Hon Paul Swain to Business Law Forum
Speech Notes for speech by Hon Paul Swain to Business Law Forum, 22 November 2001
I would like to take the opportunity today to look at the direction the reform of New Zealand’s capital markets regulation is heading in and to explain the context for the government’s activities in this area.
I will outline the government’s perspective on the drivers influencing the capital markets environment and the impact of these drivers on the reforms which the government has undertaken.
Our regulatory approach cannot be determined in isolation from how markets are evolving and how firms are responding. International markets are becoming much more open, driven by trade and investment liberalisation and E-commerce. Consumers have more choices and firms have more options open to them, in terms of where they locate particular operations and where they source capital. The question is how we enhance the ability of our firms to be competitive in world markets through ensuring that:
- At the very least, there are no regulatory barriers to our firms accessing capital and organising their operations to improve productivity and market access; and
- Preferably we provide New Zealand firms with a competitive advantage.
It is critical for New Zealand as a small open economy to ensure that our policies and regulatory frameworks take into account those of our key economic partners. While we will not import inadequate laws from other countries, we recognise that there are costs in our laws being different. For example, if a firm wanting to carry on business in two countries has to obtain two sets of regulatory approvals and comply with two sets of rules, the costs of these requirements are a barrier to it extending its business across the border. We also want overseas and New Zealand investors to have confidence in our market integrity, as this affects access to and cost of capital for New Zealand business.
In August last year we signed the Memorandum of Understanding between New Zealand and Australia on the coordination of business law. This showed the high priority the government places on deepening the trans-Tasman relationship and making it easier for New Zealand business to operate on a trans-Tasman basis. The removal over time of impediments to trans-Tasman business activity will deepen the existing trans-Tasman market.
What this means is that when we are looking at business law reform, the Australian law is a starting position. We will not just be takers of Australian laws, however. We will ensure in each case that the benefits of coordination outweigh the costs. We need to ensure that our strategy increases, not limits, choices for New Zealand firms and investors in a global, not just a trans-Tasman environment. We will also be aiming for our regulation to be cost effective for a New Zealand setting, having regard to any characteristics unique to New Zealand. And we will, where appropriate, use the dialogue established under the Memorandum of Understanding as an opportunity for us to influence Australian law.
In a wider global environment we need to be aware of international best practice and the need to integrate the New Zealand and trans-Tasman markets into the overall global market. There is a trend towards increasing international coordination of financial market regulation, through initiatives such as the IOSCO principles. The development of international norms puts pressure on New Zealand to demonstrate that we meet international standards. The government has a role in reassuring international investors that New Zealand has a market of integrity, with effective enforcement of our securities laws.
In this context, the government’s main goals are:
- To ensure that businesses in New Zealand, both public and private companies, have access to the capital needed to achieve growth;
- To ensure that the cost of capital is kept as low as possible;
- To ensure that there are robust financial market institutions, such as securities exchanges, brokers and advisors, and effective regulatory bodies;
- To ensure that there is a favourable environment for investors.
An important aspect of the investment environment, and the focus of today’s forum, is the regulatory environment. However, the government’s role in providing a favourable environment for investors is not restricted to a regulatory role. The government has also introduced wider economic development initiatives aimed at enhancing the capability of firms, particularly at the early stages of their life cycle. These activities include the programmes provided by the government through Industry New Zealand. I will mention a couple of examples.
The Incubator Support Programme, delivered through Industry New Zealand, comprises a management support service and annual cash awards for incubators adopting best practice programmes and processes. Incubators typically provide work space and support services for entrepreneurs and new businesses at the start-up and early stages of development.
The New Zealand Venture Investment Fund has been launched to finance business start-ups, in partnership with private sector venture capital.
The aim is to increase the level of seed and start-up investment activity in the New Zealand venture capital market, following a strategy used successfully by countries such as Israel and Singapore. This is seen as requiring short term involvement by the government in a part of the venture capital market which is at present under-developed.
Another important aspect of the business environment is the requirement for skilled people. The government’s initiatives to attract more skilled and business migrants should have positive spin-offs for the financial markets.
In the longer term we have to make sure that our tertiary education system is geared to met the needs of individuals and business.
The government, through the TEAC process, is taking a more strategic approach to our tertiary education system with the establishment of a new permanent tertiary education commission in July 2002.
I will now focus on the government’s regulatory reforms, and where they fit in the context of the environment I have outlined and the goals we are aiming at.
A notable advance this year was the implementation of the Takeovers Code. The code ensures the fair treatment of all shareholders, and is designed to improve investor confidence by providing an orderly process which is transparent and gives certainty for companies to follow when staging a takeover. By providing a regime which is similar to those in other jurisdictions, the code allows international investors to have greater confidence in the integrity of our market.
Prevention, Detection and Enforcement of Insider Trading
The government announced earlier this year decisions to improve the prevention, detection and enforcement of insider trading in New Zealand. The Securities Markets and Institutions Bill which will implement these reforms was introduced to the House earlier this month.
The key changes introduced in the Bill include:
Prevention: The implementation of a statutory continuous disclosure regime for listed issuers and a requirement that directors be required to disclose share dealings at the time that they occur.
Detection: Statutory obligations will be placed on securities exchanges operating in New Zealand to provide assistance and information on breaches of securities law to the Securities Commission.
Enforcement: The Securities Commission will be given a role as a public civil enforcement agency for insider trading and continuous disclosure.
Functions of Regulatory Bodies
We have also reviewed the functions of the Takeovers Panel and Securities Commission. This has resulted in proposals to enable these bodies to carry out the enforcement of securities law more efficiently and effectively.
The key change proposed out of the review is increased investigation powers for the Takeovers Panel regarding takeovers activity and the Securities Commission in relation to secondary market activity.
The package of changes signals a fundamental shift in the Securities Commission’s functions, from a general monitoring agency to an investigatory and enforcement body. This change will align the Commission’s powers more closely with those of ASIC in Australia and other equivalent securities regulators.
Framework for Mutual Recognition of Securities Offerings
The Bill also includes a framework to allow for the implementation of arrangements for the mutual recognition of securities offering requirements between New Zealand and other countries. Such agreements could significantly reduce costs for issuers offering into other countries. This proposal is consistent with the aim of removing impediments to trans-Tasman business activity and was at the initiation of the Australian government.
NZSE Restructuring Bill and Co-regulatory Framework
Some of the work aimed at ensuring that there are robust financial market institutions has been initiated by the market itself. The NZSE wants to put in place a legal framework that would allow its members to vote to demutualise. The private Bill which will enable this is now in its committee stages. In the course of the consideration of the Bill, it was agreed that the new regulatory measures applying to the NZSE should apply to all securities exchanges. These measures are part of the Securities Markets and Institutions Bill. They couldn’t be included in the NZSE Bill because it is a private Bill.
The select committee decided that the Securities Commission should be given a power of direction over the activity of exchanges and a role in approving the rules of securities exchanges, and the government should be given an ability to impose percentage ownership limits on securities exchanges. .
This introduces a new co-regulatory framework for securities exchanges.
This framework means that exchanges will perform the direct daily supervision of the market, with the statutory regulator - the Securities Commission - broadly overseeing the market. This involves the exchange and the Commission cooperating to provide a comprehensive co-regulatory framework of market supervision.
The focus of these measures has been on aligning our law with Australian law and reducing compliance costs for businesses operating in the market, where this is consistent with the overall goals we are trying to achieve.
The government is also undertaking a fundamental review of New Zealand’s insider trading legislation. The review will also consider the possible implementation of market manipulation law, what entities and financial products our securities law should apply to, whether criminal penalties should be imposed for breaches of our securities law and what improvements can be made to current civil penalties and remedies. Three discussion documents on these issues will be released within the next few months.
These will seek views on the policy justifications for regulation of these areas and possible regimes which could be adopted in New Zealand, taking into account the law in Australia and in other jurisdictions.
Business Law Reform Bill
One of the goals I mentioned was ensuring that the cost of capital raising is kept as low as possible. A number of changes to the Securities Act which will be made through the forthcoming Business Law Reform Bill are designed to reduce the cost of capital raising for small, innovative and potentially high growth enterprises.
Some of the areas being revised in the Business Law Reform Bill which is currently being drafted are:
- Amendments to the Securities Act 1978 to free up the current requirements governing pre-prospectus advertising. This would enable intending issuers to determine the level of public interest in a potential offer before incurring the compliance costs associated with disclosure requirements prescribed under the Securities Act.
- Amendments to provide for an exemption from the mandated disclosure requirements of the Securities Act for offers made only to wealthy and experienced investors. The term “wealthy and experienced investors” should include persons who have knowledge and experience in investment matters and are well placed to bear the financial risk.
You have heard from me about the government’s perspective on where the market is heading. You will have the opportunity to hear the market perspective from the next speaker, Simon Allen.
This forum is a chance for the business community to provide feedback to the government on business law issues. The government is keen to hear your views on the work we are doing, what more we can do, and how the government and the business community can work together to achieve New Zealand’s goals.
In the internationalised environment of the twenty-first century, it is essential that government and business have an effective partnership. This is the only way we can ensure that New Zealand has the greatest possible influence in the trans-Tasman environment and the greater global market.
I encourage you to take this opportunity to contribute to the debate on how we can together achieve our goals for New Zealand’s capital markets.