Finsia's ‘Government Speaks’ breakfast series
13 December 2006 Speech Notes
Speaks’ breakfast series
Te Papa Wellington 7.30am
I have been asked to talk to you about the regulatory environment under which the financial sector operates. Since 1999 the government has pursued a series of major reform programmes designed to encourage greater confidence and participation in the financial sector. So this is a timely opportunity to reflect on what we have achieved and to look at the current programme in that context.
I would also like to discuss the results of your Poll, which you are releasing this morning, because I believe they are significant indeed in terms of the government's overarching ambition with respect to the reviews of financial intermediaries and financial products and providers.
In addition to these reviews I am personally leading a review of regulatory frameworks, which is designed to ensure that both the legislative framework and the enforcement mechanisms are not only efficient and effective, but also that they are proportionate to the risk they are designed to manage. The Quality Regulation Review is a multi-faceted review of the impact that particular regulatory frameworks have on business.
The Australians have been onto the need to address regulatory issues as well, but with their layers of State and Federal frameworks, their task is far more onerous than ours. We in New Zealand have been following with interest the Australian Report of the Taskforce on Reducing Regulatory Burdens on Business and the Australian government's response.
A point made by the Taskforce's chair, Gary Banks, is particularly salient and I think it is worth repeating:
"Rethinking regulation does not mean we should abandon worthwhile regulations. There are important economic, social, and environmental goals that warrant regulation, and should not be traded off simply to improve business competitiveness."
This is an important point, as very few people these days argue that we should dispense with regulation altogether. I also believe that there is an increasing belief that the triple bottom line is an essential component of sustainable economic growth and I am finding that within the business sector as well as among the public at large.
As part of the review I have travelled the length and breadth of New Zealand attending small focus groups of business owners and operators and I have heard first-hand of the frustrations that affect particularly small businesses. When the owner is the manager, the marketing department, the payroll department, the human resources manager, the procurement office, the planning office…the list goes on…they rightly say that the burden of compliance weighs heavily on their shoulders. They just want to know what the rules are, that they are appropriate to their business, how they comply and that if they do they won't find themselves subject to the punitive actions of a regulator.
I recently released the first milestone report on the Quality Regulation Review, and it confirms New Zealand as having a good regulatory environment, but there is always room for improvement. Cabinet is asking all departments to identify workable solutions, which address the key themes that have come through the consultation, namely:
- removing duplicated or overlapping regulatory
- providing tailored information on regulatory requirements to meet the needs of business;
- designing ’safe harbours’ so that if certain conditions are met, firms are deemed to have complied with the law;
- undertaking a more rigorous risk analysis when developing and enforcing laws; and
New Zealand is also working with Australian officials to implement the Business Cost Calculator. This I believe will significantly improve the quality of the cost benefit analysis that is a critical part of a quality Regulatory Impact Statement. We are planning to have this tool operating next year. We are also lifting our game with respect to the Regulatory Impact Analysis Unit, which will play a much more assertive role in ensuring that the Regulatory Impact Statements are of high quality.
Turning now to the Review of Financial Intermediaries and the Review of Financial Products and Providers, as I have already indicated these have been driven by our desire to meet international best practice and to benchmark favourably in a global marketplace of investors who don't stop too long to find out why our regime is different to the rest of the world.
We began our work with the implementation of the Takeovers Code, followed by the Securities Markets Legislation, followed by Securities Act changes, including rules around insider trading and market manipulation, and now we have these two reviews, which are designed to deliver an effective and consistent framework for the regulation of financial intermediaries, non-bank financial service providers, and financial products.
The objective is to support confidence and
participation in our capital markets by investors and
institutions alike. I believe, however, that there is a
further element required to improve the participation rates
in our financial sector and that is improved financial
literacy. I hope that the campaign around the introduction
of KiwiSaver next year will increase awareness about these
issues and get a lot more people thinking about the
importance of savings and the range of investment options
that are available.
The review of financial intermediaries proposes that they be subject to conduct standards, enhanced disclosure obligations, dispute resolution processes and disciplinary procedures. Cabinet has agreed in principle that a co-regulatory framework will be used in the regulation of financial intermediaries, with industry-led approved professional bodies taking the frontline responsibility, backed up by the Securities Commission.
Submissions on that review’s proposals numbered over 150 from a range of stakeholders. The majority of submissions concerned:
- the definition of ‘financial
advice’ and whether this should be linked to the
definition to financial product;
- the definition of ‘financial intermediary’ and whether there should be different treatment for those who transmit information and those who give advice; and whether an ‘intermediary’ should be defined by reference to the range of advice offered;
- how remuneration should be disclosed, considering the difference between fee based services compared to commission and the effect of disclosure on the consumer;
- links between the roles of product providers & approved professional bodies;
- links to the Review of Financial Products and Providers.
On this last point, it
quickly became apparent that there were many links between
the work on financial intermediaries and the work on
products and providers. Originally, the two reviews were
running to separate timelines, on the basis that the Review
of Financial Intermediaries was able to rely on the work
carried out by the earlier independent taskforce and was
more advanced than the larger review.
However, we have found, through developing proposals for reform and from industry feedback, that the very close links between the two reviews mean that one review cannot be fully implemented ahead of the other review, without creating uncertainty for the financial sector and running the risk of inconsistencies emerging when legislation is implemented.
To ensure those issues are managed consistently, the policy details of both reviews will be considered together by Cabinet in the first half of 2007. I am hoping to have legislation introduced before the end of 2007 and passed before the 2008 election. It is an ambitious target, but it would be good to see the completion of the work programme we commenced upon taking office at the end of 1999.
In closing can I refer to the Finsia NZ Industry Opinion Poll. Naturally I am encouraged that the industry has expressed such a positive economic outlook. The overwhelming endorsement of the government's intent in aiming for consistency with international standards is also very gratifying, as is the recognition that non-bank deposit takers and financial planners require urgent regulatory attention. I am confident that we are on the right track, however, it would seem from the poll that there is concern around some of the detail.
I would be interested in understanding what drove the response on the effectiveness of the RFPP in reducing unnecessary compliance costs. Given that some parts of the financial sector have virtually no regulation now, there will be increased compliance costs – the real test is whether the compliance costs will be proportionate to the risks involved.
A well-designed regulatory framework for the financial sector, which is consistent with international best practice and our international obligations, will reduce the potential for damage to confidence in, and the reputation of, our financial markets.
I also believe that the regulatory changes proposed in the review will improve consumer confidence but it will take time to flow through. We need to make sure that the regulatory framework is robust enough for consumers to have confidence in making investment decisions and in having access to information and advice, which is understandable and comparable. Coupled with a real emphasis on financial literacy I am hoping we will see much better informed investors committed to securing their financial future. That would be a win-win for the industry and the country.
Finally it was interesting to read that most respondents felt the need to have regard to Australia – whether that’s about being guided by their reforms or learning from their experiences. What guides us in looking at Australia is recognising the value of having a regime that provides ease of doing business across the Tasman but always thinking at the end of the day what’s best for New Zealand – and this is what the responses reinforce, which again is encouraging.
Having signed the updated MOU on Business Law Co-ordination with Australian Treasurer Peter Costello earlier this year, I am committed to minimising the differences in compliance for those who do business on both sides of the Tasman, but that can be achieved on a range of different levels from unilateral adoption of the other jurisdiction's rules to a Treaty relationship such as one that underpins the proposed joint regulator for therapeutic products.
New Zealand's commitment to the Single Economic Market Agenda does not override our responsibility to weigh up the costs and benefits of different approaches, including where we alone do not have the scale and scope to efficiently and effectively regulate for safety and in the case of therapeutic products efficacy as well.
I will take this opportunity to express my disappointment that the opposition has chosen not to support the legislation at this stage and I hope that once the regulatory impact analysis is properly scrutinised by them they will see that this is the best option for New Zealand from both a business and consumer perspective.
So, thank you for inviting me this morning. And thank you for promoting discussions around regulatory issues that aren't really regarded as politically sexy, but which we can only get right if key stakeholders like yourselves are willing to engage.