Q+A: FMA CEO Rob Everett

Q+A: FMA CEO Rob Everett interviewed by Corin Dann
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KiwiSaver providers must supply ‘critical information like their fees’– FMA CEO Rob Everett

‘Our beef is if you want investors to really engage in KiwiSaver and make those decisions about which fund they’re in, what their lifetime plan is, they need to be able to see critical information like their fees, and they need to see it in a way they understand it, and that’s dollars, not percentages.’

Rob Everett was speaking to Q+A’s Corin Dann about the Financial Markets Conduct Act which comes into force this week – signalling a big shake up for the sector.

Financial service providers will have to provide much simpler, clearer information. Rob Everett told Corin Dann how that would be enforced, ‘ you can make them rewrite it. You can suggest some rewriting. And in a worst-case scenario, you can stop them putting the document out and halt the deal. So we wouldn’t expect to have to do that, but we have that power, and that’s important.’

Please find the full transcript attached and you can view the interview here.

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Q + A
Episode 38
ROB EVERETT
Interviewed by Corin Dann

CORIN Robert Everett is the CEO of the FMA, our financial markets watchdog. He joins me now. Good morning, to you.

ROB Good morning.

CORIN The biggest change in 30 years – what will consumers see?

ROB Yeah, so it’s a huge change. And in all, it’s been about ten years in the coming, so there’s been a lot of work that’s had to be done. I think the key issue for the new regime is to focus on the consumer. So it’s making disclosure easier to read. It’s making it shorter. It’s forcing providers to operate in an environment where they put their customer first. So it’s a really huge change, but these things take a long time to really start to bed in. So we’re at the point now where the new rules are in place. And our mission going forward is to make sure that the providers do the job that they’re supposed to do and consumers get the information they need.

CORIN So let’s work through that. So perhaps someone wanting to dip their toe into the share market or a managed fund, they look at the disclosure document or prospectus or something – what are they going to see now that’s different? It’s going to be, what, in plain English? One sheet maybe?

ROB Yeah, so the focus is on understanding that up till now – and New Zealand’s no different to the rest of the world, by the way in this respect - people aren’t reading an actual product disclosure. They’re not reading the investment disclosure. It’s too long, it’s too complicated, it’s too lawyerly; the main information really want to see is buried away somewhere. So the approach of the new legislation is to try and create a disclosure that people will actually read and will influence decision. So the risks are up front, the key business metrics are up front, the document’s shorter. It doesn’t mean there’s not more information you can’t find somewhere else, but the core information the investor needs to look at should be shorter, and it should point straight to where they need to go.

CORIN Have the actual providers in New Zealand been, what, deliberately making it difficult? Or is it just the nature of how it’s evolved?

ROB I think it’s more the nature of how it’s evolved. You know, once people get involved in putting these documents together, they look at the last thing that went wrong, and they try and put in some wording that will help them avoid that going wrong next time. And then it just builds up, and it gets completely unmanageable. And again, New Zealand’s the same as the rest of the world. So really, what our legislation tries to get us to do is to cut through all of that to go straight to the core of why you should invest and what you should be careful about in making that decision.

CORIN And will you be the grammar police? If someone hasn’t explained it in clear English, you will do something about that?

ROB Yeah. I mean, obviously, we’ve got better things to do than correct grammar, but if that’s getting in the way of people getting to the core of the decision they need to make, absolutely, we’ll start leaning on people. We won’t look at every document. You know, we’ll cherry pick which ones to look at. But we’re already influencing the industry to take a much more investor-focused approach to the document.

CORIN But what can you do, make them rewrite it?

ROB Yeah. Absolutely. You can make them rewrite it. You can suggest some rewriting. And in a worst-case scenario, you can stop them putting the document out and halt the deal. So we wouldn’t expect to have to do that, but we have that power, and that’s important.

CORIN Do you think if you’d had had this legislation in place with the finance companies, then it might have made a difference? Is that what we’re talking about here?

ROB Yeah, it absolutely would have made a difference. I mean, with the finance companies too, they’re now regulated, they’re now licenced by the Reserve Bank, which they weren’t at the time. And the disclosure rules at the time were very lawyerly, very easy to get lost, can’t see the wood for the trees. We now have the ability. And it’s not perfect, it will never be perfect, but we have the ability to really lean on the companies, the lawyers, the accountants to tell the investor what’s the key information.

CORIN They were just chasing yield. They were chasing a high interest rate that they couldn’t get in the bank. You are never going to be able to stop that?

ROB No, and that will happen, particularly in the current environment. You will see people chasing the high yield. But the issue is can you better point out to them that for chasing that high yield, they’re taking a much higher risk? So they need to look at that balance between the yield they’re being suggested and the risk that they’re taking. If you look back to the finance companies, the core issue was the risk didn’t shout itself out at you from the document.

CORIN And what we’ve seen is obviously another big continued surge in housing. What do you want here? Do you want New Zealanders to be more diversified, to actually move out of property a bit and get more money into financial services? Is that what you want? Is that the goal?

ROB I think the goal is a broader, deeper capital market that investors are more confident with participating in. So it’s not for us to direct people out of one particular type of investment into another. What we’re really mandated to do is try and make people more confident, and if they do invest in the share market or other financial products that aren’t property, they can be confident it’s well regulated, they can be confident they’re not going to get ripped off, they can be confident that if something does go wrong, someone goes after the wrongdoers. So I think it’s more about encouraging New Zealanders to feel that their capital markets are a safe environment.

CORIN And when you go after the wrongdoers, I mean, there haven’t been a lot of authority- action taken against companies over the years in New Zealand.

ROB Yeah.

CORIN Is it time you actually made an example of people when, if somebody does something wrong, really take them all the way?

ROB Yeah. So, you would’ve seen in the aftermath of the finance companies a fair amount of court action against people that didn’t do what they were supposed to do. And we still have those powers, and, in fact, the act gives us a lot more power to intervene a lot earlier in the piece. Whilst we have the power to take people to court, which is critical – you’ve got to make people scared that if they do the wrong thing that someone will come after them – we also have a lot of powers that enable us to get in earlier in the piece and say to providers, ‘You know what? That’s not the right way to go around this. You need to start thinking about doing this differently.’ And in theory, the end outcome of that is you reserve taking people to court for the very worst offences, and you start to influence people to behave in the right way. But we have the big stick and we’re quite happy to use it if we need to.

CORIN How would you describe conduct in the New Zealand financial market at the moment?

ROB Well, I should touch some wood, but the experience you see in other markets - the UK, the US, for instance - hasn’t replicated here in quite the same way. So you haven’t had the mis-selling scandals, you had the bank collapses, if you ignore the finance company piece. But that’s not to say it can’t happen here. So whilst I think conduct here is probably in a better place than some of those jurisdictions, you can’t leave this alone. You can’t leave it till the next crisis and then wade back in again, so it has to be irritative. So the complacency risk is significant here, and as interest rates stay low and people start to get adventurous about what they invest in, we have to be right on top of the providers all the time.

CORIN KiwiSaver is probably where most New Zealanders get their exposure. This will require the disclosure of fees in dollar terms. It seems to have been a bit of sticking point, a pushback from the banks. Are they making a fair point? They’re saying it’s too difficult to provide that information in dollar terms, what these amount to each year.

ROB Yeah. And one of the issues with KiwiSaver, you’re absolutely right. It’s probably the only experience with the investment markets that most people have, so it’s absolutely critical to get it right. And the regulations lay out some real minimum standards that have to go into the disclosure documents, and the industry’s compliant with that; that’s fine. Our beef is if you want investors to really engage in KiwiSaver and make those decisions about which fund they’re in, what their lifetime plan is, they need to be able to see critical information like their fees, and they need to see it in a way they understand it, and that’s dollars, not percentages. So that push, yes, it’s difficult for the industry – they have to rewrite their systems, they have to do a bunch of work. But you know what; KiwiSaver has been such a boom for New Zealand financial services and providers. They really have to up their game so that they’re thinking about the consumer and not just the minimum standards.

CORIN Because those consumers, it sounds like, don’t know what fees they’re paying. Is that right?

ROB Yeah. I mean, our experience tells us that a lot of consumers have very little understanding of their KiwiSaver at all, even to the point of not really understanding which provider a lot of them are with. So we have to do a lot of work, both with the providers on the one side and the consumers, the investors, on the other side to encourage them to ask those questions, to look at the documents and to make their providers give them stuff that’s actually useful that they can actually read.

CORIN Do you have a view on the fees? Are they generally too high, or do you have a…?

ROB I think if you look at the size of the New Zealand market and the relative newness of KiwiSaver, I would say, broadly speaking, the fees are sort of in the range you would expect. So the issue here is do people understand why they’re paying fees, what they’re paying for so that they’ve got a choice, so that if they want to go with a low-cost provider that’s actually charging less fees they actually understand the decision they’re making? And up till now, I think that wouldn’t have been the case.

CORIN Rob Everett from the FMA, thank you very much. Much appreciated.

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