Dalziel: Securities Law Update Conference
Hon Lianne Dalziel
Minister of Commerce, Minister for Small Business,
Minister of Women’s Affairs, MP for Christchurch East
29 May 2006 Speech Notes
Speech to Securities Law Update Conference
Te Papa Tongarewa,
Good morning and thank you for the invitation to address the Securities Law Update Conference today.
I have been asked to provide you with the government's perspective on the general direction of the New Zealand market and in particular on the progress of the Securities Legislation Bill, which was introduced in 2004. As you are aware the Bill includes proposed amendments to the Securities Act 1978, the Securities Markets Act 1988 and the Takeovers Act 1993, and is part of the government's commitment to ensuring New Zealand has up-to-date and modern business law to support growth and innovation, by providing certainty to business and keeping compliance costs as low as possible.
This is very much a part of what the government has defined as our economic transformation agenda, which as was stated in the Budget speech, “lies at the heart of this Labour-led Government’s ambitions for the future.”
Before coming back to the Securities Legislation Bill can I briefly mention the review of regulatory frameworks, which I announced last Monday at the Vector Winter Lecture Series. One of the features of the review is to see if we can reduce the cumulative effect of compliance that impacts heavily on smaller businesses. It is difficult to address the larger issues when the noise is generated by the smaller companies that simply do not have the scale, or scope to deal with a multi-layered range of regulatory frameworks and a multiplicity of compliance requirements.
That is not to say that the big issues will never be addressed by the government as some commentators have suggested – it just means that they are not the focus of my work. I think that if we can clear away the small things that are annoying business, then we could focus on what the real issues are. Sometimes the issues are not the ones people think they are, because they haven't updated their information or they have misunderstood the rules.
My job is to see whether government can make it easier at the point at which regulatory frameworks intersect, which can be at the sector level or the level of the firm. The fast-track mechanism we are designing is essential to this work and I hope you too see this as an opportunity to highlight any of those annoying and seemingly meaningless compliance issues that you might come across in your work. I have made the same point to the regulators too.
Under the Quality Regulations Review, the government will also be focusing on the removal of unnecessary regulatory constraints on economic growth as well as the continuous quality improvement of regulatory frameworks and processes. We are promising that Regulatory Impact Analysis will become fully integrated into the policy development process – and that means clearly identifying the objective; considering any existing regulatory frameworks; setting out options; taking a risk and opportunity check; conducting a cost/benefit analysis; and consulting with key stakeholders. Although I believe we have done well in certain regulatory proposals, in others I think we have fallen short of the quality standard we need to adhere to in order to promote economic growth and inspire business confidence. We are committing to a quality process going forward.
I am confident that the development of an appropriate regulatory framework for the financial services sector will meet this high standard. I am absolutely convinced that if we put the effort in at the beginning of the process we will get the best result. The processes we are using are in my view robust, responsive and based on sound analysis. This will ensure that our proposals are effective and actually achieve the objective.
In this case the objective is to design a framework that encourages investment in New Zealand’s financial markets by promoting a sound and efficient financial system in which the public and industry can have confidence.
The Securities Legislation Bill, and some of the other reviews that I’ll be discussing this morning do both, that is, they are designed to remove unnecessary regulatory constraints and they are designed to continuously improve the quality of regulation going forward.
In relation to removing unnecessary regulatory constraints, an example is the announcement I am making on upcoming work on directors and officers disclosure duties because of the feedback I have received.
I have received a number of comments on the current directors and officers disclosure obligations under the Securities Markets Act. Industry has told me that:
- the definition of “officer” under the regime is too wide and is acting as a disincentive to companies listing in New Zealand ; and
- there is a potentially misleading effect caused by disclosure relating to transactions involving officers having to disclose non-beneficial shares in, for example, employee superannuation share schemes.
This is exactly the type of thing that the review of regulatory frameworks will be targeting – identifying areas where business has raised concerns with the costs of regulation and considering whether the law needs to be changed. I will release more information on this work shortly, but the main message is that government will respond to industry concerns, and this is exactly the type of contribution we are looking for under the review of regulatory frameworks.
In relation to the continuous improvement of regulation, one example is the work my officials have been doing which includes consulting with many of you on how to improve the framework around financial products and providers to make sure that any rules are consistent, well targeted, proportionate and achieve the required purpose of promoting a sound and efficient financial system while not imposing unnecessary costs.
I hope that you will take all the opportunities that I am promoting to feed back to government any concerns that you have – and any solutions that might be worth considering.
Securities Legislation Bill
So to turn to the Securities Legislation Bill.
Purpose of the Bill
The purpose of the Securities Legislation Bill is to encourage investment in New Zealand’s financial markets.
The Bill aims to do this by promoting confidence and participation in New Zealand's securities markets. The Bill does this by addressing a number of current deficiencies in our securities markets law:
- The first deficiency relates to the effectiveness of our securities markets law - our insider trading rules are complex; the Investment Advisers (Disclosure) Act fails to deliver meaningful information to consumers; and disclosures made by substantial security holders are confusing.
- Second, other aspects of our law are out of step with international norms. This government recognises that, given the small size of our capital markets in global terms, there is a real investment risk if our regulatory environment looks too different to overseas investment destinations.
- Third, regulators of our financial markets must have the tools to enforce the law effectively.
Content of the Securities Legislation Bill
To briefly run through the content of the Bill, the main provisions include:
- A new insider trading regime which will focus on the damage such conduct poses to the efficiency of, and confidence of investors in, financial markets;
- Prohibitions against market manipulation – this is conduct which creates a false impression of securities trading activity, price movement, or market information;
- Simplifying the substantial security holder regime;
- Improving the investment adviser and broker disclosure law by requiring additional information to be disclosed to clients before giving advice, and by making all disclosures mandatory. Also, the Securities Commission is given a public enforcement role in this area; and
- A complete overhaul of the size and range of penalties and remedies available under securities and takeovers law aimed at deterring illegal behaviour and encouraging compliance.
Where the Bill is up to……
As you will be aware, the Securities Legislation Bill is currently awaiting the Committee of the Whole House stage of the legislative process. The government is keen to progress this Bill, but there has been some delay caused by the election and also further work on the Supplementary Order Paper to address a number of concerns raised by market participants on parts of the Bill affecting advisers and insider trading.
Changes that I am hoping to make through the SOP will address concerns that:
- investment advisers may not always be able to meet their disclosure obligations if they have to make all the disclosure prior to giving advice;
- the requirement that investment advisers disclose whether or not they have been the subject of an adverse finding by a tribunal or disciplinary body could be too broad;
- professional advisers such as lawyers, accountants and investment advisers may be inadvertently caught by insider trading laws when acting in their professional capacity – so I am planning to allow exemptions for professional advisers.
The SOP, which is still being drafted and will have to be consulted on with other parties, will be tabled at the Committee of the Whole House stage of the Bill, which means that the Bill is likely to go through its final legislative stages in the next couple of months.
Which brings me to the regulations under the Securities Legislation Bill.
Regulations under the Securities Legislation Bill
In accordance with the Quality Rules approach my officials have already sought public submissions on the proposed contents of regulations so that they can be introduced quickly once the Bill is enacted. Thank you to those who have contributed to this process. My officials have told me that they have received intelligent and practical comments on the current and proposed application of regulations and the costs involved. I am hoping to take policy proposals to Cabinet in mid-late 2006 and draft regulations by the end of the year.
There are four areas of the Bill requiring regulations:
- Investment advisers’ and brokers’ disclosure;
- Substantial security holders’ disclosure
- Insider trading exemptions; and
- Market manipulation exemptions.
Investment advisers’ and brokers’ disclosure
The Bill will require investment advisers and investment brokers to disclose more information prior to giving investment advice, or receiving investment money or investment property. The purpose of the disclosure regime is to help consumers make an informed assessment on the quality of the advice they receive, including matters like conflict of interests.
This will lead to better-informed investors. However, to be effective, disclosure should be meaningful which means it must be consumer focused, well timed, and easily understood. I am aware that increased disclosure can mean increased costs to industry, but I am all for plain English disclosure that says what people need to know up front – and that doesn't takes pages. In fact dense complex disclosure documents that need lawyers to interpret them are usually designed to protect the other party's interest not the consumer's interest.
In the discussion document, we asked submitters to consider a number of disclosure obligations suggested by the independent Taskforce on Financial Intermediaries in addition to existing disclosure obligations under the Bill.
This is because the work under the Securities Legislation Bill will be used as a standard setter for disclosure obligations of other intermediaries, where this is appropriate. So your submissions will be fed into the Review of Financial Intermediaries.
Insider trading and Market manipulation exemptions
We have also listened to the submissions made at the Select Committee stage in relation to insider trading and market manipulation exemptions.
The government has always recognised that there will need to be some exemptions from the market manipulation and insider trading prohibitions to ensure that legitimate activity is not captured. It was thought best to provide these exemptions through regulations so we could consult on them further with the market and so that the regime was flexible enough to include other exemptions through regulation that could arise as markets develop.
Some of these possible exemptions were raised at Select Committee and others have been raised by market participants approaching officials directly. As a result of these comments, we outlined a number of possible exemptions in the discussion document for conduct that could be regarded as “legitimate market behaviour”.
Other current work
In addition to the Securities Legislation Bill, officials are carrying out a range of work in the financial sector:
- Business Law Reform Bill (Financial Reporting Review changes, Phase one credit unions changes and Companies Act amendments);
- Insolvency Law Reform Bill;
- Limited Partnerships Bill;
- Mutual Recognition Regime for Securities Offerings;
- Technical amendments to the Takeovers Code; and
- Work on Implementation of KiwiSaver
- The Review of Financial Intermediaries;
- The Review of Financial Products and Providers (RFPP);
- The Review of Domestic Institutional Arrangements (led by Treasury); and
- The Implementation of FATF 40 Recommendations on Money Laundering and Anti-Terrorism (led by Justice).
The important thing to note is that the Ministry of Economic Development is managing this work to ensure that all regulation is consistent, and that costs are minimised.
Right, so what’s next?
In the remaining time available I would like to focus on two of the major reviews being conducted under the Commerce Portfolio – the Review of Financial Products and Providers (RFPP) and the Review of Financial Intermediaries.
Can I say at the outset that, as with all regulation, neither review is intended to bring about a “zero risk environment”. The government cannot protect members of the public from all investment risks. Under the work proposed for both reviews, consumers will still be responsible for their decisions – it’s just that unethical, fraudulent, dishonest or negligent advisers will find it harder to practice, and there will be clearer and more consistent standards across the range of financial products and providers.
Review of Financial Products and Providers
The RFPP was originally a number of separate reviews including:
(i) the response to Law Commission report on Life Insurance;
(ii) the Review of Ratings and Deposits;
(iii) a Review of the Securities Act;
(iv) the Ongoing Review of Credit Unions; as well as
(v) concerns which had been raised about the regulation of finance companies: disclosure and beyond.
The Review is wide-ranging and encompasses the following products and providers:
- Insurance (life, general and health);
- Securities offerings;
- Non- bank financial institutions (credit unions, building societies, finance companies, friendly and industrial and provident societies; and
- Collective investment schemes (unit trusts, participatory securities, group investment funds).
The Review is a four-staged process and is currently at the tail end of the second phase. In Stage One, officials developed a framework for the regulation of the non-bank financial sector; assessed the current regulatory regime against the framework; and considered general directions for reform. The key message from this work was that while the regulatory framework was not fundamentally flawed, there were areas where: costs on business could be reduced; regulation made more effective; and consumer protection enhanced.
As I noted earlier, the aim of this work is not to create a zero risk environment; there will still be entities that fail. Instead, the aim of this Review, and the overall review of regulatory frameworks, is to make sure that the regulation of our financial markets is effective and consistent, without stifling innovation or imposing excessive costs.
The second stage of the Review has involved consultation with industry experts and key players as officials tested options for reform. For both the Financial Intermediaries Review and RFPP, Ministry officials have made a conscious effort to engage with key stakeholders early in the process.
In relation to financial intermediaries, Ministry officials have met with a range of stakeholders, including those entities who expressed an interested in being “approved professional bodies”.
In relation to the RFPP, early consultation was undertaken on the problem definition and then advisory groups of market participants were formed to develop and test out options for reform. I have had positive feedback from stakeholders about the use of advisory group meetings as a consultation tool. Officials too have benefited from this early engagement with industry experts. They have found gaining access to the industry insights has helped them to develop options which are appropriate for market conditions and which target the problem in a way which does not impose unnecessary burdens on industry, while ensuring appropriate consumer protection.
Officials are now completing the discussion document for the Review of Financial products and providers, and it is anticipated that subject to Cabinet approval the discussion document will be sent out for public consultation in July/ August.
Review of Financial Intermediaries
The objective of the Review of Financial Intermediaries is to ensure that consumers can rely on intermediaries providing them with the information they need to make good decisions.
- adequate disclosure of intermediaries’ conflicts of interest, fees and levels of competency so that investors/consumers can make informed decisions about whether to use an intermediary and whether to take their advice;
- and it means ensuring that intermediaries have the experience and expertise to effectively match an investor or consumer with products that best meet their needs and risk profile;
- accountability for advice given and incentives for intermediaries to manage any conflicts of interest in an appropriate way; and
- encouraging innovative behaviour.
Cost of this regulation
At the forefront of most intermediaries’ minds is the issue of cost. I think there have been some nervous glances across the Tasman. But as I have said recently I don't look jealously in that direction and think I wish I had what they have but this is a good thing because we can learn from what they have done.
Nor is this an industry in crisis. I actually think that is a good thing too, because crisis can lead to over-reaction. The government has had time to take stock and listen to what both the sector is saying and what consumers are saying in terms of trustworthy and reliable advisers. And they are saying the same thing, namely that:
- the lack of consistent domestic standards means that it is hard for consumers to compare intermediaries.
- consumers have limited information and therefore, only a limited ability to evaluate their financial intermediaries.
- consumers may not be able to verify the information provided by financial intermediaries.
The consistent thread is the need to professionalise the industry; something the industry is leading.
The reality is that most consumers do not have experience and expertise in investing in the financial sector, and, if there is a problem with an intermediary, there is no standard dispute resolution or disciplinary process – this was noted in the 2005 Ministry of Consumer Affairs survey which looked at consumer experiences in a number of sectors operating in the finance market.
Where the review is up to
The review of financial intermediaries started back in 2004 when an independent Financial Intermediaries Task Force was formed to propose changes to the regulatory regime for financial intermediaries.
Government asked the Taskforce to consider changes that would ensure quality financial advice is offered to the public in order to assist New Zealanders to make the most of their savings. The Task Force recommended the adoption of a co-regulatory model for financial intermediaries. Under this model, industry-led “approved professional bodies” and a government regulator will work together to regulate financial intermediaries.
In December 2005, Cabinet agreed (in principle) the co-regulatory model, with Ministry officials directed to carry out the detailed design work, around the following features:
that there would be industry-led approved professional bodies and a government regulator (the Securities Commission) which would work together to regulate financial intermediaries;
financial intermediaries would be subject to enhanced disclosure obligations when providing financial advice, with obligations being dependent upon the class of financial intermediary;
legislation would set a number of conduct standards for financial intermediaries;
financial intermediaries would be subject to dispute resolution and disciplinary procedures.
Ministry officials have been consulting with potential Approved Professional Bodies, the Securities Commission and other stakeholders on the co-regulatory model and are working on a discussion document. As I said before they are linking the work on investment advisers and brokers under the Securities Legislation Bill and accompanying regulations to this work on financial intermediaries, particularly in relation to disclosure obligations and the enforcement powers of the Securities Commission.
We are relying on your experience so that we can design a regime that is consistent with existing regulation and which avoids imposing any unnecessary costs. I want this to be a model of good regulatory practice. We all agree that there should be rules but we want the right rules for the game. All going well, I should have Cabinet signoff on the policy by the end of this year and legislation implementing the co-regulatory framework passed in 2007/2008.
In conclusion, I am very excited by the work that I am responsible for in this government, because it will make a major contribution to the economic transformation agenda. The key to what I am contributing is the commitment to a quality regulatory environment going forward. We want to lift our game, because we believe it is better for everyone that we do. We already rate number one in the World Bank survey for ease of doing business – that's up against 155 economies.
We are regarded as having the best quality of government, because we don't have corruption and backhanders as business as usual.
We remain committed to right-sizing regulatory frameworks that are proportionate to the risks people face and that support confidence in our financial markets.
But we remain clear that the government cannot and will not assume all of the risks because most of them belong to business and belong to investors.
Entrepreneurship and investment are about risk taking – the number eight piece of wire is New Zealand's symbol of our can do attitude – it lies at the heart of creativity and innovation. It is part of our national identity – our brand – "exciting and dynamic" – that's how Tony Blair sees us. Trusted and good for business - that's how the World Bank sees us. Delivering reliable high quality products and services – that's how our markets see us. Committed to environmental values – that's how our tourists see us. World leading science and research – that's how history already sees us. And that's how we should see ourselves. Economic transformation is about confidence – the confidence to achieve great things and we can.
Quality Regulatory Frameworks don’t sound as if they are part of that agenda but when you think about all the things they are designed to protect – it is clear that they are not only part of the economic transformation agenda they underpin it.