the Securities Commission financing itself through successful prosecutions as well as fees on banks, finance companies and other deposit taking institutions.

The Commission's budget is boosted to the tune of $2 million in 2009-10, $4 million in 2010-11 and $2.9 million in each of 2011-12 and 2012-13. Not bad in a time of serious cutbacks and possible mergers in other parts of the Government.

But there may be better ways to fund the Commission. For one thing, non-public sector funding would satisfy Government drivers for tighter expenditure by aggregating costs across a relatively large number of parties.

Those parties are profitable institutions who are most able to afford it.

But there are many benefits in alternative funding aside from the obvious savings to the Government's hip pocket. It would provide an appearance of independence from Government interference and require the Commission to approach investigations with cost-effectiveness as one driver.

Furthermore, some argue the Commission is not appropriately incentivised to be a regulatory watchdog.

If the Commission were allowed to take recoveries from prosecutions and fines as income it might even turn a profit. Incentives work. Reduced Government funding might actually incentivise the Commission to more robust investigations.

Two obvious funding streams exist. First, successful prosecutions and fines. Second, through costs more directly apportioned to business. The Commission currently receives a dribble of fees in addition to funding through Vote Commerce. Third party fees were an insignificant $237k of the total $7.9m budget in 2008/09 but this demonstrates the Commission has capacity to receive them.

This issue raises wider questions about how New Zealand can best source funding for state agencies. Because Government is a monolith, too little thought goes into smart funding models.

The classic response from bureaucracy when this is raised is either the cost of building new and improved complexity into the system is prohibitive and/or the pressure on the sectors affected is inequitable. There is little empirical work produced for these views and they are based on assumptions.

The Commission has previously attempted to take a more commercial line. For example, in 2003 the Ministry of Commerce raised costing the Commission's advice to the Minister as part of its funding. The call for more funding came out of costly liaison with NZX on the initial rule approval for the NZSE rules.

Costs were in the order of $120,000. The response to costing from the Government was that "...this option was rejected as it does not take into account the public benefits of the NZX's major initiatives under the new regime." (Read: bureaucratic stonewall).

Would this driver result in a 'witch-hunt' by the Commission against New Zealand business? Highly unlikely. The Commission has sound governance directives. Currently, the decision to prosecute or fine a company is taken after legal advice and on the basis the case is likely to have a good chance of success. Decisions are subject to natural justice and appellable.

If the funding from the Commission comes from New Zealand business the costs of the Commission investigations are more directly and equitably apportioned to those likely to be responsible for them. In other words, why should 'joe public' pay to investigate dodgy businesses when the non-compliant businesses claim in each disclosure statement and annual report that they are operating according to appropriate standards?

Many argue that the absence of any 'moral hazard' was a factor in the economic crisis in 2008. Ethics was absent in many cases in the collapse of our finance companies.

The ethical restraint on finance companies was clearly not coming from within the profession itself.

If the business community had to directly and meaningfully fund its own investigator it might lead to an incentive for overall better ethical practice. Undoubtedly, the business community and its regulator might publicly butt heads more often but that leads to healthy public discourse.

There is no doubt the Prime Minister John Key's dream of New Zealand becoming a financial services hub can only be realised if we have a powerful regulatory infrastructure.

Before the GFC nailed Ireland, the former 'Celtic Tiger' set out to become a worldwide financial centre and succeeded. The clear conclusion of many investigating Ireland's downfall is that is failed to have sufficiently strong oversight of its financial services industry making it an easy target for the unscrupulous.


Simon Arcus is a lawyer who has lived in Sydney and Auckland