Speeches: New Zealand and Australia leading the way - mutual recognition as a global solution


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New Zealand and Australia leading the way - mutual recognition as a global solution

Jane Diplock AO
Chairman, Securities Commission New Zealand
& Executive Committee, IOSCO

Trans-Tasman Business Circle, Auckland
20 October 2009

It gives me special pleasure to be here today to talk to a group that, by its very nature, understands a crucial point: that our future lies in taking a broader view of our economy than has traditionally been the case. What world markets urgently need is a perspective that goes beyond the narrowly national.

This is a subject close to my heart and others'.

On the eve of the sixth Australia/New Zealand Leadership Forum in August, New Zealand delegation leader Foreign Minister Murray McCully said:

"Australia is our closest neighbour, our closest ally, our closest economic partner, and our closest market. The importance of the trans-Tasman relationship cannot be overstated."

I heartily agree. I want to add, too, that what's developed - and will continue to develop - between our two countries in the arena of securities market regulation is an important plank in that relationship.

My key professional concern is, of course, ensuring markets run in a way that enhances investor confidence. However, I'm convinced that capital markets and their regulation are of far wider significance in the overall economic picture than has traditionally been acknowledged.

Thriving markets are a vital ingredient of a thriving economy. When capital markets wither, so do economies, bringing an avalanche of concomitant miseries.

The G-20 itself acknowledged that growth couldn't return to world economies until domestic lending and international capital flows were restored. So one of the major lessons to be learned from the crisis is that markets matter.

New Zealand and Australia have for some time now been carving a path towards a single economic market. I'd like to share with you what our two countries have achieved in the regulatory area and my hopes for the future.

At their September Summit in Pittsburgh, the G-20 Leaders recognised the role of securities market regulators in identifying and managing new market structures and products, as well as identifying areas of markets that may harbour systemic risks.

Need for research

Research can no longer be considered an optional extra. It is absolutely essential to uncover and understand emerging systemic market risks. We must also assess the usefulness of any strategies employed by regulators and others to enhance market confidence.

Let me quote Professor Andrew Lo, of the MIT's Sloan School, writing recently in the Financial Times:

"Markets are neither always efficient nor always irrational, but are adaptive .... During normal times prices can be trusted to reflect the wisdom of crowds. During times of distress investors act instinctively and emotionally and the wisdom of crowds becomes the madness of mobs."

We too need to be adaptive. This means being aware of and vigilant about potential tipping points. Only if we are will we have the opportunity to forestall the mob madness Professor Lo refers to.

The financial crisis

I'm talking to you today, of course, against the backdrop of the global financial crisis. This is the elephant in the room, although it's arguable that New Zealand and Australia have been somewhat less affected by the crisis.

Earlier this month, Austrade launched its 2009 Financial Services Benchmark Report and the Australian Financial Markets Association its 2009 Australian Financial Markets Report. Both reports evidence the strength of Australia's financial markets and how well they've fared in contrast to markets elsewhere.

Australian and New Zealand banks have proved resilient. Few New Zealanders were directly exposed to the securitised products that caused turmoil elsewhere. New Zealand banks did not invest in the US mortgage assets that have been at the centre of the current financial crisis, and that has allowed them to avoid the substantial credit losses incurred by many of their international counterparts.

Nevetheless, blame for the financial crisis has been liberally distributed.

Speaking recently in Wellington at the 75th anniversary of the inception of the Reserve Bank, Howard Davies, Director of the London School of Economics and Political Science and former Chairman of the UK Financial Services Authority, summed it up splendidly. His address was entitled ''The Financial Crisis: Whodunit?''

"Now the initial shock is fading, so the Wall St Journal editorial pages have concluded that they were right all along, and that the problem was excessive government interference in the markets.

Politicians on the left have decided that they were right all along, in believing that unbridled capitalism carried within it the seeds of its own destruction.

The French have decided that it's the fault of the Anglo Saxons in New York, and especially London. The English have decided, with some justification, that the real villains of the piece were Scottish Bankers.

The Tories think the only villain is a Scottish Prime Minister.

No doubt in New Zealand there are those who blame all your economic ills on your trans-Tasman cousins. The Australians themselves, as is their wont, blame the umpires.

What do ordinary people think? Well, they seem to have a fairly balanced view. A British financial website shows a good distribution of responsibility, with all the main suspects named. Bankers take pride of place, and I would not wish to deny them that accolade."

Regulators too have taken their share of blame. However, I'd like to nominate another culprit - lack of political will to regulate. This in spite of quite long-standing suspicions that certain entities and behaviors had serious systemic implications.

The origin of the crisis lay partly in flawed assumptions about the self- regulatory power of markets, but also in the lack of political will to regulate market conduct.

Now is the time for G-20 Leaders and others to demonstrate their determination to ensure the global securities market regulatory standards formulated by the International Organisation of Securities Commissions (IOSCO) are implemented around the world. Not only implemented but audited or assessed for compliance, and those assessments publicised.

Only these steps will ensure the extent to which each jurisdiction is complies with global norms is totally transparent. Only then will investors be in a strong enough position to accurately gauge what risk their investments run in various countries.

Such measures would, of course, demand significant resources - but if there's ever a case for doing something well, this is it.

IOSCO Principles

Australia and New Zealand have each been on their own journey to ensure full compliance with IOSCO Objectives and Principles of Securities Regulation (IOSCO Principles), which is the basis for all cross-border regulatory solutions. What's needed isn't necessarily identical regulatory frameworks in every country but equivalence of outcome through implementation of the IOSCO Principles.

It sounds idealistic, maybe even unachievable, but the good news is that in fact this process is already well underway. A quiet revolution has ushered in a critical piece of infrastructure.

The IOSCO Multilateral Memorandum of Understanding Concerning Consultation and Cooperation and the Exchange of Information (IOSCO MMOU) has been gaining traction world-wide. It commits signatories to key enforcement related regulatory principles to do with consultation and information-exchange across international borders.

IOSCO has 115 member jurisdictions covering more than 95% of the world's capital markets. By 1 January 2010, almost every member jurisdiction will have signed on to the MMOU or, at least, have undertaken to remove any obstacles to their doing so. We can count on the fingers of one hand the countries yet to apply to sign on.

By any standards, this constitutes a significant international move. Yet it leaves it up to individual jurisdictions to implement the IOSCO Principles and the cooperation standards embodied in the MMOU as they see fit. This concept of global ideas implemented nationally is the fertile ground from which mutual recognition can grow.

Australia/New Zealand mutual recognition

June 2008 saw the coming into force of a landmark agreement between New Zealand and Australia - a mutual recognition of securities offerings regime.

Before then, issuers wanting to raise funds in both countries had to comply with two sets of regulatory requirements.

The new regime allows issuers who are lawfully offering a product in one country (their home jurisdiction) to offer it into the other country (the host jurisdiction), without the need to comply with most of the substantive requirements of the securities and fundraising laws of the host jurisdiction.

This lowers their regulatory burden. Allowing a single offer document with only minimal additional requirements reduces duplication, resulting in issuer cost savings and improved transaction efficiencies.

It also gives investors a wider choice of investments without increasing their risk. Investors continue to enjoy the same level of protection.

So now, an Australian issuer can offer securities - including shares, debentures or interests in managed investment funds (MISs) - in New Zealand using an Australian prospectus or PDS. Similarly, a New Zealand issuer can offer securities in Australia using a New Zealand prospectus.

Issuers on both sides of the Tasman do need to satisfy certain upfront requirements and ongoing conditions before they can benefit from the regime. The rest is left to the regulators.

Agreed protocols allow the regulators in the two countries to share information on a range of matters. These include whether issuers are complying with their home jurisdiction requirement; and whether there have been regulatory concerns about their operations in the host jurisdiction.

All the signs are that the regime is achieving what it was designed to achieve.

ASIC research

Responding to the need to ensure regulatory interventions are useful to the market, ASIC recently completed a valuable piece of research, for which I am most grateful. It has looked at whether the mutual recognition agreement is actually facilitating trans-Tasman engagement.

The findings will be formally released later this week, but it would give me great pleasure to share them with you this morning, given your close interest in trans-Tasman business.

To date, the regime had been used seven times by New Zealand issuers offering securities into Australian for capital raising, and 253 times by Australian issuers - predominantly those issuing MISs.

The research shows issuers on both sides of the Tasman are very supportive of the regime. They speak of its "speed and ease", say it is "straightforward" and "about as good as it could possibly be."

Issuers estimate a saving of between 55% and 95% in the additional legal and documentation costs of capital raising in the host country. One firm said the new regime promised significant savings by reducing the need for its physical presence in the host country.

Firms also say the regime allows them to go to the market more quickly than before. One firm claims that the regime allowed it cut its usual time of eight weeks down to six.

All indications are that the new regime is, and will continue to be, a resounding success.

The future

New Zealand and Australia mutual recognition offers a promising way forward to recovery by enhancing market liquidity and resilience. The significance of this arrangement, though, goes far wider and deeper than merely a local marriage of convenience.

There's no doubt in my mind that, globally speaking, this kind of mutual recognition is the way of the future. We are showing the rest of the world this kind of arrangement can work, and work well.

It's worth noting here that a number of issuers interviewed for the ASIC research stated their strong support for establishing similar regimes with developed Asian markets. The IOSCO Asia-Pacific Regional Committee meeting, later this week in Melbourne, will be an opportunity to discuss this exciting possibility with other regional regulators.

Successful implementation of the trans-Tasman regime gives us the confidence to continue working with our Australian counterparts to create other milestones. We aim to support the two governments' goal of achieving a single economic market, to help deepen the trans-Tasman economic relationship that New Zealand and Australian Prime Ministers are committed to.

Mutual recognitions are one of the ways of streamlining the process of doing business across the Tasman. My ideal would be to achieve mutual recognition in all financial regulatory areas. This would mean our two commissions continuing to work together to reduce regulatory costs for firms operating in both markets, with considerable effort going into regulatory reform in both countries.

I firmly believe that what we have implemented across the Tasman is a shining example of what's needed world-wide. It's also one that our two countries can take further. I look forward to the day when mutual recognition is extended across the entire panoply of trans-Tasman financial services.

In this country we are implementing the Financial Advisers and the Financial Service Providers legislation, which will be in force by the end of next year. It requires all financial advisers to be registered with the Companies Office and regulated by the Securities Commission, and is designed to enhance public confidence in the sector.

The next step might well be trans-Tasman regulation of financial advisers. Australia has regulated this sector for several years. Its Parliamentary Joint Committee on financial advice and advisers is due to report next month. This will be the perfect moment to launch a dialogue about the regulation of financial advisers in our respective countries, and ensure emerging frameworks are mutually recognizable.

It offers the possibility of financial advisers being able to operate in both countries without having to seek further approval. It's an opportunity we must be sure to seize.

I don't pretend for a minute that mutual recognition is a quick and easy solution to all our woes. It requires, for a start, an imaginative leap - a willingness to look beyond our own geo-political borders.

Australia and New Zealand have long acknowledged considerable common ground in many areas. The challenges for establishing recognition agreements between jurisdictions without such close ties may be considerable.

Mutual recognition agreements are based on the principle of "substituted compliance". This means each jurisdiction relies on an issuer's substantive compliance with the rules of the other jurisdiction. Setting up such a system goes far beyond setting in train complex and protracted bureaucratic processes. It demands trust and confidence between the parties. These qualities can be hard to come by at the local, let alone the global, level.

We must not, however, allow ourselves to be paralysed by the challenges. The success of the IOSCO MMOU demonstrates that countries can, and do, work together. This despite often fundamental differences between their governments.

The success and further promise of what New Zealand and Australia have achieved is a model for other jurisdictions.

Global players cannot be expected to comply with conflicting national regimes. Only two weeks ago in Basle, credit agencies were complaining about the difficulties that makes for them.

Mutual recognition, as I pointed out, doesn't require participating countries to surrender their sovereignty by adopting identical legislation. Rather, it aims for domestic laws and regulations that reflect national imperatives while simultaneously offering the capacity for cross-border cooperation and enforcement.

Just this month, Minister of Commerce Simon Power claimed the trans-Tasman arrangement as the most advanced mutual recognition agreement in the world.

I believe he's right. I believe we have achieved something to be proud of. I also believe that this is just the beginning - for Australia and New Zealand, and for the rest of the world.

Thank you.

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