From regulation spotlight to floodlight

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Regulation is primarily about influencing behaviours and it cannot prevent business failure, nor should it strive to do so, says Commissioner for Financial Advisers David Mayhew.

Friday, November 12th 2010, 5:04AM

by Jenha White

He says if the capital markets are the playing field, we need to ensure all the players' conduct is visible to those watching the game wherever on the pitch the action is taking place.

"We are moving from regulation by spotlight to regulation by floodlight; let's make sure no dark corners are left out of the light's reach."

Mayhew says advisers needs to recognise that rebuilding investor confidence - without which capital markets stagnate or decline - requires dealing with all elements of the investment market network and addressing all dysfunctional behaviours.

He believes the current round of financial market regulatory reform is the culmination a decade of change.

"In a decade we've evolved from a situation of, for example, in 1996 the chairman of the Securities Commission saying undertaking enforcement was not consistent with its role of facilitating the operation of the securities market; to the requirement of "... visible, proactive, and timely enforcement".

However he believes there is a risk of an expectation gap building between what the FMA can deliver and what the public expects.

"With the common use of language like "super regulator", there's a danger that the public expects the new FMA to be an aggressive enforcement agency like a financial police force, focussed on proactively investigating and preventing collapses and frauds before they occur."

Mayhew says the reality is that the FMA will simply be a more efficient version of the current regime, with some additional powers and regulatory reach (e.g. trustees and statutory supervisors; auditors).

He is concerned that without further changes the current expectation gap will widen - to date it has been one of powers/functions; with the FMA it is likely to be both powers and resources.

Mayhew believes to bridge the expectation gap reformist momentum must be carried into the Securities Act review.

• License fund managers - need for professionalism and integrity here as well
• Clarify and expand new powers – e.g. independent right to enforce directors duties
• Institute a capital markets misconduct civil fining regime to sit alongside criminal law e.g. Feltex case
• Extend the jurisdiction of the Rulings Panel, and make it a proper administrative tribunal specialising in financial and capital markets matters - which will take pressure of the courts and speed up enforcement; and could ensure appropriate apportionment of responsibilities.
• Ensure the FMA has adequate resourcing - an issue of budget allocation.
• Recognise the limitations of regulation: smart regulation but cannot prevent failure. • Working with the markets involving the concept of partnership.

Mayhew says we have the opportunity to create a first class regulatory environment through the current reform process.

"The key to achieving that outcome is to maintain the momentum of reform, to pursue the logic of what has been started and to equip the regulators with resources to meet expectations."

Jenha is a TPL staff reporter. jenha@tarawera.co.nz

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