Opinion: NZX needs to re-establish trust

Stock exchange must bring trust and a new focus

Let me be careful to declare our conflict here. Simplicity is a KiwiSaver manager that buys and sells shares on the stock exchange. The stock exchange also owns a KiwiSaver manager, so we are both clients of, and in competition with, the exchange. We are also shareholders in the exchange on behalf of our clients.

More than 2.8 million Kiwis have a KiwiSaver account. It’s the most popular financial product in NZ since the introduction of the cheque account. By 2030, KiwiSaver nest eggs will total $200 billion. Every week more than $10 million of new KiwiSaver investment goes into the NZ share market.

It’s not an immediate tidal wave of money, but it certainly is a rising tide. Companies should be lining up to list on the NZX and take advantage of this growth, but they aren’t. In fact it’s a backward slide.

The number of companies listed fell 5.3 per cent in the last year to October, and the value of listed companies, relative to our GDP, is below 50 per cent. That’s in stark contrast to 104 per cent in Australia and 146 per cent in the US.

One reason the market is so small is lack of confidence. Local and overseas fund managers are questioning the amount of trading happening off-market, and the concentration of information in the hands of a few brokers. To be fair to the NZX, this is a global trend, but many wrongs don’t make a right.

‘Out of touch’

My personal experience as a fund manager is that too many NZX50 chief executives and chairs are disillusioned with the exchange and feel it’s out of touch. No marketplace should be out of touch with its customers.

To its credit, the stock exchange has admitted these problems, hence its strategic review. This was released last month and emphasised refocusing on their core businesses and growing dairy, environmental and energy markets.

Growing its Smartshares and SuperLife funds management businesses was a priority too.

The timing of its release was unfortunate. Xero, one of NZ’s corporate sweethearts, had just announced its intention to delist. It was a vote of no confidence in our stock exchange.

If start-ups, private equity and venture capital sectors are to thrive, there needs to be an easy, effective and trusted way to list on our local exchange. It’s the ‘exit’ trade for many start-ups, who want access to larger markets and more shareholders. We could end up with a log jam of companies who can’t access efficient capital markets or go to Australia to do so.

Locally that could mean less growth and fewer jobs. And KiwiSaver members will miss out.

Lucrative fund fees

There are very few stock exchanges globally who also own fund managers. But it’s something the NZ exchange is excited about, as it has identified it as a key focus for growth in the strategic review.

It’s not hard to see why, as funds management is a highly-lucrative business. KiwiSaver managers this year alone will charge $370 million in fees, with the average member paying $54,700 in fees over their lifetime. Margins are extremely high. We estimate that for every extra dollar a member pays in fees, more than 80c is profit.

But the core function of the stock exchange should not be making the most money, it should be building the best marketplace. It’s now showing that you can’t do both.

If the exchange isn’t in crisis mode, it should be.

What’s the solution?

The stock exchange needs to be properly split between its regulatory and commercial functions.

Its funds management and other profit-making functions can stay in its listed vehicle and compete with all others. Its regulatory and market-listing functions need the proper attention they deserve within an unlisted, independent body. This could sit within the FMA, or stand alone.

And the exchange needs 100 per cent independent directors, who will be capable of making the tough and unconflicted decisions that will get transparency and confidence back in the share market, particularly with its largest clients.

I suspect most of the exchange’s owners would prefer having the market regulator inside their tent, rather than a more independently-minded one outside it. But a forced separation may have to be the answer because the status quo is not.