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New Zealand 'has conflict problem'

Almost half the Financial Markets Authority’s executive management team and board of directors have held roles with banks or other financial institutions such as fund managers, sparking concerns about the potential for conflicts of interest.

Tuesday, October 4th 2016, 6:00AM 14 Comments

by Susan Edmunds

Ainsley McLaren

On Friday, it was announced that Ainsley McLaren had been appointed to the FMA board, on a five-year term. McLaren was previously acting head of business performance and strategy at Westpac Institutional Bank, and before that worked for BNZ, First State Investments and ASB.

She is one of a number of board members and executive management who have other connections to the industry.

On the board, Campbell Stuart, is a director and principal of Aspiring Asset Management. Mark Todd is  co-founder of AML Solutions, a business that helps those who fall under the Anti-Money Laundering legislation comply with their obligations. He is also chair of Mint Asset Management. William Stevens is an adviser and director at Craigs Investment Partners. Vanessa Stoddart was this week appointed to the board of Heartland Bank.

Peter Neilson, former Associate Finance Minister and former chief executive of the Financial Services Council, said there was an inevitable problem in a country such as New Zealand.

“Anyone with enough knowledge of how the industry works is also likely to have a potential conflict. It’s about how well that’s managed. I don’t think it’s an inherent problem for board members but it would be if the day-to-day management team had that conflict. It’s manageable for people on the board.”

The FMA executive management team does include people who have previously worked within the industry.

John Botica, who is now chief operating officer, was previously managing director of Guardian Trust and general manager of wealth management at AXA, and director of external communications Paul Gregory worked at Westpac earlier in his career.

It also accepts people from industry roles for fixed terms on secondment from time to time.

Neilson said without industry experience, there might be more “unworldly” decision-making from the FMA.

He said it was helpful to have people involved who had a clear idea of what it was like to work in the industry and how it might respond to regulations.

"It would be a mistake not to have people who have relevant experience in the organisation. New Zealand is a small place and it’s impossible to have a group of public servants who have never worked in the private sector.”

Claire Matthews, director of academic programmes at Massey University, said the important thing was to recognise conflicts, ensure they are disclosed and then to manage them appropriately. “Since the FMA looks at how conflicts are managed on other boards, I would expect them to manage them appropriately.”

Insurance industry commentator David Whyte said there was an argument for having closer industry ties, particularly when it came to things such as its recent focus on churn.

"There is a perception that, as the regulator has little, if any, expertise or experience in the area of the market under investigation, the effectiveness and impact of those efforts could be better."

But adviser Brent Sheather is critical of the appointments. The board in particular should also be selected from a wider pool, he said.

“I think they should look at it through the perspective of who the customer is and ultimately that’s Mr and Mrs Retail Investor. Their interests aren’t served by having a board dominated by individuals who have been working for institutions on the other side of the transaction.”

He said it would be better to have more academics, people from overseas, and people such as Grimes with Reserve Bank experience, in board roles in particular. “I don’t buy the idea that the directors need a background in finance. If an FMA board member doesn’t understand a product then it’s inappropriate for the public.”

The FMA referred inquiries to the Ministry of Business, Innovation and Employment.

An MBIE spokesman said: “Given FMA’s role as a financial markets conduct regulator, it is important the Board is made up of people with a wide range of expertise and experience in the financial services industry. The FMA Board has strict policies to manage any potential conflicts of interests around its board and governance arrangements once members have been appointed.”

Tags: FMA

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Comments from our readers

On 5 October 2016 at 8:39 am winstonkey said:
I would disagree with the headline "New Zealand has conflict problem". Well governed institutions easily identify and manage conflicts, and the FMA would certainly be doing an effective job managing conflicts.

But there is something way more insidious and that is what I would regard as a bias problem. When all of your directors come from a similar background with a similar outlook, and all are ultimately sanctioned by a political process that has no checks and balances, then it wont be surprising that a particular institutional mind set develops.

Clearly, the NZ regulatory framework has been institutionally captured by the banks and large instos. The clearest evidence for this is the ability to get last minute changes inserted in to legislation (QFE anyone?). You also don't need to look past any public uttering by the minister or senior civil servants to identify the corporate line they stick to. Again, plenty of evidence from every time the minister speaks, and now even to what I suspect is Rob Everett's regret, the infamous "CBA polo shirt" comment - something so at odds with previous FMA commentary I still cannot get my head around it.

Unnervingly, I also agree entirely with Brent's comment about who should be on the board. Clearly, the most important stakeholders are entirely un-represented: investors who are not insiders in the investment industry. My vierw is you couild get close to that (without scaring the Minister with too much democracy) by appointing 1 or 2 actual practitioners to the board and an independent AFA or a non-big end of town fund manager would be the easiest way to do this. Instead we get more people with the same background (big end of town corporate types.) I cannot identify one board member who ticks all of the following boxes:

- directly faces retail investors
- risks their own capital
- has personal liability for either advice or offers

On 5 October 2016 at 9:48 am Dirty Harry said:
I'm just going to leave this here.
On 5 October 2016 at 10:33 am dcwhyte said:
If I might chip in my 10 cents worth, most, if not all, of the focus and comment has been on investment and investors. A significant part of the FMA's remit and recent resource allocation has been in the life insurance risk sector. I can identify no evidence of any experience or expertise in this important area of the market. But very happy to be proved wrong.....
On 5 October 2016 at 10:48 am blogger billy said:
Wistonkey , you are right on the money
But how to fix it?

Paul Goldsmith has seen the Simon Power example of MP to a Fisher-Westpac salary. That must be a nice option for him to keep open so he will keep the banks sweet

John Key and Malcolm Turnbull in Ozzie are big mates with the banks, common in centre right parties. Turnbull has for the past few months been trying to deflect a big ground swell in Australia for a royal commission of enquiry into the suspect behaviour of the big four banks. The public in Ozzie don’t trust their banks – Kiwis take note !

The NZ public are not great fans of NZ advisers after the GFC – regardless so who was really to blame

And Sean Hughes and his anti cowboy ads seriously damaged our image too

We would have to start by getting Paul Goldsmith to see the error of his ways in (favouring the banks). But there are too many advantages for him and the National party (aka election contributions) so they will always keep in sweet with the banks

So for advisers to change this pernicious and outrageous situation will be all uphill

It would take an ultra determined and gutsy group of senior advisers who are prepared to take them on and fight to the bitter end

And this group would have little support from anywhere (maybe Winston Peters might)

They would need committed support from all non-aligned advisers, but are we too fragmented ? I fear so
e.g. we commonly bicker with each other in this forum, we rarely share the good stuff that we know, and every now and then Brent Sheather rips into FA’s too ( he does some good too but not in this respect)

Of course we could wait. In the USA big accountancy firms have exited financial planning and in Ozzie ANZ have made a (twisting) mess of their life insurance branch and want to sell it

As likely as not the banks in NZ will mess it up - too profit driven or public mood swings against their greed - and be forced out / choose to exit investments in NZ too but it may be a long wait

But right now it is an outrageous situation that cannot not be allowed to persist
On 5 October 2016 at 12:20 pm AFA Muggins said:
David Rockefeller presentation to Trilateral Commission 1991:
“We are grateful to The Washington Post, The New York Times, Time Magazine and other great publications whose directors have attended our meetings and respected their promises of discretion for almost forty years. It would have been impossible for us to develop our plan for the world if we had been subject to the bright lights of publicity during those years. But, the work is now much more sophisticated and prepared to march towards a World Government. The supranational sovereignty of an intellectual elite and world bankers is surely preferable to the national auto-determination practiced in past centuries”
From David Rockeferller’s “Memoirs” autobiography:
Page 405: Some even believe we [Rockefeller family] are part of a secret cabal working against the best interests of the United States, characterizing my family and me as 'internationalists' and of conspiring with others around the world to build a more integrated global political and economic structure - One World, if you will. If that's the charge, I stand guilty, and I am proud of it
On 5 October 2016 at 12:59 pm blogger billy said:
Thanks Harry

just watched it

compulsory viewing for all NAFA's ?


and not a lot different in NZ

Very sad to see cronyism, greed, pseudo insider trading and corruption insidously creeping into NZ
On 5 October 2016 at 2:46 pm blogger billy said:
silly me, there is an easier way

We just make sure the public of NZ know;

-that the the National party and FMA put their own wallets first

-and favour the banks too

- and that the only group that complies with Code 1 is the NAFA's

That should do it

On 7 October 2016 at 6:19 pm Chartchecker said:
Conflicts abound in NZ. And few are concerned sufficiently to do anything about it. From insider trading by audit and accounting staff to insurance company management acting for shareholders and their own interests against policyholders, down the line to KiwiSaver fund allocations and diversification, to finance company management side agreements, to management companies running management agreements with fund managers which are apparently commercially sensitive, to dairy trade deals with China and politicians, to regulators with a preference to not spend budgets on pursuing their mates. Wake up NZ or keep sucking the Kumera. These people know only too well how to spin that the conflicts are well managed. The joke is that few understand the depth of conflicts in NZ that result in wealth interests for some elite, as well as apartments, property, offshore bank account balances, offshore share accounts, and friends galore who praise their well-upstanding friends.
On 7 October 2016 at 7:10 pm I was wondering said:
The reality is that essentially there is no conflict of interest. The FMA was set up by, or has been captured by those whose interests align with the big end of town. The fund managers, the banks, the politicians, the big law firms etc. who have a vested interest in business as usual under the guise of regulation. The FMA provides them a fig leaf to cover up the same old business practices dressed up as new compliant processes. Like their recent and risible proclamation to 'put the client's interest first' as long as you can still flog them some piece of bank investment product!
The FMA is 'tainted' by the revolving door policy of corporate to public to corporate appointments and only serves to reinforce the notion that it is there for the advancement of the participants and the corporates themselves only. The Minister is a good man but he is influenced by his advisers and he obviously has an eye on his next career. I'm taking odds that he will join a corporate or bank as thanks for not seriously 'rocking the boat' just as Simon Power gratefully accepted his position with Westpac.
I agree with winstonkey that actual real advisers should be represented on the FMA in numbers, but this will never happen. This would cause a real 'conflict of interest' in the FMA! Expect to see the continuing appointment of flunkeys eager to embellish their corporate CVs with a stint at the FMA before returning to their corporate careers.
I have absolutely no faith in nor respect for the FMA.
On 10 October 2016 at 8:35 am Brent Sheather said:
I pretty much agree with you there “I was wondering”. The FMA may argue the point but actions speak a lot louder than words and even the words have been very dodgy of late i.e. “fund manager fees need to be fair but there is no way in the world we are going to define what fair means” and “if by virtue of your business model you can only sell dodgy high cost products don’t worry because you are still putting your clients interest first.”

You say that the Minister is a good man but how can he be a good man and sanction bad regulation and stuff the FMA board full of banksters? Surely the way we should measure his performance is how well he protects retail investors. My view is that he gets a “Fail”.

Where I disagree is in your last paragraph. The FMA board should not have “real advisors” on it any more than it should have bankers on it. The Minister should look to the SEC where the equivalent of the board are drawn from industries and backgrounds largely outside the finance sector. And goodness me there are no directors of fund managers on the board either. This is a huge indictment of the NZ financial scene.

The excuse that Mr Goldsmith and the investment bankers at the MBIE roll out for putting the foxes in charge of the hen house is that “we need people who understand banking”. Contrast this naive, compromised approach with the view of Elizabeth Warren, a former Harvard Law Professor, who said the other day that “the finance guys argue that if you are never in the club you can’t understand it. But I think they have it backwards. Not being in the club means not drinking the Kool-Aid”. She is probably referring here to Tom Wolfe’s book “The Electric Kool-Aid Acid Test” written back in the 70’s. Coincidentally I read it at the time. The Kool-Aid had LSD in it.
On 12 October 2016 at 3:16 pm blogger billy said:
I have $500 to contribute immediately to a fund to bring Elizabeth Warren, US Senator,to NZ

As a guest speaker on the perils of allowing revolving doors in our financial industry

Brent, you brought her to our attention, so are you interested in joining this project ?

If so, are you willing to be the treasurer ?
On 13 October 2016 at 3:23 pm Brent Sheather said:
I am not willing to be the Treasurer or organise this but my firm will put $5,000 towards paying her costs. I think with the Election she won’t have the time but you never know. This is the sort of thing one could reasonably expect INFINZ, the CFA Institute, the Commission for Financial Incapability or the Ministry of Investment Banking to support. We won’t mention any other government departments.

It’s important to get the public engaged on this topic and the more they know the less likely it will be that the banksters and their friends, whom we won’t name, can rip them off.

On 14 October 2016 at 12:46 pm Graeme Tee said:
I will put up $5,000 to get Elizabeth Warren, or someone else with a similar public profile, to NZ to generate some public awareness on this issue.

Perhaps John Kay could be persuaded to come back to NZ for a lot less money than Elizabeth Warren?

Discussions in our office always get back to the point that politicians have created this environment of cynicism in MBIE, FMA and the bank owned funds management industry. This attitude has culminated in the recent appointment of another bank representative to the FMA board.

Its only public opinion that will persuade politicians to act in the public interest because clearly politicians are not fulfilling the public duty they are elected for. I know this behaviour goes across the board with politicians but if the public really knew how (and how much) they were being ripped off they (the public) might do something about it come the next election. Perhaps making this an election year issue is the way to make a change. If the Commission of Financial Culpability (sic) were doing their job they would be doing this, not us.

On 14 October 2016 at 1:27 pm R1 said:
A Warren seminar would surely be some of the most valuable CPD we AFAs could do, so come on INFINZ or AFA/PAA/FMA/etc. someone pick up the ball and organise it and I/we will happily pay to attend. If we could have it rolled out before the election that would create some addition value through political pressure to do the right thing by retail investors.

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