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SMELLIE SNIFFS THE BREEZE: A new big stick

SMELLIE SNIFFS THE BREEZE: A new big stick

By Pattrick Smellie

April 30 (BusinessWire) - This week's announcements on securities law reform by Commerce Minister Simon Power are profound for New Zealand capital markets after years of serial failure by both the makers and enforcers of laws to protect the gullible from bad investments.

Bringing everything currently covered by the Securities Commission, the disciplinary tribunal at the NZX, Companies Office vetting of offer documents, and something unexpected involving the Government Actuary under the wing of a new Financial Markets Authority is probably a good idea.

The FMA will be a clean slate and will have a very clear brief to engage in "visible, proactive and timely enforcement" - the thing that seems to have been missing so far. The search has been under way for some months to find the first CEO of the FMA and it must be assumed, he or she will need to look like one mean mofo, as it were.

The politics looks activist and it allows various small town rivalries between the Securities Commission and the NZX to be set aside maturely, not to mention that improved compliance is likely.

It also allows an orderly exit for the chairwoman and CEO of the Securities Commission, Jane Diplock, whose time is up anyway in September next year. Diplock is arguably more sinned against than sinning, given that legislation did not allow the commission to police in the way you'd expect when it came to finance companies' marketing and disclosure. But her credibility is irreparable within the timeframes of a government moving at speed to try to restore trust in local investment options outside housing.

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Her missing rules have apparently been created, and a tighter regime is certainly taking shape place for Mum and Dad investors from December this year, when all financial advisers need to have registered.

Power did bend a bit this week and gave a six month extension for advisers to be trained and gain the new qualification that the law requires. A sizeable sub-group of old codgers who've been giving financial advice their own way for years, thanks very much, are kicking up a stink and many will leave the industry when they realise they can't avoid sitting the professional equivalent of re-sitting their driving licence.

Meanwhile banks, in particular, are breathing a huge sigh of relief over this extension, since the regulations the Act will engender are not even finalised yet, bespeaking yet another deficiency in the legislative process that led to the Financial Advisers Act being passed in 2008 by the new government with a bunch of glaring problems.

The politics are murky, because Power and his opposite number in Labour, Lianne Dalziel, agreed on most of this stuff when Power was in Opposition and chair of the commerce select committee and Dalziel was the Minister.

That cross-party unanimity may have acted against a willingness to hear new problems arising, but Power has now listened.

A special fix-up Pre-Implementations Adjustment Bill was before the commerce select committee already because of a lot of other problems identified, there is one Supplementary Order Paper already attached, and more to come as obvious but substantial reforms are decided almost on the hoof.

Arguably Power's biggest announcement this week was to concede that more work is needed on an area where the Financial Advisers Act threatened to derail the conduct of high finance, corporate dealings and other activity involving lawyered-up parties who should be able to look after themselves.

Tucked away in the blizzard of other changes, Power hinted at a behind-the-scenes scramble to get advice on changing the way the Act treats "wholesale clients, generic advice often issued by institutions rather than individuals, and how the regime deals with group corporate structures."

In other words, what was a Sydney banker going to say when their New Zealand exporter client rang to organise a futures contract and was asked whether he was registered as a financial adviser in New Zealand? Apart from laugh.

It was going to get silly.

But there's an extra worry here, and one that goes to the heart of the deeper issues for New Zealand's thin and isolated investment markets.

It's to do with scale.

It took New Zealand lawyers, accountants, corporates and banks a surprisingly long time to realise the deep problems with the Financial Advisers Act. It seems extraordinary that it's only now, getting on for two years since the Act was passed, that fundamental errors are only just being acknowledged, let alone rectified.

This is a sign of how thin the specialist skills can become in an economy that has lost its head offices to Australia, Singapore, Japan, the U.S. and Europe, as is the amateurish rather than shabby law-making on display here too.

And a sign, too, of how small and thin New Zealand's capital markets are becoming. The best rules in then world - and we don't have them yet - might assist liquidity, but they won't create it the way volume will.

In that sense, the incentive to join as well as catch Australia becomes more compelling by the day.

(BusinessWire)

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