PAUL Our share market is anaemic. It has been a disastrous five years for investment in this country - 63 finance companies collapsed, a whopping $8.5 billion of people's money were lost. Since 1997 - get this - investment in our share market as a percentage of GDP has halved, and is down around the levels of Greece and Ireland. So a posse called the Financial Markets Authority has been sent in to clean up Dodge, to make it safer for NZers to start investing again. Its boss is the sheriff of the share market, he's Shaun Hughes, a 45-year-old lawyer and banker with much international experience. Mr Hughes, good morning.
SEAN HUGHES - Financial Markets Authority
Thank you, Paul. Thank you for having me on.
PAUL It's a pleasure, and thank you for coming on. It's a shocker, isn't it - 63 finance company collapses, $8.5 billion of people's money down the drain. How did it get to this?
SEAN Well, I think first of all, Paul, the real problem has been people don't understand the markets that they're investing in. And to add to the article that you had published in the newspaper yesterday, it's not just crises in terms of earthquakes in Christchurch and binge drinking in some schools, but we've got a national crisis around financial literacy. And for me, that is the issue that we need to focus on. We need to rebuild that confidence by making sure that people have got the tools and the equipment they need to invest safely in this market.
PAUL Well, yes, I saw that that was spelt out very clearly on your very good and very friendly website, Mr Hughes, and your website makes the point that the difference between people who make money by investments, from them to the people who lose their shirts is information, is understanding the investment.
SEAN That's right. And one of the tools for getting there is through the new financial advisor regulations, which come into force from the 1st of July. Already 1100 financial advisors have been authorised, and they'll be able to start giving advice from the 1st of July. Unfortunately, there's gonna be a few that are not gonna make it, and we'll be taking action to ensure that those people don't give advice.
PAUL So you're getting rid of the cowboys.
SEAN I think it's important that we focus on where the really critical risks are for investors, and for us, it's retirees and it's young people coming into the market for the first time, entering into KiwiSaver, and that's why we've taken action already just in our first seven weeks in relation to people that are selling KiwiSaver in a most inappropriate way.
PAUL But you talk about NZers' financial illiteracy. What can we do to change that? Where's that got to start?
SEAN Well, look, it's a partnership approach, Paul, and we've all got a part to play in it. It starts in school and it goes right through the life cycle, and I'm delighted to see that the government announced some initiatives around financial literacy - Massey University and Westpac - earlier in this week, but we also, at the Financial Markets Authority, have got a critical role to play. We've gotta raise standards in the market, we have to pursue wrongdoing where it's deliberate or particularly reckless, and wherever possible we will go out there and try to recover funds for investors who have lost money where we can.
PAUL Yeah, because you are a move, are you not-? I mean, we have been- I don't want to labour the Wild West, uh, imagery, but we had been the Wild West, it's generally agreed. Are you a move to greater regulation?
SEAN I don't believe in greater regulation just by itself, Paul. It's gotta be about more effective regulation and having the right people to do the regulation, and that's why earlier last month I announced a restructure of Financial Markets Authority. The people that we inherited from, the Securities Commission, a number of those roles have been advertised, and we're out in the market now looking for people who will be part of the future of this organisation and will help rebuild that shattered confidence and that national tragedy that I've been talking about.
PAUL I don't expect you to comment on the performance of the Securities Commission, which you have replaced, even though most of those finance companies that collapsed had prospectuses approved by the Securities Commission. But things are going to be different under the FMA. Can I get some brief answers from you about some of those ways in which things are going to be different? You've got a bigger budget than the Securities Commission, for a start, yes?
SEAN That's right, yes. And it's about a 44% increase on its previous year. And that's gonna go towards rebuilding both our people and also some of our core systems.
PAUL You're going to be able to take civil action against miscreants, so the burden of proof will be slightly less?
SEAN Yes, that's right. We can also seek to recover money where it's been lost on behalf of investors where they say it's OK for the FMA to stand in their shoes.
PAUL What are the chances of getting some of that 8.5 billion back?
SEAN Look, I think we're gonna look at those cases very seriously, and we're well down the path of doing that right now, to see where we can recover assets. Now, Paul, I've gotta be honest with you - if the money's gone offshore or if it's been spent or it's been squirreled away somewhere, we could spend millions and millions chasing that, and at the end of the day, there's no dividend available for those investors. So we're gonna have to accept in many of those cases, that money is gone. So what's the right remedy in that case? Is it taking those people out of the market and forever shaming them? Maybe that's the better outcome than simply trying to pursue money that we'll never get back.
PAUL Yes, you're talking about triaging - deciding which cases you've inherited you're gonna continue with cos you want to move on. Surveillance. You now have great powers of surveillance. Are you going to be spying on businesses everywhere?
SEAN Well, I don't want to use the word 'spying', but we'll certainly be doing things such as shadow shopping, we'll be following up on promises that advisors make to their customers about the sorts of services they're offering. People who say today, or on the 1st of July, that they're authorised to give advice and they're not, we'll certainly be cracking down on them. And we'll be working with other agencies to make sure that we have a holistic approach across the market to crack down on bad behaviour.
PAUL Now, let's look at the NZX, which, despite all the flash talk about certain people there, is anaemic. Since 1997, the amount of money invested in the NZX in proportion to GDP has almost halved - 52% to 29%. Australia, over the same period of time, the investment has doubled to 130% of GDP. Why?
SEAN Well, Paul, it's a very different market economy, and I'm lucky to have spent the last 15 or so years living in Australia. I mean, obviously very deep boom in terms of the mining sector. Also there's been a much greater history of retail participation in the share market in Australia because of compulsory superannuation. So we've had a very different experience. People in Australia are familiar with the share market, and they have greater confidence. And what we wanna do is rebuild it here.
PAUL Well, that's right. But I suppose the reason Kiwis don't invest in the NZ share market is there's no money in it, and if there is money in it, the company's probably crooked.
SEAN Well, I don't agree with that, Paul. I think we're starting to see the emergence of more and more boutique or smaller firms, and then we've got the large ones like Fonterra who offer a really great opportunity, and I think we wanna make sure that people have confidence and spread the risk across their whole portfolio.
PAUL How are you gonna bring people into the share market, then? How are you gonna do that, Mr Hughes?
SEAN Well, first of all, we've gotta raise the standards, Paul, and so the financial advisor regime that's coming in on the 1st of July is the beginning of that. We've got more regulations coming in later in the year in relation to trustees, and next year in relation to auditors. So there will be a raising of the standards across the board. On top of that, the financial literacy programme that I've been talking about where we work with other government agencies, and thirdly, taking enforcement action to squeeze out people that are doing the wrong thing. I think that's the approach we've gotta take.
PAUL Can you just briefly explain to us - why is it important for an economy to have a healthy share market? In some of your stuff, you say, 'We're not gonna really grow this economy unless we start getting a vibrant capital market.'
SEAN Well, it fuels growth within the economy, Paul, so it's self-serving. As companies go out, they need more capital to grow, they need to reach out into the community that they're serving, and therefore investors have an opportunity to play a part in the growth of that company. And so it's a circle, really. And what we wanna do is make sure that people are investing in companies they understand and are comfortable with their risks.
PAUL You've inherited investigations into 25 companies from the Securities Commission, Mr Hughes, and you've said you want to move on and deal with the future. And I used this word before, 'triage', you've said you'll triage some investigations. So what do you mean by that? Are some buggers gonna get away with stuff?
SEAN I don't agree with that, Paul. We're gonna look at these matters very carefully, and we're a long way down the path already. Um, we announced on Friday that we are ceasing proceedings into one particular matter were it simply doesn't fit our criteria. Early next week, we'll be making some joint announcements with the Serious Fraud Office in terms of some additional matters where charges are going to be laid. So we're trying to get through that list as quickly as possible. But, look, matters that are very old, very stale, where there's no hope of recovery, where the particular people involved don't have any assets, we're gonna have to ask ourselves, 'Is it worth spending taxpayers' money - yours and mine, Paul - to recover or to pursue somebody who, at the end of the day, is just not worth pursuing?'
PAUL Now, will you still go after-? Many people are gonna want to know this at home. Will you still go after Hanover - Eric Watson, Hotchin? Hotchin, a man who, with a deteriorating company, of investors' funds began to build a $40 million home in Paritai Drive. Do you intend to pursue that?
SEAN Uh, we expect that our investigation into that particular matter, Paul, will be concluded by the end of next month, and I'd be happy to come on to the programme thereafter and talk to you about what we're going to be doing with that matter at that point in time. We've made a commitment to the court and to the other parties to have that investigation wrapped up next month.
PAUL So 25 investigations you've inherited. How many might you drop, or have you dropped?
SEAN Uh, well, we've talked about the Lombard matter already, and we'll be making decisions on the remaining ones of those 25 very early next month. We've only been going seven weeks, Paul, so we're going as fast as we humanly can.
PAUL I'm sure investors are very pleased to hear what you've said this morning. Thanks, Sean Hughes.
SEAN Thanks, Paul.
PAUL Thanks, Sean Hughes, the chief executive of the Financial Markets Authority, the new FMA, which replaces the Securities Commission.