Everett: Get good advice

FMA chief executive Rob Everett has suggested “turning down the music a little” and ensuring investors understand the risks they’re taking in the capital markets.

Wednesday, September 10th 2014, 6:00AM 1 Comment

by Susan Edmunds

He spoke to the Shareholders’ Association about the quality of the regulatory environment in New Zealand.

Everett said the New Zealand public market was in a strong growth phase. “The public equities market is taking off steadily. New investors are buying and existing investors are buying in greater quantities. It’s harder to measure accurately the private capital market – including debentures and property syndicates – but we can assume it is also warming up.”

Everett quoted William McChesney Martin, who, as chairman of the Federal Reserve, said his job was to take away the punchbowl when the party got going.

“Let me say, I’m not here today to call a halt to the party and I’m not sure I could if I wanted to. But I am going to suggest turning down the music a little,” Everett said.

What was sensible would depend on individual tolerance for risk, he said.

“One person’s tolerable risk is another person’s idea of potential agony. A private investor who is contemplating an IPO, for example, should ask themselves: How they will feel if the return is considerably less than they anticipated? How they would feel if they lost all or part of the capital? How long they are willing to wait for a positive return? How would a serious loss affect them, their family, their retirement, or their social standing? Overall, investors – especially private ones – should avoid getting caught up in hype.”

He said good advice from a financial adviser would help, as would the use of the disclosure documents on offer.

“However, in the end, prudent investors make their own decisions, having fully assessed how much risk they are really willing to carry. In the current market – where it would be easy to be distracted by hype – I’d urge investors to ensure they do exercise the maximum prudence.”

Everett said even the best regulation would not prevent failures.

He said that was particularly true in overly-exuberant markets where investors and firms lost sight of fundamental questions they needed to ask about risk.

“Quality regulation also allows us to set standards – for firms and professionals – and ensure they meet them. It makes it easier to take action against misconduct where it occurs. And – under certain circumstances – good regulation allows the regulator to anticipate problems and act to head them off. But regulation is not a panacea. Or a super-guarantee for investors. Regulation doesn’t displace or eliminate uncertainty,” Everett said.

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