Regulators need to get out more, according to Stephen Hunt, Russell Investments head of operational due diligence (ODD).
The Sydney-based Hunt, in Auckland last week for the annual Russell conference, said regulators, like all parties in the financial services business, have a ‘know your client’ obligation.
He said, for example, regulators couldn’t police the funds management sector from behind a desk.
“Regulators have to got out and see the managers,” Hunt said. “They need to get know their ‘clients’ and to listen to what they tell them.”
Rather than simply reacting when things go wrong, he said regulators globally have now taken on a much more proactive role in the financial services industry, requiring them to develop a deeper knowledge of how it operates.
Hunt was scheduled to brief the Financial Markets Authority (FMA) last week on the tricks of the funds management trade gleaned during his ODD career.
The FMA is set to assume greater control of the NZ funds management sector this December as the managed investment scheme licensing regime goes live.
He said while the FMA may have an easier task in regulating funds management than in larger, more complex jurisdictions such as the US, the potential for large-scale failures – a la Madoff et al – would still exist in New Zealand.
“Some funds managers might think scandals [like Madoff] won’t happen here,” Hunt said. “But there’s no more or no less chance of it happening in New Zealand than anywhere else.”
In his presentation at the Auckland Russell Conference, he also said NZ fund trustees and supervisors would now have to “earn their money” under the new Financial Markets Conduct (FMC) regime.
“There is no free lunch any more [for trustees etc],” Hunt said. “You are facing greater scrutiny and liability.”
He said even though schemes may outsource many services “you can’t outsource responsibility”.
Consequently, Hunt said trustees needed to have a thorough understanding of all their third-party suppliers – including custodians, administrators, fund managers and the like – and review them regularly.
“Think of it like servicing your car,” he said.
According to Hunt, employing something like the ODD “three-stage process” could help trustees discharge their higher duty of care.
“Using the car analogy, the first preparation stage is like reading a brochure. The second document review stage is where you get deeper into the specifications,” he said. “And finally, the on-site visit is like taking a car for a test drive – no one would buy a car without doing that.”