New Zealand’s Financial Markets Authority (FMA) published its first ever corporate plan (CP) in August 2017. The CP sets out FMA’s planned regulatory activities and key areas for future focus for the period up to July 2018. This sits alongside other core strategy documents and provides a useful summary of current & future activities, as well as highlighting new initiatives. I comment on a few interesting parts of the CP below.
The CP includes FMA’s most detailed statement to date on its approach and attitude to innovation, particularly in relation to financial technology (FinTech). While FMA has certainly been supportive of FinTech it has not made much information available publicly, whereas regulators in other countries have been undertaking significant branded FinTech initiatives. Key FMA proposals include increasing engagement in the sector, providing tailored guidance material, and reviewing the impact of regulatory burdens on innovation. The CP is the first FMA publication to refer to the FMA’s “Innovation Strategy Group”, which leads FMA thinking and co-ordination in the area and is chaired by Garth Stanish, FMA’s Director of Capital Markets. It is also notable that this is the first FMA strategy document to use the term “FinTech”.
The CP is the first FMA strategy document released since the International Monetary Fund (IMF) published in May 2017 the results of its 2016 review of NZ’s financial sector. FMA sets out in the CP initiatives it is taking to respond to key IMF recommendations. That includes building a better understanding of wholesale market risks (including wholesale asset management and custody), seeking improvements in the independent supervisor regime, and undertaking policy work to support potential licensing and supervision of custodians (an IMF recommendation).
The CP sets out a new initiative, being a thematic review of incentive structures and conflicts management in vertically integrated firms. This appears to focus in particular on product providers (e.g. large institutions like banks and insurance companies) who both create financial products and distribute them. While addressing conflicted conduct is an existing FMA priority, the review is perhaps a response to the complaint of financial advisers that, while the advisers have been the subject of a wide-ranging inquiry by FMA into their insurance replacement activities, potential conduct issues arising from product providers distributing their own financial products have not been specifically addressed. A thematic review is of a lower order than an inquiry but it may lead to further regulator activity in the future.
The FMA sets out a programme of work to support the proposed change of law that will require (amongst other changes) all financial advice businesses (even very small ones) to hold a license. FMA’s activities will include mapping out related transitional arrangements and understanding more about the registered financial adviser (RFA) population. Clarity about FMA’s approach will be helpful, particularly as the law changes are still to be debated in Parliament. FMA’s approach in this area will hopefully help to limit the potential large regulatory burden that could fall on small advice businesses as a result of licensing.
The CP highlights work FMA is carrying out to improve its own effectiveness and efficiency, in response to a review by Deloitte in 2016. Key areas of focus include implementing a more intelligence-led approach to FMA’s activities, further embedding a culture of continuous improvement in FMA’s investigations and enforcement areas, and better recording of the resource applied to different sectors. FMA will report on initiatives to assess, respond to and reduce regulatory burden. These initiatives are all likely to have longer-term benefits for market participants.
The CP includes a very helpful internal structure diagram showing each function within FMA and key management roles and personnel within each of them (see pages 24-25). It also shows head counts for key functions. The largest department is “Supervision” with 28 staff- a challenging role for the manager of that department. While most of the executive team is comprised of white males, there is much greater diversity amongst the senior managers, in the next tier down. The CP also highlights that head count is not increasing in proportion with FMA’s significant increase in funding. The CP notes that this reflects a number of factors that cause a non-linear response. This is potentially positive, particularly if FMA can make greater use of technology to drive efficiencies and effectiveness in its operations.