E ngā mana, e ngā waka, e ngā reo, e rau Rangatira mā,
Tēna koutou katoa,
Thank you for having me speak to you all today, and a big thank you to INFINZ and staff for hosting this event. It was a pleasure to be a part of your annual dinner earlier this year, celebrating amazing personal and team achievements, and I’m delighted to have the opportunity to be here to speak to you today.
Thank you too, Michael, for those fascinating insights on the art of changing minds. This is incredibly useful, because some of what we strive to do as a regulator is exactly that, changing minds. Our engagement-led approach is about engaging with industry, nudging, guiding, steering, and sometimes directing, using all the soft and hard powers we have at our disposal. It’s also about engaging and informing consumers as well, to try to encourage people to make thoughtful, good decisions as they save, invest and plan for their financial futures – so they understand their options and the opportunities and risks involved.
Capital Markets changes
As I’m sure many of you are aware, the future of regulation for New Zealand’s capital markets is currently being discussed across Government, industry and regulators. There are several meetings happening on a regular basis in preparation for a Ministerial decision on reforms. I know some of you in the room are heavily involved in that process.
So how is the FMA approaching this?
First, we’re approaching it from the principle of being open with all our stakeholders, setting out our positions and the reasons for those. In several areas, we’ve indicated strong comfort with making changes or supporting changes to make it easier for firms to raise capital, and where rules and regulations have been shown to be unnecessary.
Indeed, as I have said before publicly, the FMA had provided the Minister with a list of rules and regulations which we feel are not needed, are a regulatory burden on firms, and sometimes aren’t a good use of our resources, such as renewing exemptions every five years. This is an important part of our job – to keep the laws around financial markets under review. It is something we have been doing for a long-time and will continue to do so into the future.
However, it is important to note that this can never be a free for all, burning of the regulations.
There are fundamental investor protections that need to remain in place, and we will look to ensure those protections are retained and enhanced. For example, the work we have done and continue to do on the inappropriate use of the wholesale eligible investor regime.
These fundamental matters include protections for retail investors that were put in place following the global financial crisis and collapse of New Zealand’s finance companies. We must not forget the harm caused to those investors and the detrimental impact on trust and confidence in our financial sector.
Trust in the financial sector is critical, and it is why scams have such a damaging impact. As I am sure you are all aware, they are becoming more sophisticated and harder to detect. The funds management sector is not immune. We are seeing a significant uptick in investment scams. All of us across the industry must be extra vigilant to safeguard investors from this risk. It is not going away, and prevention is key.
We consider scam detection and avoidance to be a vital component of a firm’s operational resilience. The obligation to exercise professional care, diligence and skill in the best interests of investors extends to scams. I know a reassuringly large number of you take this very seriously, but I want to emphasise, all providers need to take this extremely seriously.
Climate Related Disclosures
There are also ongoing discussions on Climate Related Disclosures, including the standard setter, the XRB. Being one of the first countries in the world to introduce a CRD regime comes with inevitable challenges, as there isn’t the luxury of learning from those who came before us.
So, with a large portion of entities now having published their first climate statements, it’s understandable that we take a moment to look at how it’s working. XRB recently published their consultation document on climate standards. I encourage you to provide your feedback by the end of this month.
I do understand and appreciate there may be a desire for more detail on where we are at with all this work. Ultimately, these are policy matters and are decisions for the Government of the day. I look forward to talking more with you on this in the months ahead, after the appropriate announcements are made.
In the meantime, our approach to this regime will continue to be - educative and constructive, seeking to support firms to successfully navigate in this new area.
I want to acknowledge that there has been significant work across the industry to prepare and get ready for this regime, and our team have clearly seen that. Towards the end of next month, we’ll be publishing a monitoring report setting out what we’ve seen, both good and bad, to assist the sector. We’ll be following this report up with some industry webinars and roundtables, as part of our engagement-led approach to take feedback and discuss the findings.
Liquidity Risk Management
The theme of this conference, ‘Adaptability,’ is perfectly timed for where we are today. From a regulator’s perspective, adaptability does not just mean responding to change; it is about anticipating and preparing for it and looking to the horizon to see what is coming.
As a kaitiaki of financial markets, we want to secure the outcome of everyone participating in market, well informed and with confidence. Our goal is to set clear expectations and guide market participants on what they need to do, particularly where there are risks of veering off the path.
Our updated liquidity risk management guidance, published in April this year, is a case in point.
Let’s remember how this guidance came about.
In April 2020, following significant market volatility in response to the COVID-19 outbreak, we published a good practice guide on liquidity risk management.
The industry self-assessed against this in August 2020.
Those industry responses disclosed some significant gaps between existing liquidity practices and acceptable practice, particularly around the frequency of stress testing.
For example, almost half of all the fund managers surveyed did not provide a date for their last liquidity stress test or said they could not remember the date. To be frank, this was simply not good enough.
The FMA is not going to be a regulator that sits back and waits for a significant liquidity failure, with the resulting harm for investors in that fund. You only have to look to the collapse of the Woodford Equity Income Fund in the UK in 2019 to see what happens there. Sitting back and simply waiting for harm to happen is not the FMA’s preferred approach, and I’d remind you, it’s what the industry has always said it doesn’t want its regulator to be.
Having appropriate systems and controls to manage liquidity, enables investment in these types of assets. It means the frameworks and tools are in place to identify and manage the risks as and when they arise. In short, it’s about being prepared to protect investors from foreseeable harm.
Taking all of this into account, particularly the short comings we observed in 2021, and cognisant of international regulatory standards, we consulted on and then published updated guidance in April. This guidance is deliberately principles-based, and capable of application to all funds, including and particularly those incorporating significant proportions of private assets and other less liquid assets.
It is guidance that needs to be considered at the Board Level, as a matter of strategy and policy. It’s not capable of sensibly being sent to legal, risk and compliance without that direction. This is because it is not prescriptive guidance. Purposely it’s not.
Generally, Guidance should not simply be left to the legal or compliance departments.
Indeed, the audience for any guidance we publish, are the senior strategy leaders within your organisations, so they can take a strategic view of what is needed. We are not looking for tick box compliance to our guidance, indeed, I am not sure, looking at the guidance, that that is possible – it is designed to guide firms to consider the important issues.
Green Bonds
I’ve spoken previously about the views I bring to the table as a child of New Zealand in the 1980s, under an over-controlled economy with unrealistic controls on just about everything. I am not interested in regulation for the sake of it. I am interested in regulation as an intervention to support growth and the long-term prospects for New Zealanders.
The FMA is focused on regulation that genuinely matters and delivers for New Zealanders. It must meet the 'so what' test, ensuring it fosters beneficial innovation rather than stifling it.
Our work on green bonds is a notable example of this. The sector has told us that there can be a more efficient route to market for these bonds that reduces compliance costs and offers investors an additional non-financial benefit, further driving the development of this market. When we hear fair arguments like these, we will act. The aim is for this exemption to be in place early next year.
We are also continuing to engage with the FinTech community to understand how we can best enable the safe growth of this sector. The FMA has led the Council of Financial Regulators work on FinTech for a number of years now, acting as a gateway for firms. Most regulators overseas have looked at ways to encourage this sector, and we are talking to those regulators to understand what might work, and what doesn’t for New Zealand. Domestically, we are meeting with Government and FinTech firms and working with the industry to best understand the hurdles and opportunities so we can get a practical understanding of what can be done here and the part we can play.
What is important for me to underline is that we understand that the financial landscape is evolving. Technological developments are rapidly reshaping innovation, and competition – with much potential for us here in New Zealand. It is important that the FMA is clear on the part we can play to support the safe nurturing of this potential.
FinTech
At the FMA, we are committed to fostering innovation while ensuring that regulatory safeguards remain effective. By actively engaging with the industry and aligning with international standards, we aim to support the responsible adoption of these technologies, ensuring they deliver meaningful benefits to both investors and consumers.
We are eager to support solutions that challenge traditional investment models while ensuring fair, transparent and equitable outcomes for all market participants.
During our recent engagement, there’s also been a degree of focus on the exemptions we can issue. Lots of ideas have emerged, some of which could have us taking over from Parliament’s job – running a coach and horses through primary legislation.
So, I’m going to spend a moment on the box office topic of exemptions.
The FMA can grant exemptions from compliance provisions to classes of persons or transactions, provided they align with the FMCA’s legislation's intent and purpose. We can also grant one-off exemptions in relation to a particular offer if there are reasons the prescribed rules are not applicable.
There are rightly legislative safeguards which restrict the scope of exemptions that we can grant.
The FMA should not and does not grant exemptions to reform the law or implement new policy changes. Exemptions must be targeted and appropriate to fall within the scope of our powers.
Further safeguards include scrutiny at Parliament’s regulation review committee and judicial review. So, while exemptions can provide flexibility in certain cases, they are not a mechanism for broad policy reform, and it is important that is widely understood.
We nonetheless welcome market participants to approach us early when considering whether a one-off exemption may apply so we can work through the options.
Economics Research
Yesterday, we issued our latest piece of FMA research from our talented economics team. Established 18 months ago, the team is now ramping up, having published research on fairness in financial services and AI. After a series of industry roundtables to discuss the findings, the team’s focus has now turned to commercial real estate.
Commercial real estate has long been a positive asset class due to its ability to provide both steady income and growth potential in a well-diversified portfolio. However, these investments, like all investments, come with risks. Since 2023, many overseas commercial real estate markets have been going through a downturn. In some cases, real estate funds have had to introduce redemption limits or withdrawal suspensions.
To understand the situation, we held discussions about commercial real estate exposure with KiwiSaver managers and international regulators. We found that New Zealand investment managers are generally doing a good job in identifying and communicating risk.
We have identified a couple of areas where some firms can enhance their risk management practices. Overall, however, there is minimal cause for concern. I encourage all of you to read the report. Like our guidance, this research is designed to help think about the issues – it is not a recipe for compliance.
I want to close by coming full circle and touching back on the continuing discussions across Government and industry to support changes to capital markets. The FMA has been here before, contributing half of the funds to deliver the Capital Markets 2029 report.
It has been a pleasure to engage with people who are passionate and committed to the development of New Zealand’s capital markets, as I’m sure all of us in this room are.
The FMA is committed to tackling regulation where it is unnecessary, but also steadfast in its commitment to ensure appropriate and effective protections are in place for the mum and dad investors who were so severely burnt during the collapse of the finance companies. Getting this balance right is key, and I am certain we will get there.
Thank you again for your time, and I would welcome any questions you may have.
