FMA: Conflict not a problem

Questions have again been raised about whether those working within the financial services industry should be able to sit on the board of its regulator.

Visiting economist John Kay addressed the question in his recent seminar, which was called: Why has financial regulation failed?

Asked whether there could be a potential problem in having people move back and forth between roles in the regulated industries and the boards that regulate them, he said it was hard to see it as anything else.

The Productivity Commission issued a report in 2014, in which it said there was a risk of conflict because all the members of the FMA board were in active in the business world as well as holding governance roles.

Adviser Brent Sheather said it was something that needed to be addressed if consumer confidence was to improve.

“I have been in this industry since 1984 and have always been concerned that while the participation of retail investors is encouraged it is not always clear that too many people are looking out for their interests. “

The Financial Markets Authority board has former Deloitte chief executive Murray Jack as chair, alongside an economist, chartered accountant, two lawyers, a journalist, fund manager, adviser and professional director.

Britain’s Financial Conduct Authority board is manned by people from backgrounds including KPMG, Credit Suisse and Deloitte as well as a former MP, co-chair of a charity, academic, regulatory specialist and a pension fund manager.

In the US, most of the board members of the Securities and Exchange Commission are people from regulatory, legal or academic backgrounds.

“The FMA has robust policies to manage any potential conflicts of interests around its board and governance arrangements once members have been appointed. The board appointments are approved by the minister and subject to a rigorous selection process. Selection is based on a range of criteria including the overall consideration on ensuring there is breadth of expertise and experience from various sectors and including the financial services industry itself.”

Adviser Murray Weatherston said he could understand the complaint but it was hard to see an alternative.

“The board has got to come from somewhere. Where are the board members going to come from otherwise, are we suggesting they appoint people who know nothing about it?”

FMA chief executive Rob Everett told the Productivity Commission the benefits of the current governance structure in terms of informed regulation and to the executive in terms of access to market and industry experience outweighed any logistical challenges relating to avoiding conflicts.

Comments from our readers

On 22 February 2016 at 9:57 am R1 said:

John Kay, in my eyes, is a very knowledgeable, experienced and credible source. The idea that the board must have people from the industry is highly debatable if you truly understand what a governance board's role is. At best any industry participants on the board should be retired and have no directorships of industry related organisations and be there contributing with the investors' needs upper-most in there minds. Reading John Kay's most recent book makes it clear that most of the financial sector's business is about trading amongst its own and not working in the best interests of clients, or shareholders for that matter. We need an FMA that understands the real issues and has the guts to do the right thing, not one that serves the regulated as is clearly the case at the moment, at least that's my perception.

On 22 February 2016 at 10:23 am Pragmatic said:

Assuming that robust systems exist to avoid conflicts of interest, my preference continues to be towards industry practitioners being part of the industry regulator. The alternative structure of people from "regulatory, legal & academic backgrounds" leaves me with little confidence

On 22 February 2016 at 2:52 pm Brent Sheather said:

Hi Pragmatic, Andrew Park from the FMA talks about systems to manage the conflicts of interest not avoid them. As we all know management of conflicts of interest rarely if ever works so effectively you are left with the foxes managing the hen house. John Kay came across as a very sensible fellow and, in answering a question on this topic, he seemed to be of the view that conflicted people on the Board could not be managed away. Common sense really. Furthermore if you look at the make-up of the SEC and to a lesser extent the FCA its pretty clear that the powers that be in those countries are of the view that the best way to manage a conflict of interest is to completely avoid it. No doubt it will take NZ sometime to reinvent the wheel but I am hopeful we will get there sooner or later.

On 23 February 2016 at 11:43 am Pragmatic said:

I hear you Brent, and don't necessarily disagree with your perfect world preference. Unfortunately when looking at the calibre of "regulatory, legal & academic backgrounds" folks versus "industry" folks, my preference remains to have the 'heavily-policed' foxes looking after the hen house.

On 2 March 2016 at 1:11 pm Comprehensive Planner said:

For what it is worth, my comment is that Governance of any entity requires sound knowledge of the sector in which the entity operates. Any conflicts should first and ideally be avoided and then if unable to avoid them they should be managed such that they don't adversely impact the performance of the Board decision making. Diversity is a significant benefit for any board and this includes having people from the profession that the entity is operating or in this case supervising, along with Consumer representation, but get the balance right and ensure that the board members are not misrepresenting either the board or their stakeholders in other areas of their professional involvement.

There are enough lawyers in FMA already so overloading on the board is a mistake. In the specific case of the FMA, I feel that having suitably experienced past and/or present practitioners is preferable to unwitting non participants in our field.

FMA: Conflict not a problem

The Financial Markets Authority says it has robust policies in place to manage any potential conflicts of interests from its board members.

Monday, February 22nd 2016, 6:00AM 6 Comments

Comments from our readers

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