FMA performance scorecard
ON THE anniversary of its establishment in May this year, the Financial Markets Authority (FMA) commissioned a survey which polled or interviewed key financial market stakeholders.
The survey elicited views in relation to the FMA’s performance in its inaugural year, as well as identifying areas where the FMA might improve in the future. The key findings of the survey which was conducted in June are available on the FMA’s website.
Colmar Brunton’s process preserved the anonymity of the survey respondents, thus significantly improving the usefulness of the survey conclusions. Conducting regular stakeholder feedback surveys is a requirement of the FMA’s Statement of Intent.
The survey found that many stakeholders initially held low expectations of the FMA, given that it was effectively a new organisation which faced many challenges, including those inherited from the Securities Commission.
I consider this perception may have been driven by the FMA’s lack of a presence in Auckland, what appeared to be slow progress with respect to finance company investigations and prosecutions, an apparent personnel shortfall to execute its legislated mandate, as well as uncertainty as to the diligence, discipline and balance that the FMA would apply in its new areas of oversight.
It is therefore pleasing to note that on it first anniversary, the stakeholder community considered ‘‘that the FMA has mostly shown strong performance and successful stakeholder engagement’’. Respondents praised the amount the FMA has achieved in its short life and how well it has tackled the challenges with which it was presented.
Measured against the four key outcomes identified in its Statement of Intent, the FMA performed strongly on two – its intention to lift levels of competency and compliance by financial market participants (73 per cent of respondents say it is performing well) and in supporting the integrity of the financial markets (70 per cent rated it as performing well).
This reflects several key achievements by the FMA during the year. An Auckland office was established in a central-city location and more than 30 new personnel were successfully recruited, thereby ensuring its capacity to perform against its regulatory mandate.
The Council of Financial Regulators was established in association with the Reserve Bank and new Memoranda of Understanding entered into with the Serious Fraud Office and the Australian Securities and Investments Commission, thereby addressing the market’s concerns with regard to fragmented and unco-ordinated jurisdiction.
The FMA has engaged with stakeholders in its policy development and shown a willingness to alter its position when offered constructive suggestions for improvement. The development of the guidance note for ‘‘Effective Disclosure’’ is an example of this, whereby the final guidance note differed from the draft in a number of areas.
About 61 per cent of stakeholders considered the FMA had helped clarify their understanding of their obligations and 67 per cent agreed it effectively communicated its expectations. Furthermore, it is generally perceived by stakeholders as accessible, consultative, open and frank, which reflects well on the organisation’s culture.
I believe a key factor in this strong rating is the way the FMA regularly communicates its objectives. Chief executive Sean Hughes is visible in the media and at industry functions. Hughes uses a consistency of language and plain-English messaging that leaves few market participants in the dark as to the FMA’s priorities, intentions and interpretation of its mandate.
While there was room for improvement in stakeholders’ understanding of how the FMA strikes the balance between prevention and punishment, 63 per cent felt it was communicating clearly on why it undertakes regulatory action.
I consider that successful finance company prosecutions based on meticulous investigation and case preparation reflect well on the FMA’s competence and determination in enforcement, thus upholding the integrity of markets by demonstrating that those who choose not to comply will pay a heavy price.
On the other two key outcomes identified in the Statement of Intent, significant neutral and negative opinion exists.
Stakeholders who considered the FMA is performing well in ‘‘building confidence in the financial markets’’ amounted to 5 per cent, whereas only 40 per cent rated the FMA well in its role of ‘‘promoting informed investor participation’’.
Raising public awareness of financial matters and producing more financial literature are the key ways stakeholders suggested the FMA could do more to help consumers and investors.
I consider this rating is to be expected and, unfortunately, the FMA will probably struggle to rate highly in this area.
The task of materially raising the financial literacy of the overall population is a noble objective but extremely difficult to achieve. International studies have shown that a high proportion of the public struggle with the simplest financial concepts, including fractions, percentages and compound interest.
Raising the general financial competence to a level whereby even a vaguely competent assessment of the merits or suitability of a security offering could be made by the man in the street would require that investing become a compulsory multi-year high-school subject.
Key stakeholders would also like to see the FMA collaborate more with other agencies to increase New Zealanders’ financial literacy.
This a fair point. There are many organisations with at least some element of mandate in terms of investor education and this sort of fragmented and unco-ordinated approach is unlikely to be optimal. However, the responsibility for solving this lies with the ministers of the various responsible organisations rather than the FMA.
The Ross Asset Management debacle is disappointing in light of David Ross’s accreditation as an authorised financial adviser and is of serious concern to the FMA and the investment profession.
Hughes has taken this on the chin, acknowledged a degree of responsibility on the part of the FMA and indicated that he will seek law changes as a result.
However, it also reflects poorly on the financial literacy of Ross’s victims. In truth, the FMA can’t be everywhere and those determined to deceive and defraud may never be totally eliminated.
This survey shows the FMA is on track and demonstrably delivering on several important aspects of its mandate. Since this survey was completed, the FMA has issued further guidance notes, implemented the licensing regime for statutory supervisors and has used its new search and seizure powers. There is much to be satisfied with, but also much to be getting on with. Simon Botherway was general manager of investment management at ANZ Wealth until the end of September. Before that, he was chairman of the Financial Markets Authority’s establishment board and a shareholder activist. He is now consulting.