Retail investor confidence undergoing a 'resurgence' but there's more work to do yet, says departing FMA boss Sean Hughes

By Gareth Vaughan

Ma and pa retail investor confidence in New Zealand's capital markets, shaken to its core by finance company collapses, is undergoing a "resurgence", says departing Financial Markets Authority (FMA) CEO Sean Hughes. However, he acknowledges there's more work to be done yet.

Speaking with his tenure on the FMA's helm set to end next week, Hughes also told interest.co.nz in a Double Shot interview he feels some disappointment the FMA hasn't yet used its so-called section 34 power that lets the regulator step into an investor's shoes and take civil action, although there are "one or two" possibilities where this power could be used. And Hughes says the enforcement action taken by the FMA has been "universally successful."

Hughes, the FMA's inaugural CEO, is a New Zealander who previously worked for the Australian Securities and Investment Commission (ASIC). He's returning to Australia to join his family and has no new job to go to. He'll be succeeded by Rob Everett, a British former Merrill Lynch executive.

The FMA opened shop on May 1, 2011 consolidating powers and functions of the Securities Commission, the Registrar of Companies, the Government Actuary, and sharemarket operator NZX. The Government tasked it with restoring retail investors' confidence in the capital markets after the meltdown of the finance company sector lost hundreds of thousands of investors billions of dollars. (See full details of the failed finance companies in our Deep Freeze List here).

'There is a policeman on the beat but confidence can't just be measured by heads on sticks'

Asked whether this restoration of confidence had been achieved, Hughes said progress had been made, but there was more to come.

"I think we've made some steady progress but it's like cultural change really. You can't measure it in days or weeks," Hughes said.

"Obviously the work that we've done in the enforcement and litigation space has, I think, sent a very clear message to mums and dads that there is a policeman on the beat, that we are following up on where we see misconduct. And the action that we've taken so far has been universally successful." (See details of jail time dished out to convicted finance company bosses in our Porridge List here).

"But more importantly I think in terms of sustainability we're starting to see the growth in terms of investors coming back into the market. So obviously the SOE sales programme has encouraged some New Zealanders to invest or at least to show an interest in investing, whether they've actually parted with money or followed the articles and progress, that's a good sign in itself," says Hughes.

"(We've seen) very healthy growth in KiwiSaver, both in terms of new members and funds under management."

"I think overall we are starting to see a resurgence in confidence. But three years is too short of a period of time to measure it by and it can't just be measured by heads on sticks. I think you've got to look at some other metrics as well."

Hughes' comments come after Commerce Minister Craig Foss told interest.co.nz in September retail investors' confidence and trust in the financial markets was beginning to return with a good framework having been built.

'We've made some really hard calls'

Meanwhile, Hughes says the FMA's 25 investigations into failed finance companies mostly started from scratch after it inherited "lists or names on a file" from the Securities Commission.

"And I understand there has been some real investor impatience and commentator impatience about why is this all taking so long," says Hughes.

"Some of them have been very, very complicated and long standing... I think we've made some really hard calls. Some of those investigations, having looked at all the evidence and assessed whether there were good merits to take the matter on, we had to say no. And I understand for the investors who have been involved in those failed finance companies that would have been a devastating situation."

"But the reality is we're taxpayer funded, we have to make hard decisions about proper use of our resources and where we think the merits of an action might lie," Hughes adds.

The FMA has three live finance company investigations left being ones into property financiers St Laurence, Mutual Finance and Viaduct Capital. Announcements on them are likely by the end of December, or early in 2014.

Of St Laurence Hughes says: "I'm hoping in the next week or so before I finish up that we're able to make a decision. We've still got a few more enquiries to finish off . So it'll either be late this year or very early next year."

Hanover on a 'normal civil litigation path' with no trial date yet

One of the highest profile finance company collapses has been Hanover. In April 2012 the FMA filed civil proceedings against directors and promoters of Hanover including former owners Mark Hotchin and Eric Watson. However, the case appears to have been progressing at a glacial pace since. Hughes says it's following a "normal civil litigation" path.

"Once you're in the system you're in the system and there are very, very heavy demands on court time, on judge time. And parties to litigation whether you be the plaintiff as we are, or whether you be the defendant such as Mr Hotchin and his colleagues, they're entitled to a fair process," says Hughes.

"They're entitled to challenge us on the case that we've put to them and on the evidence that we're going to be relying on. So we're in the process of what I would call normal civil litigation where each party is exchanging information with the other side and we're trying to hone down the issues that are in dispute."

"The court itself has not actually set a trial date for that matter and we really are in the hands of the court in terms of the timetable going forward. Obviously we're keen to get this matter closed as soon as we can, we've got our existing asset preservation orders in respect of one of the defendants (Hotchin). So to that extent we've tried to move this matter along but we respect the court process, we respect the fact that people are entitled to a fair trial."

Property financier Hanover froze $554 million owed to 16,500 investors in July 2008. Investors' subsequently approved a moratorium proposal in December 2008 that pledged to pay them back over five years. Then a year later after getting back just 6 cents in the dollar, Hanover investors narrowly agreed to swap their Hanover debentures for shares in Allied Farmers valued at 20.7 cents each, which were yesterday at 3.2c.

'For every person that might benefit from use of that power, there's taxpayers who are going to be paying for it who won't get any benefit'

One of the big talking points out of the FMA's creation was its Section 34 power, based on a similar powers ASIC has. Effectively it enables the FMA to exercise a person's civil right of action. So if, after an FMA investigation or inquiry, the regulator believes it's in the public interest to do so, it can exercise the right of action of a person (investor) by launching and controlling civil proceedings against "financial markets participants" including company directors, auditors or trustees. The FMA can seek money or "other relief" for fraud, negligence, default, breach of duty, or other misconduct.

The regulator is yet to use this power and Hughes admits to some regret about this.

"We've looked at it on a couple of cases and we've asked ourselves 'is this the right case to bring?' And some of those matters where there were receivers appointed, they've already brought similar actions in terms of recovery so there's no point us doubling up."

"The other thing is that a section 34 action can be against a trustee, or a director or indeed third parties like auditors or lawyers who were involved in the finance company situation. In not every case are those individuals what's known as a financial markets participant and they have to meet that legal test for us to bring the action," Hughes adds.

"I'd say it's disappointing to some extent that after all the hard work that was done particularly by the former (Commerce) Minister Simon Power and his officials to get that power up that we haven't been able to use it yet. But what I would say is that I think shows an appropriate use of governance and objectivity and maturity in the way in which we have gone about assessing whether we've got the right case."

Hughes adds, however, that the FMA may yet use the power.

"Based on what I know there could be one or two examples where we could be looking at that power. But as I say the public threshold test, public interest threshold test, is set appropriately high. And for every person that might benefit from the use of that power, there's a whole group of taxpayers out there who are going to be paying for it who won't get any benefit from it. So that's why we do that balancing act," Hughes says.

He has previously hinted that Hanover could be a section 34 target.

Successor to get 'a clean sheet of paper'

Despite much time and resource being spent on finance company collapses that pre-date its establishment, Hughes says the FMA hasn't been bogged down by dealing with them.

"They've created a sense of impetus, a change in culture and proactivity. They've also encouraged investors, I think, to now regard the markets as being well policed," says Hughes.

"But inevitably they have been something of an impost on our resources. And because they relate to events that happened many years ago, we've felt at times as though we're always looking in the rear vision mirror. What I'd like to think is going to happen now is that the FMA of the future, in 2014, will start dealing with real time matters in today's markets."

"So hopefully that's something I'm handing over to Rob (Everett) to say 'mate, you've got a clean sheet', which is something I didn't inherit when I started',"says Hughes.

*This story is taken from part one of the video interview with Sean Hughes. Part two will follow tomorrow.

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