Govt's new 'super' financial markets regulator says restoring investor confidence requires 'everybody rolling up their sleeves'

By Gareth Vaughan

The chief executive designate of the Financial Markets Authority (FMA), the government's new super financial markets regulator, says restoring ma & pa investors' confidence in the capital markets is a big task and he and the FMA won't be able to do it alone.

Sean Hughes, a New Zealander who is a former Australian Securities and Investment Commission (ASIC) executive, ex-group general manager for compliance at ANZ, and former senior legal counsel at BNZ's parent National Australia Bank, told interest.co.nz in a Double Shot interview that restoring retail investors' confidence in the financial markets wasn't the job of a single person. Hughes said he ultimately wanted to see investors have the confidence to plough their savings into productive areas of the economy rather than just parking it in cash or investment property.

Hughes will head up the FMA, which is to be up and running from May 1 consolidating the powers and functions of the Securities Commission, some of the functions of the Registrar of Companies and the Government Actuary, plus some of sharemarket operator NZX's regulatory roles.

Commerce Minister Simon Power has tasked the FMA with leading a drive to restore investor confidence after the demise of 63 finance companies and other entities over the past that has put NZ$8.59 billion of investors' money, held in more than 205,000 deposits, on the line. See our Deep Freeze List for full details.

But Hughes said he would need help.

"Restoring confidence is not a single job for a single person," said Hughes. "This really involves a partnership and everybody has to get in and roll up their sleeves."

That said, looking at the shocks, disappointments and losses New Zealand investors had experienced, "I do have something that I can contribute, I believe. Learning from what I’ve experienced overseas and bringing that here to hopefully strengthen the regulatory environment and increase confidence is my goal," Hughes said.

'No investment is without risk'

The government had shown its commitment by establishing the FMA and giving it new powers such as the ability to either take action itself, or take over action brought by an investor, against company directors or the likes of its auditors or trustees - potentially retrospectively - when it believes it's in the public interest to do so. But Hughes said the establishment of the FMA was only the beginning.

"There’s a whole series of other steps that investors have to go through and that also includes investors understanding the risks that they face when they come into the market," Hughes said. "No investment decision is without risk and every regulator around the world faces the same challenge day in day out: How can they be there at the forefront to try and prevent losses from occurring but knowing that it’s the nature of capitalism that companies will fail."

"So we have to accept that. But what we can do is ensure that it’s a safe place to invest, that people know the risks that they’re investing in and that they’re comfortable with their risk."

Another important job was to police the market. This involved making sure that people who take advantage of investors, who lie to them or mislead them, are held to account and wherever possible the FMA tries to get some money back.

"I am mindful that there is a lack of confidence in investing in this country and I compare it to Australia where there is greater confidence," said Hughes. "So I want to learn from those lessons and take them on board."

'Parking money in cash and investment property not good for the economy'

"But frankly it’s not good for the economy if investors simply park their money in cash or in investment property because that’s not productive investment. What we want to see happening is investors starting to use their discretionary money to put into productive ventures and that way we’ll grow the economy."

These views echo those of Simon Botherway, chairman of the FMA Establishment Board, who told interest.co.nz last year a measure of the new regulator's success would be greater investment outside property over time. Hughes said he could understand investors looking to him and the newly minted FMA board, chaired by former ABN Amro New Zealand CEO and ex-NZX chairman Simon Allen, to see what they were going to do to make them feel comfortable.

"(But) it’s a tripartite exercise. We (the FMA) can be there a bit like an air traffic controller making sure that it’s a safe environment in which to play, but also everyone else has got to play their part. Importantly investors need to be given the tools to understand the risks that they’re taking. So financial literacy is absolutely key to building that confidence."

The FMA would work "very closely" with the Retirement Commissioner and other agencies - including the media - that had a role in improving financial literacy.

'There is a crisis here'

Internationally the FMA would be a member of the International Organization of Securities Commissions (IOSCO), where outgoing Securities Commission chairwoman Jane Diplock has chaired the executive committee, which Hughes said would be a useful forum for sharing information and hopefully learning from colleagues. The most important overseas partner would be ASIC which the FMA would "work very closely with" given the close economic relationship between New Zealand and Australia.

"But I want to reassure your viewers that doesn’t mean that the board or I will be spending a lot of time overseas," Hughes said. "The focus has got to be here. There is a crisis here and we want to work on that and that’s our priority."

Diplock has been nicknamed "Plane Jane" amid criticism of her extensive international travel whilst the finance company sector crumbled in New Zealand. Figures released to The Independent under the Official Information Act in 2009 showed Diplock had racked up NZ$227,000 worth of overseas travel in the two previous years. This included 19 overseas trips during 2007 and 2008 including to Madrid (where IOSCO is headquartered), Dubai, Mumbai, Paris, Washington DC, Shanghai, Tokyo, Romania, Marrakech and Jordan.

Meanwhile, Hughes said the FMA's new ASIC-style power to either take action itself, or take over action brought by an investor against company directors and advisers (see more on this here), was a "critical" power. That said, the FMA would have to be able to show that it was in the public interest to use it and this meant probably not using it on behalf of just a handful of investors given taxpayer money was on the line.

"But what we do want to use that power to set some early benchmarks around directors duties and the obligations of others in the financial markets as to what their legal obligations are and how they’re meant to perform them," Hughes said.

"It may well be that a by-product of running those cases will secure some compensation for investors but it won’t be 100 cents in the dollar and we can’t run every case. So we’ll be selective, we’ll ensure that the cases are truly meritorious in terms of meeting that public interest test, and in particular we want to be able to say ‘this is how we’re going to run these sorts of cases, these are the sorts of things we’ll take into account' so that in future people will know that’s when the regulator will get interested."

Retrospective enforcement action possible

Asked whether the FMA would look to use the powers retrospectively, which could potentially mean against those involved in finance company collapses, Hughes said there would be occasions when the regulator would look back.

"The power enables us to take on an action that an investor already has on the day that we’re set up. So if there’s an existing case ready to go, we will certainly look at that and see whether it meets that public interest test. That’s the extent to which we could look backwards. It will be a handful of cases and where we meet that strict test."

Hughes emphasised, however, that it wouldn't be the role of the FMA to pursue every case of wrongdoing.

"There are other avenues as well. There are liquidators, there are shareholders banding together by themselves, there are potentially class actions so we will fit within that framework. But where we do see a serious breach of the law, where we need to make a stand and where we need to clarify what the legal obligations are, then we will act and it may also involve a consideration of large sums of money being at stake too."

When approached about throwing his hat in the ring for the FMA job last year, Hughes said it didn't take long to think about whether to do so or not.

"This is a very, very far reaching and exciting moment in New Zealand’s capital markets where we are moving to a more holistic regulatory regime."

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