Discretionary investment management services (DIMS) will come under the regulatory spotlight this financial year with a much-delayed review of the opaque sector slated for publication.
According to the just-released Financial Markets Authority (FMA) annual report, the previously flagged “risk assessment of DIMS providers is in progress, following a delay due to reprioritising some work, and will be completed in the 2022/23 year”.
“The findings from this review will inform our future planned and thematic monitoring for the sector,” the FMA report says.
While DIMS data is sparse, the Reserve Bank of NZ (RBNZ) captures some of the market in its measure of ‘individually managed portfolios’ released quarterly along with broader fund statistics.
As at the end of September last year, the RBNZ recorded more than $45 billion in individually managed portfolios compared to about $53 billion in retail funds (excluding KiwiSaver).
Typically sold by broker-based wealth management firms, DIMS providers don’t publicly report the fees, performance and other data required by the more structured retail unit trust sector.
The regulator will also continue its ‘value-for-money’ campaign in the retail managed fund (including KiwiSaver) market, FMA chief, Samantha Barrass, says in the report.
Barrass says value “is broader than just fees, and we have observed that more needs to be done to a greater or lesser degree across the sector to secure funds’ members’ interests”.
“This will remain an important focus of our work,” she says.
The FMA report warns that poorly disclosed commissions paid to third-party distributions by providers to lure “new members to their funds” will come under tighter scrutiny.
Fund managers and KiwiSaver schemes must have “procedures to manage the conflicts created by commissions”.
However, the FMA says absolute fee levels are not the deciding factor in determining value-for-money.
“We do not have the power or desire to set fees or push the industry toward passive investment,” the report says. “We do not and will not confuse acting on poor value for money with preventing access to providers and products with a solid investment proposition and robust risk management, even if they are novel, relatively expensive – which is not the same as poor value – and/or relatively complex.”
The value-for-money initiative is just part of a heavy workload for the regulator that saw its budget, staff numbers and legislative ambit inflate considerably over the 12 months to June 30 last year.
According to the 2022 annual report, the FMA spent almost $55.5 million last year including close to $40 million on employee costs: the regulatory budget is on track to rise to almost $80 million over the next few years as the conduct of financial institution, climate-reporting, full financial advisory licensing and other new regimes ramp up.
The FMA staff pool rose by almost 50 during the 12-month period to reach 311 by the end of June last year.
Under a “strategic change programme” put in place by Barrass last year, however, the executive suite was almost halved to six to ensure the FMA is “best positioned to accelerate our growth and expansion plans for overseeing a broader remit and become a more outcomes-focused regulator”, the report says.
“In September 2022, the FMA has confirmed its new enterprise level leadership which is consisted of six executive level roles reporting directly to [Barrass],” the report says. “The new structure will be effective from 1 February 2023.”
Earlier in January, the FMA confirmed Stuart Johnson in the new executive role of chief economist with three top positions still vacant.
Barrass told an audience at a Financial Services Council (FSC) event last week that the FMA “has been doing significant work” internally to ready for its enhanced responsibilities.
“We’ve created new roles and introduced a leadership structure that enhances our innovative, forward-looking capability as well as underpinning a collaborative strategic approach to our core licensing, monitoring, and enforcement work. Both are critical for a regulator that has grown significantly in recent years and has much to deliver,” she told the FSC.
“We’ll bring new people on board, recruiting from both New Zealand and offshore. Some of those roles have already been advertised, some will be advertised in the months ahead.”