The Financial Markets Authority (FMA) could struggle to staff-up ahead of a looming expansion of its powers regardless of mooted funding increases, a PwC review of the regulator warns.
According to the report commissioned by the Ministry of Business, Innovation and Employment (MBIE), the FMA would face a hiring bottleneck as it seeks to boost staff numbers by as much as 40 per cent.
Under PwC’s preferred option the FMA would quickly add a further 86 full-time employees to its current head-count of 199 to cope with impending new regulatory duties.
“That presents a substantial recruitment challenge (albeit a challenge that the FMA has faced before following its establishment in 2011 and as the shift to conduct-based regulation under the [Financial Markets Conduct Act] FMC took effect),” the PwC report says.
The FMA will have to police a much broader swathe of the advisory industry as the Financial Services Legislation Amendment Act (FSLAA) kicks into gear this June.
At the same time, the Financial Markets (Conduct of Institutions) Amendment Bill – second on the government’s to-do list this week – will further extend the regulator’s remit into the banking and insurance sectors.
But as well as competing in the same talent pool with other government agencies – including the Commerce Commission and the Serious Fraud Office – the FMA’s financial lures “do not match private market levels of remuneration in some career levels”, the PwC review says.
PwC suggests government agencies could collaborate to better-coordinate staff hiring campaigns with the potential to embark on “joint international recruitment drives”.
The report also notes that “people in the financial services industry are in great demand currently”, which has seen the industry poach experienced FMA staff.
“… due to the difficulty of finding talent in such a specialist financial services industry, the FMA is mitigating this pressure with a strategy of hiring talented individuals who may not necessarily have financial services backgrounds and training them, which subsequently makes them more employable and sought after in the external market, making retention challenging,” the PwC review says.
And even if the regulator does hire talent from other industries “it takes time and investment upskilling and teaching new individuals to develop a regulatory mindset”.
The staffing squeeze has already disrupted essential regulatory work, PwC says, most notably by the ‘culture and conduct’ reviews over 2018/19 that diverted 31 FMA workers from planned operations.
For example, during the first half of the 2019 financial year, the culture and conduct work saw the FMA defer significant industry oversight duties, including:
- 25 site visits relating to FMC monitoring;
- 15 site visits relating to anti-money laundering;
- 50 plus site visits to financial advisory firms;
- two site monitoring visits to managed investment scheme (MIS) supervisors;
- about 75 per cent fewer deregistration reviews of the Financial Services Providers Register; and,
- a reduction in engagement with the MIS sector;
The FMA also delayed thematic reviews of the discretionary investment management services (DIMS) sector, derivative issuers and the wrap platform market to complete the culture and conduct investigations.
“… work on building a better understanding of fee competition and practices across the KiwiSaver market was deferred to FY20,” the PwC report says.
At least some of the KiwiSaver ‘value for money’ work is now under way, including a report by consultancy firm MyFiduciary exploring the active/passive question on behalf of the FMA.
Next week the FMA plays host to a ‘great debate’, chewing over the much-masticated question of whether ‘passive management gives investors the best outcome’.
Hugh Stevens, Smartshares chief will go into bat for the affirmative along with Simplicity founder, Sam Stubbs, and Jarden head of direct wealth, Fiona McKenzie.
Meanwhile, in the other corner Rebecca Thomas, Mint Asset Management chief, will fight the active cause with John Berry, Pathfinder director, and, Paul Gregory, Pie Funds head of investments.
The debate, however, is probably not a big budget item for the FMA, which will without a doubt see a much larger chunk of tax-payer money coming its way in the coming financial years.
If the government adopts the PwC preferred option, the FMA will receive an extra $15 million (above the current $36 million budget) in the next financial year, rising over four years to an additional top-up of almost $26.4 million.
In a speech last week, FMA chief, Rob Everett said the PwC report shows “that the FMA punches above its weight in terms of its budget and resource, but is under-resourced in some key areas”.
A strong and vibrant financial sector needs an effective regulator and that’s what we want to be,” Everett said.