New sheriff not afraid to take a hard line

Sean Hughes, head of the Financial Markets Authority. Photo / Mark Mitchell

Sean Hughes, the man who will head up the new Financial Markets Authority (FMA), is surprised the debate over regulation of New Zealand's markets still exists, given the experience of the global financial crisis and other catastrophes.

To him, a totally deregulated financial market is like an airline industry without air traffic controllers.

"There is still a voice, and sometimes quite a powerful voice, that says that regulation is no more than an additional burden on cost and does not generate any adequate return on that investment, and that the free market would work best in squeezing out those who are inefficient," Hughes said in an interview with the Business Herald.

"I think that model has been shown to be not effective, particularly in the northern hemisphere, and especially during the global financial crisis," he says.

"You only need to look at the way in which derivatives were not directly regulated in any consistent or uniform way, and any regulators in the US know that to be true. But it is interesting to me, coming in as an outsider, to hear that that debate is still alive in New Zealand."

The FMA will be the single regulator for New Zealand's financial markets, taking on the regulatory functions of the Securities Commission, the Ministry of Economic Development and the NZX.

It will usher in new powers that have not been seen before in the New Zealand finance sector, among them being the ability to retrospectively sue finance company directors on behalf of out-of-pocket investors.

The advent of the FMA comes after a series of finance company failures from 2005 to 2009, which destroyed around $8.5 billion of investor wealth and which raised doubts about the effectiveness of the Securities Commission, chaired by Jane Diplock, as a market watchdog.

Hughes, who was born in Palmerston North, is a former Australian Securities and Investment Commission (ASIC) executive, and has held several senior positions with the ANZ and at National Australia Bank.

While he does favour regulation, he is not a fan of red tape. To him, restoring investor confidence in the market will be about effectiveness of regulatory performance, and promoting what he calls a tripartite relationship between the regulator, the market and the individual.

The FMA, which officially comes into force tomorrow, is loosely modelled on the powerful ASIC, so it is perhaps unsurprising that he sees harmonisation with Australia as being the way forward.

His argument is that if New Zealand cannot harmonise, wherever possible, its regulatory approach with Australia's, there is a risk that foreign investors will see New Zealand as too different and not worth the trouble. At the same time, he says it's important not to see the Australian model as a panacea for all evils and ills, because it is a model that works in a much larger economy.

Hughes' experience in the enforcement area is across the market. He started out with the ASIC covering consumer protection matters involving financial intermediaries and financial advisers and insurance brokers.

He has also investigated and taken action against directors and officers - particularly around breach of duty and dishonesty matters. He has also been involved in stopping fund raising documents from being issued, cases of market manipulation and continuous disclosure matters.

The FMA's mandate is to rebuild confidence in the financial markets. To that end, he says the country needs to have a debate about standards of corporate governance. "Being a company director should not be seen as some form of retirement benefit," he says.

"On the regulatory output side, I think there are some things that we can learn from Australia and apply here but we might have to tailor them to a slightly different market," he says. "For me, I think the biggest areas of difference are obviously the size of the NZX compared with the ASX, and therefore the type of market supervision model that we will put in place may well have to differ, although there are some similarities."

Hughes said Australian issuers had to jump through more hoops to secure funds from the public. Dozens of New Zealand finance companies failed between 2005 and 2009, but would any of their prospectuses have seen the light of day in Australia, under the ASIC's watch?

"It is fair to say that they would have been challenged," he says. "Knowing what I know, I think there would certainly have been questions as to the extent to which the risks were adequately disclosed and whether investors could have understood [given the Australian test] what they were investing in."

Hughes has been talking about taking a twin city approach, with market supervision based in Auckland but with policy based in Wellington. Around 65 people currently work at the Securities Commission. A handful of people are coming over from the Ministry of Economic Development. Once the market intelligence unit is up and running, Hughes expects total staff to be around 100, which compares with the ASIC's staff of 2000 plus.

The revamp of security law is a work in progress. The rules on financial advisers have been tightened and the Financial Advisers Act, comes into effect on July 1. It will require advisers to fully disclose, among other things, whether they stand to benefit from the sale of a financial product they are giving advice on.

A review of the Securities Act is ongoing and it's envisaged it will be done by the middle to the end of next year and will further strengthen the way things are done.

Insider trading can expect to get some attention under Hughes' watch.

"It's an abuse of the market. It leads to asymmetric behaviour. It favours that those who have the knowledge over those who do not." But on that score, the FMA will need people to come forward and provide information, because "at the end of the day we will only be a handful of public servants".