The Financial Markets Authority (FMA) chalked up a more than $3.2 million surplus over the 12 months to June 30 driven by above-budget licensing revenue and cost savings across all expenditure lines.
According the 2018 FMA annual report released last week, the regulator booked revenue of $38.7 million for the year (including the $36 million government appropriation) against total costs of just under $35.5 million. While revenue overall was more-or-less on budget, FMA penny-pinching saw costs fall about $2.7 million below forecast.
“Personnel costs were lower than budget, due to vacancies during the period and some savings in recruitment and transitional costs,” the FMA report says. “Other operating expenses were below budget, with savings reflected across all expense categories.”
Despite staff numbers jumping a net 24 over the year to 194, the FMA underspent on humans by about $1.4 million compared to budget. However, Everett jumped up the pay scale a little, moving into the $610,000-620,000 band compared to $590,000-$600,000 last year.
At the same time, ‘other revenue’ of just over $1 million ($1.5 million in 2017) was above forecast “due to higher than anticipated revenues for licensing and application fees, coupled with settlement funds received for the Warminger case as cost recoveries”.
The regulator collected $530,000 in licence fees during the financial year – down about $360,000 on the 2016/17 period that included the bulk of managed investment scheme (MIS) initial licensing.
In July this year former Milford Asset Management portfolio manager, Mark Warminger, paid off a $400,000 fine levied against him for market manipulation: the FMA pocketed about $163,000 to defray costs with the remainder tipped back into government coffers.
While the FMA left some spare cash in the kitty over the fiscal period, it was a busy year for the regulator culminating in the ‘conduct and culture’ review of NZ banks and insurance companies beginning this March.
Rob Everett, FMA chief, says in the report that the bank and insurer investigation – a joint initiative with the Reserve Bank of NZ (RBNZ) – “has inevitably drawn staff resources away from other parts of the FMA’s work”.
“However, our approach to regulation involves focusing on areas that pose the most risk of harm, and this gives us a useful tool for prioritisation,” Everett says.
He says the financial services industry conduct shortcomings, sparked by the Australian Royal Commission, “have been extraordinary and are probably unprecedented”.
“Even before the Conduct and Culture Review launched, the tone of the FMA had started to shift. Conduct regulation is no longer a new concept in New Zealand’s financial services sector. All market participants should be fully aware of their licence conditions and/or other obligations under the legislation we oversee,” Everett says. “Where we see non-compliance our response will be proportionate to the risk of harm. Lack of time or experience will not be a valid excuse.”
The FMA/RBNZ report on the NZ banking sector is due any day now with the insurer sequel slated for a December publication date. According to the FMA report, most financial institutions have provided responses that “are generally extensive and relevant to our request”.
“Some indicate a proactive and mature approach to conduct risk, while other banks and insurance firms have not yet fully embedded conduct risk, governance or oversight into their operations,” the report says.
During the year the regulator also carried out 250 “supervision monitoring engagements” across all laws under its purview including Financial Markets Conduct Act (FMC), KiwiSaver, anti-money laundering and financial advisers.
Following its monitoring, the FMA notes there is a “need for significant improvement” in the advisory industry – especially among registered financial advisers and qualifying financial entity advisers – to meet the higher standard under the imminent Financial Services Legislation Amendment Bill (FSLAB) regime change.
The regulator also reviewed the wholesale investment fund sector over the year as part of its ‘perimeter’ patrol.
“Wholesale funds are unlicensed and generally unsupervised, and there is risk that protections for retail investors are lost,” the report says. “Our review has identified ways to strengthen our monitoring approach to help mitigate this risk.”
Over the 2017/18 annual period “we declined three FMC Act licence applications, and a further 10 were with withdrawn by the applicants”, the FMA says.
The report notes room for improvement, too, among supervisors (formerly known as trustees) with most needing to “strengthen their own governance models” and introduce “a more risk-based and proactive” approach to monitoring.
“We have not seen the expected level of licensed market participants showing how they achieve good customer outcomes,” the FMA says. “This may be partially due to conduct regulation and standards being relatively new in our financial services sector. Looking for evidence of ‘conduct maturity’ will be a key focus of our monitoring and supervision work this coming year.”
In November, long-standing FMA board member, Arthur Grimes, will be replaced by Prasanna Gai, University of Auckland professor of macroeconomics.
Murray Jack, FMA chair, says with a number of government investigations pending “the regulation and consumer protection landscape may change significantly, and we recognise that some of these reviews may have implications for our mandate”.