Foundations laid for grand design

NZX chief Mark Weldon. Photo / Mark Mitchell

The Capital Markets Development Taskforce's final report last year called for sweeping changes to the regulatory environment to rebuild investor confidence.

NZX chief executive and taskforce member Mark Weldon is clearly relishing the prospect of bunker-busting regulatory ordinance being deployed against the "scoundrels" lurking in the "caves" of the unlisted public markets.

He is equally enthused about other taskforce recommendations, which dovetail snugly with the ambitions he harbours for his business.

Few other listed companies enjoy the privilege of taking a leading role in government-mandated efforts to boost the prospects of a sector in which they are the dominant player.

While some businesspeople have reservations about aspects of NZX's direction under Weldon, the taskforce has clearly taken a view best expressed by adapting the famous quote attributed to former General Motors boss and US Defence Secretary Charles Erwin Wilson: "What's good for NZX is good for New Zealand."

"They did a bloody good job," Weldon says of the taskforce.

"It was a good way to end the year from many perspectives."

Putting aside the taskforce's aspirational recommendations, few in the investing public would disagree on the need for better regulation.

Preparations for a rewrite of the Securities Act began before the taskforce came to grips with its terms of reference and when it presented Commerce Minister Simon Power with its final report, Power indicated the Government would take the recommendations very seriously, with Prime Minister John Key leading the response early this year.

At the very least some of the recommendations would be examined as part of the Securities Act review.

The report came out barely three years after the Securities Legislation Act was passed. Taskforce member Cathy Quinn at the time said this piece of law would: "Introduce a general prohibition on misleading and deceptive conduct in relation to dealings in securities; endeavour to make financial advisers' and brokers' disclosure more meaningful and likely to occur; apply the Takeovers Code to a broader range of companies; and introduce an enforcement regime making it easier to enforce securities law."

She described it as "the most significant change in securities law and practice" since 1988.

Clearly it wasn't enough. Quinn, Weldon, taskforce chairman Rob Cameron and his colleagues recommended a "substantial review" of capital market regulations.

The taskforce recommended merging much of NZX's regulatory functions, the Companies Office, the Ministry of Economic Development's National Enforcement Unit and other agencies and combining them with the functions of the Securities Commission into one capital markets regulator.

It also recommended improvements to governance, disclosure and transparency in the managed funds industry and increasing the alignment of funds' long-term strategies with the interests of investors.

But given we've been here before, what are the chances the taskforce's regulatory recommendations end up being watered down?

"Some of these industries have had reasonable success in lobbying," Weldon acknowledges.

"The managed funds industry certainly has a big lobbying presence and has been effective more or less over time but this is like arguing against apple pie. These are things that are going to be good for investors so it's going to be hard for people to make public arguments in some of these areas."

Weldon puts considerable store on the "incredibly robust" approach the taskforce took in preparing its recommendations.

"We've really tried to focus on this as a system. You can't do the regulatory stuff unless you get the regulator stuff right and vice versa. It's fingers in a glove rather than a fist in a box. I've got a lot of confidence that the thing is coherent. It's not politicised, by the way, and that's good.

"For the public markets to work you need some brutal enforcement and some real clarity in that unlisted public area.

"I think the Government has a real mind to do that and they've got the right people on the regulatory side to drive it through."

He is convinced this will result in "better investor outcomes in managed funds and in dealing with the caves in which the scoundrels hide - the unlisted public markets which is where the finance companies, property and farm syndicates are".

More rigorous regulation of the unlisted public markets is likely to benefit NZX by making the alternatives less attractive, but the taskforce has identified two opportunities it believes will aid the development of both our capital markets generally and NZX in particular.

They are the potential to develop New Zealand as a hub for agriculture-based international capital markets and also for international funds management services.

NZX's dairy futures market, expected to start in the first half of this year, and a number of agriculture-focused publishing acquisitions mark the company's first steps in this direction.

NZX has also been hard at work developing other market opportunities, dipping toes into international emissions trading market services, the Australian grain market and the local electricity market.

Given NZX's burgeoning range of alternative business on one hand and the headwinds its flagship equities market faces on the other is it conceivable that NZX could outlive the New Zealand sharemarket?

Weldon chuckles a little before reframing the question somewhat.

"Outside of just pure plan vanilla listed cash equities are there real opportunities in markets for an organisation from New Zealand? The answer is unquestionably yes."

"My sense is around agriculture and tradeable products ... in a self-sustaining system. It's not reliant on the equity markets although they would work well together if you did have listed agricultural companies. So they do fit together very well."

What doesn't appear to fit together so well is the view that New Zealand's managed funds industry needs a regulatory overhaul and the taskforce's belief this country can become a service centre for international fund managers.

"The stuff that needs fixing is largely the customer or investor interface," says Weldon.

"We wouldn't see any of the proposed reforms really hitting the middle or back office which is purely a commercial institutional set of arrangements."

He sees New Zealand's advantages as an international service centre for industry as being our time zone, the multilingual abilities of some of our population, and a low cost base in some infrastructure areas.

Should "a couple of tax changes go through" we would have a tax system "that actually works as a place to base money".

"It's not a slam dunk but it's a large industry. It's one where people are moving away a little bit from finding the absolute cheapest place in the world to a mix of cost effective and good service."

Weldon clearly has a lofty vision both for New Zealand and NZX which appeared to be shared by his colleagues on the taskforce and also the tax working group.

NZX has been doing substantial spadework already, putting in place the foundations upon which these grand designs might be realised.

NZX's new central counterparty clearing and settlement system, a prerequisite for the dairy futures and other potential financial derivative markets, is part of this.

The system, which is undergoing initial testing at present and looks likely to begin operating in the second quarter of this year, marks "a fundamental change to the way the market is operating", says Weldon.

The system, particularly the settlements function, means NZX's influence will be extended to the tectonic level of this country's financial system which up until now has been primarily the realm of the Reserve Bank and a number of powerful but obscure international organisations.

"It's the plumbing of the system. You don't notice it if it works well but if you're in the shower and the water's not going down and the hair's coming up all stinky out of the hole then, hey, you've got a problem and that's where it's so important to make sure it's fast, efficient and secure."

At the behest of Cameron, the Reserve Bank and NZX are in discussions about how they might work together in this area.

"Whether it's on the policy side, the rules side, markets or acquisitions there's been a lot of work this year reshaping the organisation and restructuring and creating a bigger opportunity set," Weldon told the Business Herald late last year. "2010 is really mostly about executing that."

THE WORLD ACCORDING TO WELDON

* On New Zealanders' financial literacy:

"Nobody can really tell the difference between a debenture through a financial planner and a share in Fisher & Paykel."

* The Capital Markets Development Taskforce's proposal for regulatory changes will:

"Result in better investor outcomes in managed funds and in dealing with the caves in which the scoundrels hide - the unlisted public markets which is where the finance companies, property and farm syndicates are."

* On the new clearing and settlements systems:

"It's the plumbing of the system. You don't notice it if it works well but if you're in the shower and the water's not going down and the hair's coming up all stinky out of the hole then, hey, you've got a problem."