FMA passes 10-year milestone

When investors in New Zealand and around the world were left reeling from the effects of the global financial crisis in 2008 urgent calls were made to protect people from future financial fallout.

Friday, July 9th 2021, 6:36AM

by Matthew Martin

However, calls to shore up regulation of New Zealand's financial system started to get louder from around 2006, and when the country's largest finance company - Hanover Finance - began its rapid decline into receivership at the end of 2008 those calls turned into shouts.

As a result, the Financial Markets Authority (FMA) was officially established on May 1, 2011, as part of the Financial Markets (Regulators and KiwiSaver) Bill, passed by the New Zealand parliament on April 7 of the same year.

Since then, the FMA has grown rapidly and has almost doubled in size with around 250 people now employed by the regulator, and with more responsibilities being handed to it in the coming months, will expand even further.

The FMA's first chief executive, Sean Hughes, was appointed in 2010 and oversaw a raft of enforcement cases brought against 17 Kiwi finance companies - such as Bridgecorp, Mark Hotchin's Hanover Finance, Lombard Finance, and the spectacular failure of Allan Hubbard and South Canterbury Finance.

The FMA's current chief executive, Rob Everett, was appointed in 2014 and even though he has signalled his intent to leave the organisation in the latter part of this year says there's much work to do after sweeping changes were made to the regulation of financial advice under the Financial Services Legislation Amendment Act (FSLAA) in March and the upcoming Financial Markets (Conduct of Institutions) Amendment Bill (CoFI) which is going through parliament right now.

Everett says the FMA has transitioned from an enforcement regulator tackling finance company collapses to a conduct regulator with licensing powers to ensure customers are put first.

But has the FMA succeeded in doing what it was set up to do?

"Not yet," says Everett.

"The first couple of years were dominated by the new financial advice rules and all of the litigation that come out of the collapse of some major finance companies.

"Those early years would have felt very different to what it feels like now.

"The range of how we deal with things that have gone wrong feels completely different today than it did when I arrived when 90% of our diet was going after people that had been involved with those finance companies."

He says the FMA has made good progress but with the government re-writing the rules around financial advice its brief expands.

"Now they're on the cusp of passing legislation for retail banking and insurance...plus we've got updated contract terms for insurance, we've got climate-related disclosure - so it kind of feels like we have not had much of an opportunity to stop and pause, we are always reacting to something new.

"It does feel like we are having to constantly reinvent what we are doing and how we are doing it, which is fine, but it makes it quite hard to assess whether you have actually managed to address the original piece of legislation."

And it's not just the change in regulatory roles Everett and the FMA has to manage, it's also the rapidly expanding workforce needed to tackle those regulatory changes.

"We don't yet have the capability we will need to regulate those sectors effectively."

The FMA now has around 250 staff and Everett says this will grow in the near future, meaning internal structures will also need to change.

"There has been a lot of hiring and our people are reasonably well sought after so we do have to work very hard to retain people."

Another challenge for the FMA and its staff is how it is viewed by those that it regulates.

"People assume you are the government when we're not, we are an independent Crown entity which is an extremely important distinction for us but possibly not for the people we deal with.

"We generally don't write the rules...we do have an element of rulemaking about how we are going to apply them and what it takes to comply to the legislation.

"But the assumption that we created the rules and we can change them can be frustrating."

Having been on the other side of the table from regulators in the past Everett knows how they can be viewed from the outside.

"We're not interested in driving people out of business or throwing our weight around because we think it makes us look good.

"We have to have credible deterrents so we have to have the big stick that we can bring out when it's needed.

"But what we want is what everyone wants - which is for investors and customers to get a good deal out of the industry and to feel they can trust the industry.

"Occasionally you have to be a bit crunchy and growly to order to push people in the right direction, but the sorts of people who come to work at the FMA just want to help.

"It's the crunchy and growly bits that get the public profile, which is entirely understandable."

Unfortunately, Everett says the industry engagement and support the FMA offers businesses is not widely publicised.

FMA highlights:

- Sean Hughes appointed FMA chief executive in 2010 overseeing 17 enforcement cases against New Zealand finance companies.

- Implementing the FA Act 2008, with changes in force from 2011.

- Rob Everett become chief executive in 2014 signalling the transition from an enforcement regulator to a conduct regulator.

- Implementing the Financial Markets Conduct Act 2013 and licensing more than 2000 entities over two years.

- Regulatory facilitation of equity crowdfunding and P2P lending innovation – first licences granted in 2014.

- Enforcement of AML regime, including first court case against CLSA Premium NZ which admitted to breaches.

- Undertaking the Bank and Life Insurer Conduct and Culture reviews, which laid the foundation for the introduction of new conduct legislation (Conduct of Financial Institutions Bill)

- Implementing new financial advice (FSLA Act 2019)

- $4 million increase in litigation budget in 2019 to strengthen enforcement capability

- Funding increased mid-2020, following a PwC Efficiency and Effectiveness review, which concluded the FMA "punches above its weight"

Tags: education FMA regulation Rob Everett