New Zealand’s financial cop has flagged “governance, culture and conflicted conduct” as top policing priorities in its just-released annual review of enforcement activities.
In the ‘Investigations and enforcement’ report for the 12 months to end of June this year, the Financial Markets Authority (FMA) highlights poor governance, inadequate policies, sloppy implementation and “lack of awareness of basic regulatory requirements” as areas of concern.
“The main focus of our supervisory and monitoring work will continue to be in these areas, and we will continue to seek higher standards of conduct,” the report says.
While many cases were resolved behind the scenes over the 2014/15 period, the FMA report pulls out a few high-profile investigations as examples for the industry, including its recent probe into Milford Asset Management.
“This case highlights that boards and managers of any financial services business are responsible for ensuring appropriate systems and controls are in place,” the report says. “These systems and controls exist to protect customer and shareholder interests, to protect market integrity, and to ensure that financial services operate at the standards expected.”
Following the Milford investigation, the FMA and the NZX formed a joint working group “to review trading practices to clarify the expected standards of good market conduct”, the report says.
During the year, the FMA also investigated a “vertically integrated business structure” for potential financial advice abuses.
While the case fizzled out, the regulator warns “distribution channels need to be carefully monitored and managed”.
“Where the adviser, investment manager and provider of research information for a fund are connected, it is important that advisers test the investment information, and consider whether the products are suitable for the customer,” the report says.
“Although we do not oppose vertically integrated business structures, robust processes must be used to ensure customers’ interests are protected and put ahead of the profit-making interests of the providers involved.”
The FMA is currently investigating bank KiwiSaver sales practices with a report expected later this year.
Trustee companies also came under the FMA spotlight over the year to June 30 with one case – Prince and Partners Trustee Company, trustee of failed finance company Viaduct Capital – currently under litigation.
“It is vital that the public has confidence that trustees will protect investors’ rights. Our s34 powers enable us to stand in the shoes of another person, and exercise their right to take action against an individual or company who is, or has been, involved in financial markets,” the regulator says.
“However, the threshold for taking such a case is high and the decision to take this case was based on our view of the significant role that trustees play.”
With its mop-up of the finance companies mess virtually complete, the regulator would now shift to “harms-based conduct regulation” in the year ahead, the report says.
“We expect our supervisory team to use an increasing range of regulatory responses as we work with those we regulate to address issues and harms as they arise,” the FMA report says. “However, our enforcement mandate remains and, as the past year has illustrated, in appropriate cases we will use our stronger intervention powers where warranted. The deterrent effect of strong action needs to be respected by everyone taking part in our financial markets.”