UPDATED: Ensuring sales and advisory services meet the best interests of investors and consumers is one of seven key priorities the FMA identified in its first medium-term risk outlook published today.
UPDATED 3 pm: Financial Markets Authority chief executive Rob Everett says New Zealand company directors “can do better” at their corporate governance practice.
Governance and culture are one of seven priorities the market regulator has identified in its first medium-term risk outlook, published today. The seven priorities follow a wide-ranging analysis of the sectors by the FMA regulators to identify the areas most likely to cause concern and most deserve focus in its regulatory efforts in the next two to three years.
The other six areas include sales and advisory services reflecting the best interests of investors and consumers, firms and professionals managing conflicts of interest effectively, facilitating capital market growth while maintaining integrity, giving investors access to tools that help them make more informed financial decisions, ensuring frontline regulators such as trustees and the NZX are doing their job, and maximising the FMA’s own effectiveness and efficiency as a regulator.
The progressive introduction of the Financial Conducts Market Act this year, which provides greater powers to the FMA, means instead of just dealing with problems when they occur, it’s trying to stop them happening in the first place. More than 11,000 firms, professionals, registered schemes, and funds are now under the FMA’s mandate with around half of those falling under a licensing or authorisation regime.
Everett said the FMA had talked to the boards of many of the financial services companies, especially those new to being regulated, to ensure that directors understood the changed culture the regulator is seeking and that they promote it from the top.
The FMA is about to publish its revised corporate governance handbook to outline its expectations of directors, executives and advisers and is working with the Institute of Directors to try and increase the numbers of people wanting to be directors.
Conflicts of interest at board level were being investigated by the regulator, particularly given a 2012 study indicated a concentration of company directorships among a small group of inter-connected directors. It identified risks where boards fail to lead from the top or simply apply a “set-and-forget” approach.
“I’ve seen quite a few scenarios of directors having a degree of complacency around conflicts of interest and trading in the shares of the organisation, and some of the continuous disclosure could be a lot better. I’d say directors themselves are anxious about these issues,” Everett said.
The issue was not so much a lack of commitment and passion by directors, but a lack of expertise, he said. “Boards need to understand they’re there to serve the shareholders, not themselves or the CEO.”
The FMA is not the only one concerned about corporate governance. The New Zealand Superannuation Fund has helped set up an informal forum of institutional investors to push for better corporate governance as a group rather than individually. Super Fund chief executive Adrian Orr said as a long-term and active owner, it had a long-term interest in the governance of the companies it invests in.
"We are particularly interested in understanding board strategy and issues that improve board decision-making, for example diversity, transparency and independence. For these reasons we are working alongside other Crown financial institutions to champion best practice corporate governance standards in New Zealand. Corporate governance is also a focus of our global responsible investment programme.”
Managing conflicts of interest was also an issue for frontline regulator, the NZX, which this week announced a $35 million purchase of KiwiSaver provider SuperLife, which has $1.27 billion of funds under management and 41,000 members. The purchase is part of its plan to grow its passive funds management and administration business.
One of the seven risks the FMA has prioritised is the role of frontline regulators such as the NZX and trustees and statutory supervisors that it relies on to help oversee the financial services market.
Everett said it had pointed out a number of areas the NZX could do better on in terms on managing conflicts of interest between its commercial objectives and regulatory functions and the more individual conflicts from having market participants on the board.
“They can do better and they know that. They are going in the right direction, they are focusing more on internal governance and regulatory policy settings, their compliance group and enforcement. Personally I think they could do more to explain to the outside world how their core processes work and why they come to some of decisions they come to.”
Everett said he wasn’t concerned at the spread of NZX’s commercial activities provided “it does it to the standards we’d expect and given they have regulatory functions, that would be at the top of the tree.”
NZX today announced the establishment of a new committee to oversee how it manages conflicts of interest, which will be responsible for recommending improvements to the market operator’s conflicts management including an annual review of compliance with existing rules.
Elaine Campbell, head of the FMA’s compliance function, said a lot of work had been undertaken to lift the standard of trustees, whose role has been increased under the Financial Markets Conduct Act. Some providers had exited the market because they didn’t meet the grade or didn’t think it remained commercially viable to meet the increased expectations of the regulator. She said every trustee that had been encouraged to lift their game had engaged “proactively with those findings” and put in place improved mechanisms.
(BusinessDesk)
EARLIER: FMA to focus on 7 key market risks, including insurance mis-selling
The Financial Markets Authority has seen an increasing number of complaints regarding insurance sales and is undertaking more work to assess the size of the mis-selling problem.
Ensuring sales and advisory services meet the best interests of investors and consumers is one of seven key priorities the FMA identified in its first medium-term risk outlook published today.
The seven areas follow a wide-ranging analysis of the sectors it regulates to identify the areas most likely to cause concern and are where it will focus most of its regulatory effort in the next two-to-three years.
The other six areas include company governance and culture, firms and professionals managing conflicts of interest effectively, facilitating capital market growth while maintaining integrity, giving investors access to tools that help them make more informed financial decisions, ensuring frontline regulators such as trustees and the NZX are doing their job, and maximising the FMA's own effectiveness and efficiency as a regulator.
FMA chief executive Rob Everett said the strategic risks partly reflect the FMA's expanded mandate under the Financial Markets Conduct Act, which has taken effect progressively this year. Both its workload and annual budget has increased and Everett said choices had to be made about where it focuses its efforts in order to get the best results.
"The FMA's overarching objective is to promote and facilitate fair, efficient and transparent financial markets. Defining the risks that pose the most significant barriers to us achieving our main objectives means we can focus our resources strategically."
More than 11,000 firms, professionals, registered schemes, and funds are now under the FMA's mandate. Under the second phase of Act which came into effect on Dec.1, several hundred businesses and professional who want to deliver financial services are expected to apply for licences over the next two years and it introduced a new fair-dealing provision that prohibits misleading or deceptive conduct. It also gave the FMA better tools to anticipate problems and act before they cause harm.
Among the greatest risks to consumers and investors having confidence in the market identified by the FMA include mixed quality in financial advice, from authorised financial advisers and others. Adviser competence, conflicts of interest, poor culture and conduct, and gaps in investor understanding can all lead to unacceptable sales and advice services and poor investor outcomes, it said. A specific area of focus under this leg includes mis-selling of financial products - in particular, insurance and KiwiSaver.
The FMA said it will prioritise reports of misconduct by Registered Financial Advisers (RFAs), particularly in relation to insurance mis-selling. RFAs are unauthorised financial advisers who can give advice on simple financial products such as insurance contracts, some life insurance policies, and bank term deposits.
In relation to authorised financial advisers, the FMA sees risks for conflicted conduct around poor culture and misaligned incentive arrangements such as upfront and trail commissions that can lead to financial product mis-selling and the design and sale of products that disadvantage consumers. It can also lead to poor quality disclosure, especially about fees and risks, the FMA said.
Under the priority relating to governance the risks identified include directors' skills and competencies in ensuring firms meet regulatory obligations. Significant risks may arise where boards fail to lead from the top, or where they simply apply a 'set-and-forget' approach. Instead, boards have a responsibility to continuously assess culture and conduct against both organisation and customer outcomes, the FMA said.
It's not the only one concerned about corporate governance. The NZ Superannuation Fund has helped set up an informal forum of institutional investors to push for better corporate governance as a group rather than individually. Super Fund chief executive Adrian Orr said as a long-term and active owner, it had a long-term interest in the governance of the companies it invests in.
"We are particularly interested in understanding board strategy and issues that improve board decision-making, for example diversity, transparency and independence. For these reasons we are working alongside other Crown financial institutions to champion best practice corporate governance standards in New Zealand. Corporate governance is also a focus of our global responsible investment programme."
(BusinessDesk)
