Capital Markets 2029 Report

This week, the Capital Markets 2029 report was released by an industry-led working group sponsored by NZX and the FMA, identifying ways to improve New Zealand’s capital markets.

The report takes a 10 year view and identifies measures that can be taken, including by regulators and industry participants to strengthen New Zealand’s capital markets.  And, capital markets matter as both a means of funding the development of businesses and goods and services and as a means of generating returns (for investors) as a result of direct and indirect investment.

The report includes recommendations in relation to improvements to KiwiSaver, enhancing financial capability, using capital markets to provide a greater supporting role in the funding and development of public sector assets and infrastructure, market development, developing new listings, tax changes and making better use of technology.

This note is confined to the recommendations about regulatory matters.

Regulatory matters

Whilst the FMC Act has brought about a sea change in securities regulation, which submitters said had generated a positive impact on capital markets, there had been some unintended consequences or areas whether further thought and refinement are needed.  These included instances where the industry has applied the FMC Act more conservatively than intended.

• Simplify disclosure requirements for regulated offers:  Whilst the PDS is much better than the (lengthy) combined investment statements and prospectuses of old, they are still seen as unnecessarily long and complex for retail investors (in an IPO of company shares).  Few IPOs provide a public pool to allow retail investors without a broker to invest.  Feedback indicates that many retail investors prefer simplified fact sheets from their broker – rather than a full PDS.  Possibly, only the contents of Key Information Summary of the PDS could be distributed to potential (retail) investors, with the balance of information made available on the Disclose Register.

• Shorten IPO timetables:  The IPO timetable is lengthy and could be shortened by the FMA waiving the waiting period to allow would-be new listings to remove a week from the timetable where the FMA has actively engaged in the disclosure documentation for an IPO.

• Remove prospective financial information for IPOs:  The requirement to provide prospective financial information for 2 financial years (unless doing so would be misleading) is seen as onerous and costly.  This is not a requirement for IPOs in the UK or the US.  It is also seen as a significant deterrent to ‘compliance listings’ where no new capital is being raised. 

• Undertake a review of continuous disclosure liability settings:  Whilst continuous disclosure principles are important – liability for a breach is much stricter than many other prominent listed markets, except for Australia.  And in Australia there are recommendations that it be reviewed (noting that the current liability regime appears to have been arrived at unintentionally).  There is no requirement to establish dishonesty or recklessness – which is seen as particularly plaintiff-friendly.  Although directors do not have primary liability – they may be exposed to secondary liability.

• Amend the definition of ‘overseas person’ in the Overseas Investment Act:  It is recommended to exclude New Zealand listed bodies corporate from the definition of overseas person if no one overseas person (including any associates) holds more than 25% of the shares in the New Zealand listed entity.

• Establish a centralised process for AML:  There is no central process for customer on-boarding under the general know-your-client (KYC) procedures and the Anti-Money Laundering and Countering Financing of Terrorism Act.  It is recommended that centralisation of AML onboarding by using existing databases or by requiring appropriate regulators to conduct this onboarding.

• Align liability settings for public and private capital markets:  Under the FMC Act, the directors of the issuer are deemed to have civil liability for any misstatement in a regulated disclosure document (i.e. the PDS and the Offer Register entry).  By contrast, there is no such deemed liability for directors in relation to a misstatement contained in other non-regulated collateral (such as private market information memorandums.  The available defences also differ as well as the exposure to criminal liability.  Whilst some distinctions are relevant, the present regulatory landscape is leading to some unintended consequences.  However, it is recommended that deemed liability for directors is removed and criminal liability standards (and available defences) are re-examined.

• Revise the definition of wholesale investor:  The (global) rise in the importance of private markets compared with public markets means many investment opportunities are only available to non-retail investors.  The current test for an ‘eligible investor’ (as a category of wholesale investor) under the FMC Act is subjective and there may be differing interpretations.  A further avenue to eligibility is recommended – so that eligible investors are able to certify that they do not require the usual information that would be available to them for a regulated offer (i.e. acknowledging there is a risk they may lose some or all of their money, that they understand that there may not be liquidity or regular disclosure, and that there are risks in concentrating their investment in any one investment or type of financial product).  Such a certificate should be required for each new investment that relies on these criteria, rather than being a standing certificate for each eligible investor.  And an AFA, qualified statutory accountant or lawyer providing a certificate should not be allowed to do so if they are receiving a commission or referral fee.

• Establish an advisory group to support capital market regulatory consultation:  To address the current volume of regulatory reform and associated consultation – as well as mixed messages between regulators.

• FMA to issue guidance in respect of the Code of Conduct:  The response of the financial advisory sector is said to have led to a two-tier local equity market (concentrating retail investors in larger stocks).  As a result, it is suggested that the application of the new Code of Conduct for financial advisers introduced in May 2019 could be made much clearer by the issuance of formal guidance notes.

Concluding comments

NZX has undertaken to report on progress made in respect of the recommendations – with an initial assessment in 18 months.

The report seeks to foster collaboration to pursue the recommendations – while noting that there is no silver bullet.

Further information

If you would like more information about any of the matters discussed in this note, please contact me.