FMA sets sales, conduct and governance as priority targets

Thursday 30th October 2014

The Financial Markets Authority is stepping up efforts to police the finance sector, highlighting three areas of concern where it sees poor practice or misconduct posing a risk to the public as it beds in the final stages of its new legislated mandate.

The market watchdog is targeting sales and advice, conflicted conduct and governance saying it sees a risk of misconduct harming investors, businesses and the economy more widely, FMA chief executive Rob Everett told the Institute of Finance Professionals New Zealand conference in Auckland. The FMA is in the final stages of bedding in the 2013 Financial Markets Conduct Act, which overhauled the country's decades-old securities law with a goal of improving public confidence in New Zealand's capital markets.

"In the interests of improving standards and setting expectations up front, the new Act imposes a significant requirement on us to act as a gatekeeper for those wishing to offer financial services and financial products," Everett said according to speech notes. "We're identifying the areas of conduct and governance where shortcomings or misconduct would have an impact on a large number of people or firms. Or where the impact would be large, although on a smaller number of people or firms."

The new legislation arose out of the Capital Markets Development Taskforce in 2009, which looked to deepen New Zealand's capital markets while beefing up investor protection and regulatory oversight after the collapse of the finance companies. Under the act, FMA was given beefed up powers with a wider scope to enforce updated regulation and chase misconduct.

"We're using all the types of regulation we have at our disposal, ranging from licensing through to enforcement and all the means in-between," Everett said. "We recognise we can use regulation to good effect, right along the supply chain."

Everett sees good conduct as key to promoting confidence and the finance sector needed to know what the regulator expected from it. As the last stage of the act comes into force this December the FMA is armed with its new "regulatory toolbox" that would "anticipate problems and act before they cause direct harm", Everett said.

In the sales and advice sector the regulator saw risks in the variable quality or lack of advice available to investors. The FMA will be looking closely at churn or switching between products, particularly in KiwiSaver and insurance and financial advisors getting kick backs or commission on sales.

The regulator sees risks in conflicted conduct, especially where finance professionals were incentivised to mis-sell or churn products and poor disclosure around fees and investment risks. Directors and other insiders also fall into this priority area, and need to demonstrate they were putting the interest of the company and its shareholders before their own.

The third priority area for the regulator is governance, which is responsible for "setting and driving of culture and conduct within organisations". The regulator sees risk around directors' skills and understanding of regulatory obligations.

The FMA will publish a revised set of governance principles as well as a summary providing more detail on its priority areas and the risks it sees.

BusinessDesk.co.nz

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