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No silver bullet to regulation: Hughes

The collapse of David Ross’ investment scheme is a timely reminder that there is no single silver bullet in regulation and that we all have a role to play when it comes to getting the best out of our financial markets, FMA chief executive Sean Hughes writes.

Saturday, November 16th 2013, 2:49PM 4 Comments

by Sean Hughes

Parliament sets the rules that market participants are expected to operate under. The Financial Markets Authority regulates that conduct through our regulatory and enforcement activity, and by increasing levels of compliance of market participants. 

Along with other public bodies, as well as financial advisers and firms such as banks and brokers, it is also our job to equip investors with resources that help them make more informed decisions. Investors have a role to play, too, and are ultimately responsible for the investment decisions they make.

I have the upmost sympathy for investors who trusted David Ross with their money, and I take full responsibility for the fact that FMA licensed David Ross in 2011 under the then new financial adviser licensing regime.

The investigation into David Ross revealed that he lied to FMA in his application to become an Authorised Financial Adviser (AFA), he provided a financial service that he was not registered for, and he provided FMA with false or misleading information.

That’s cold comfort to investors who are now out of pocket, but it reveals that no regulatory framework is a perfect foil to misconduct.

FMA responded to the Ross collapse with an immediate review of all financial advisers offering discretionary investment management services (DIMS), the type of service offered by David Ross.

We found most AFAs to be behaving professionally, working to comply with the law and seeking to serve their clients well. There were a small number of cases where assets were not being clearly identified and held for individual clients and we have been vigilant in our monitoring of these.

Market feedback suggests that our approach to monitoring advisers has been generally well-received.

Since then, Parliament has completed its biggest review of securities law in more than 30 years, and has passed the Financial Markets Conduct Act. The Act changes both the way DIMS are provided and the requirements for AFAs.

It will see the introduction of a new DIMS licence and will restrict the service AFAs can offer if they choose not to obtain the new licence.

AFAs will need to ensure that where client money and property is not held directly by the client, it is held by an independent custodian. This change will better protect the security of investors’ money and FMA’s risk-based monitoring of AFAs will assist in ensuring that they are meeting their new obligations.

While the changes outlined above will improve the regulatory environment significantly, they will not, and cannot remove the risks that go with investing. No regulator in the world has achieved that level of cast-iron assurance – even with far more stringent and more onerous requirements than we have in New Zealand.

Don’t get me wrong, FMA’s job is to promote financial markets that are fair, efficient and transparent, but what we can’t do is prevent the losses (or predict the gains) that are a natural market occurrence.

Nor can we stop market participants breaking the law. Even with the right regulatory regime, and a regulator with the right capability and attitude, there will still be times when people do the wrong thing.

So given this is the climate we live in, what can you do to ensure you make the best decisions?

Successful investing requires planning and being armed with the right information before you part with your hard earned money.

I urge readers of this column take time to understand the basic principles of investing and take time to get financial advice from an objective, competent adviser to help develop and stick to a sound investment plan. For many New Zealanders, KiwiSaver will be their sole investment and will impact their future financial security.

There are now well over two million KiwiSaver members, or roughly half of New Zealand, with a stake in our financial markets. How much do you know about the scheme you are in? What fund are you in? If you don’t know the answers to these questions, then now would be a good time to find out.

Yesterday’s sentencing of David Ross was a reminder of the emotional and financial pain that Mr Ross inflicted on his clients, many of whom had known him for years and considered him their friend.

FMA is committed to help inform investors to make better decisions, and to spot the danger signs before it’s too late. Part of this pact involves you calling us when you hear things that are of concern.

We can’t do it alone.

Our doors are always open.

Sean Hughes is chief executive of the Financial Markets Authority.

Sean Hughes is the inaugural chief executive of the Financial Markets Authority.

« [Weekly Wrap] Ross - case closed?IFA working on pro-bono offering »

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Comments from our readers

On 18 November 2013 at 9:43 am W Mulcahy said:
What he hasn't addressed in his article is the absolute failure of the professional bodies to do their jobs. Either the accountants, auditors directors and lawyers involved around the world in all the financial malpractice that came to a head during the GFC were incompetent or corrupt and the regularity bodies not much better. The fines now being settled in the billions of dollars with very few of those involved going to jail is an example of the cronyism at that level. The renumeration paid to those involved in financial firms with it seems no forward accountable has brought the world to its knees and has still not been addressed.
On 18 November 2013 at 12:54 pm w k said:
Agree with W Mulcahy.

After how many million of dollars spent on legal, "consultancy", etc., and how years spent on experimenting, tweaking, etc., still nothing clear in sight? ........... SIGH!

"We can't do it alone. Our doors are always open". You're right.

"I hear you but I am not listening" sounds right.
On 19 November 2013 at 9:04 am btw said:
I'm sorry but I only have a limited degree of sympathy for investors who waive their legal rights (and sign up as "eligible investors"), or who choose unlicensed firms over licensed firms. Its very difficult to devise a regulatory system for "victims" that choose to operate outside the system.
Despite what some of you claim, Ross wasn't ever licensed to manage or hold client funds (at most he was, for a limited time, licensed to give advice). If he had been, he would have been audited etc and the fraud would have been exposed much earlier. He was unlicensed, and permitted to carry on as he did because his investors tolerated that.
On 19 November 2013 at 12:19 pm David Whyte said:
Unfortunately, btw, in the court of public opinion,I suspect you'd find yourself in a distinct minority in this current climate of investor protection.

It's true that you cannot prevent criminality by the introduction of legislation or regulation - and the betrayal of trust is unforgivable, particularly if 'eligible investor' status was not fully understood.

W Mulcahy has a fair point regarding the vigilance of professionally recognised bodies who actively canvassed for special consideration for their members. It seems that the problems arise in a regulatory environment around the fringes, with the vast majority meeting compliance standards. So regulators who insist in catering for the lowest common denominator leave the way open for these fringe operators to gain access, and destroy the credibility of honest practitioners.

As chronicled elsewhere, I believe Sean Hughes has done a good job in his all-too-short tenure, but the FMA's Lords and Masters need to step up with resources and measures to prevent the con artists gaining access - or at least minimise opportunities for them to operate.

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