Mild style hides an iron will

Sean Hughes believes that action by the FMA must meed the 'public interest test'. Photo / Mark Mitchell

The FMA's first boss wants to create an environment where "mum and dad" investors feel confident enough to put their hard-earned cash back into the NZ markets.

It's a tall order.

Household investment in NZ equities has declined from 26 per cent in 1986 - the heady height of the 1980s share market boom - to just 7 per cent a year.

The $8.6 billion wipeout of investor wealth in the finance companies' collapse has taken its toll. Investors not only lost confidence in company directors but also with the market watchdog former Securities Commission chairman Jane Diplock, who they believed (fairly or unfairly) should have blown the whistle on the sector much earlier.

It will take time to persuade them back into the market again.

Hughes has immersed himself in the market since he arrived from Australia earlier this year to take up his new job. The Kiwi ex-pat has spent most of his career offshore including two stints at the Australian Securities and Investment Commission.

In formal speeches to capital markets participants and corporate insolvency experts, he has delivered a carefully crafted message. He has stressed he's not an advocate for the efficient markets theory of minimalist regulation.

"When a company plummets over the cliff because its directors and management have been asleep at the wheel - or worse, because they've bailed out the door and let their investors take the plunge alone - then we will look to see what action the FMA will take.

"We will take action."

It's that robust stance that has already stood him in good stead with Commerce Minister Simon Power who believes confidence in the New Zealand financial sector was sorely tested by the global financial crisis and the number of serious corporate collapses.

Hughes' delivery is relatively mild. But there is no mistaking his steely determination to deliver on Power's clear message that he expects the FMA to make "early use of its powers".

"The beauty of my background is that I was a litigator and have been an enforcement regulator ... I don't come from a pure policy or capital markets background, so to me running cases and the risk of losing is not terrifying."

Power has armed the FMA with new enforcement measures, in particular, section 34 of the Financial Markets Authority Act 2011, which empowers the FMA to sue directors, auditors and trustees.

Hughes emphasises the sole purpose of a section 34 action cannot be to recover compensation for investors.

"If there is no other benefit - we're not going to be setting the standard, or clarifying the law, or sending a message to the market and all we're doing is recovering three cents in dollar for 500 investors - then I think the rest of the taxpayers of New Zealand would be right to say that that's not an appropriate use of your resources.

"So the primary objective must be that it meets the public interest test. It must be that you are establishing new principle, clarifying the law, setting appropriate standards of conduct, and if as a result of all that you also manage to recover a reasonable amount of money - and I'm not talking three cents in the dollar, better than that - then you're probably looking at the sort of case we'd want to run.

"I think it needs to be exercised fairly quickly and on a couple of occasions until the market gets used to what it is and until we are tested by the courts on how to bring those cases."

The FMA opened for business on May 2. But Hughes wasn't thrilled to be confronted on Day One with the big backlog of finance sector investigations that had still not been finalised before the commission folded its tent.

"I think others have presented it as something of a gift to us.

"It means we have the opportunity to take action very early on and obviously the action against [low-ball share buyer Bernard] Whimp would be an example of that. It's consistent with the objective to encourage people to come back into the market. And if you are getting a low-ball offer and you don't know what to do, then you're not going to be very confident."

But it is inevitable the public will judge Hughes' mettle - and that of his board - by the manner in which the FMA tackles the backlog of finance cases.

"The last thing I want to be doing is to be making promises to people that we're going to be getting 100 cents in the dollar back," says Hughes. "That every culprit or person who has breached the law is going to be sent to jail or in some way dealt with. That's just not realistic. We've got to make some hard calls and some strategic decisions around what matters are worth pursuing."

He plans an intensive review before telling the board which investigations his team thinks are worth pursuing. Factors that will be taken into consideration include the size of the loss, the significance of the breach, the numbers of affected people, the likely outcome and whether there is any prospect of compensatory recovery.

"At the end of the day they (board) need to make the call as to what they think are the right strategic cases to run and I'll give them the most robust cases I can.

"But I do think we need to be brave - There are some cases that may not be immediately obvious as winnable and I think it is important that we test our powers.

"Only through that will we get the dual benefit of giving clarity to the market around what's expected of them and then using that as a guiding tool so others don't think they have to run the distance with us."

Expect to see Hughes adopt the same sort of hard-nosed commercial approach he adopted during the Westpoint Scheme case for Asic where an "awful lot" was recovered through settlement without having to go to trial.

"From what I read before I got here, corporate criminals here are less likely perhaps to end up behind bars - and if the whole purpose of running criminal proceedings is to satisfy some bloodlust or to send a message then if you don't see the penalty you're looking for, has there been an appropriate use of resources?

"I think there will always be cases where the conduct is so egregious and so harmful that you have no choice but to pursue them, and if at the end of the day the penalty or the custodial outcome is, on an objective view, deemed unsatisfactory then you have a choice - you can appeal or live with it."

Hughes plans to publish a version of the FMA's enforcement strategy so the market can understand why it takes action in some cases but not others. The FMA will also be actively involved in investor education."

"People are afraid and don't know what to do and so they just put their money in the bank or investment property or pay off their mortgage.

"Now paying off the mortgage is great, but if you just lock it all up in illiquid or non-productive asset classes then we're not going to grow the economy.

"We, by ourselves, obviously can't grow the economy but what we can do is deliver on all of those foundation steps - guidance, enforcement, education - in that way builds a more diverse and deeper market.

"I'm not going to say we've got a silver bullet or we're going to come up with a solution. The very basic thing we can do its clean it up and make people feel that if they do come into the market that the products they invest in will be well disclosed to them, the people managing them will be monitored and the supervisors will be qualified to do the job. And where they get it wrong, we'll take action."

THE BOARD

CHAIRMAN: Simon Allen (two year term)

MEMBERS: Shelley Cave, Colin Giffney, Murray Jack (three year term)

James Miller, Michael Webb, Justine Smyth (four year term)

Mark Verbiest, Mary Holm (five year term)

BUDGET: $24 million

NEW POWERS:

* The power to exercise an investor's right to take civil action in the public interest against a financial market participant.

* The ability to prevent products from being structured to avoid FMA supervision.

* Enhanced warning powers for low-ball unsolicited offers.

* A new oversight regime for registered exchanges including real-time market surveillance.

Plain modesty

Hughes resorts to impish humour to distinguish himself from his predecessor. Jane Diplock was dubbed "Plane Jane" for her extravagant offshore travel budget. The FMA has set up shop in the Securities Commission's former offices. But Hughes is "not sitting in Jane's office". He has a more modest office, appropriate for the size and stature of the organisation. "We don't need to be too grandiose."