Changing regulatory functions at issue for New Zealand and Australian exchanges

In this article, senior associate Stephen Layburn discusses NZX's proposals to reallocate some of its capital markets regulatory functions as set out in a discussion document prepared for the Capital Market Development Taskforce.

NZX proposals to reallocate some of its capital markets regulatory functions are the latest measures up for discussion on the agenda for market improvements.

The Capital Market Development Taskforce (CMD Taskforce) released a discussion document prepared for it by NZX in the government-appointed group's ongoing efforts to boost New Zealand's capital markets and make it easier for business to raise capital.

In releasing the discussion document taskforce chair Rob Cameron noted that there is a global debate about the optimal scope and role of exchanges and regulatory functions. NZX undertakes a range of regulatory functions, some of which are inherent for an exchange, he said, but any analysis of specific regulatory function should be assessed against a clear and rigorous set of principles. Those principles would allow the taskforce to undertake a uniformed analysis across the entire regulatory landscape.

NZX uses the discussion paper to describe the legislative and capital market context in which it undertakes its regulatory activities and then outlines a suggested framework for assessing its regulatory structure and the apportionment of roles across regulators. Using that groundwork it then assesses its various regulatory functions against the proposed framework and proposes a set of changes for the re-allocation of some regulatory functions.

NZX notes that there are a myriad of ways in which the allocation of regulatory functions and their enforcement are managed globally with no single "best practice model" evident, suggesting the need for tradeoffs.

The discussion paper identifies seven key structural principles NZX believes should drive the design of the regulatory framework and the allocation of responsibilities and accountability. It also highlights the need to observe practical criteria, such as responsiveness and robustness.

In its scorecard, NZX says it remains comfortable with its current set of regulatory and market supervision responsibilities and its discharge of them, noting that, overall, there are no "burning platform" catalysts for change. Instead, it sees a fundamental rewrite of the Securities Act as the more important near-term priority. Also, it says that many of the issues that have imperilled investor outcomes, stymied productive innovation, and stunted the growth of capital markets can be traced to the obsolete nature of the Securities Act.

NZX's proposed changes

NZX suggests under certain circumstances some of its regulatory functions may be better discharged by other existing or new regulators. Five proposed changes are identified:

• Removing from supervision the advice component of NZX Participants (typically stockbrokers) - with that function being moved to the Securities Commission, as a result of the recent legislative changes making the Commission a universal regulator of client advice.

• Removing from supervision prudential capital and client fund areas for NZX Participants - with that role to be filled by the Reserve Bank as a logical extension of its new role as supervisor of non-bank deposit taking activities.

• Consolidating the approval of offer documents between the Securities Commission and the Companies Office – with NZX's role clarified and limited to Listing Rule issues (to the extent that they differ from the legislative requirements).

• Removing the current enforcement function - with it moving to either the Securities Commission or a newly formed special purpose body to take over the role currently undertaken by NZX-established but independent operating Markets Disciplinary Tribunal.

• Clarifying the scope and remit of oversight reviews – a role now undertaken by the Securities Commission in relation to NZX only. Potentially this role could be extended to other statutory and other non-statutory regulators.

While the CMD Taskforce does not propose a formal timeline and process for commenting on the discussion document, it will be interesting to see whether some of the commentators who have been particularly critical of NZX will respond. In doing so, the question remains whether those commentators will address NZX's strongly-worded rebuttal of recent criticism that its commercial operation is in conflict with its regulatory role. In that rebuttal, NZX makes the rather compelling point that the assertion that it would use its regulatory role to manipulate commercial outcomes is unsupported and ultimately unsustainable.

Equally compelling is the case that NZX makes for continuing with its approach of principles-based regulation (such as that contained in the existing NZX Listing Rules and the process for obtaining waivers from those rules) when contrasted against a 'black letter law' approach, which NZX describes as inflexible.

Developments across the Tasman

It is interesting to note that the discussion document was published on the same day the Australian Government announced that it will move to take away supervision of Australia's largest licensed brokers from the Australian Securities Exchange (ASX). This move, which includes removing the ASX's role in the Sydney Futures Exchange, will see those supervisory functions shifted to the Australian Securities and Investments Commission (ASIC).

ASIC's role is also extended to include the current powers of ASX to detect market abuses such as insider trading. Currently, ASX is responsible for detecting suspected breaches and then referring them to ASIC for follow up, including prosecution.

ASX's ability to effectively supervise market participants (licensed brokers) has been questioned after the failure of two large Australian brokerages, in which it emerged that one of the brokers had not met a principal regulatory requirement for more than two years.

Changes would leave ASX with its supervisory role for listed companies. It is also described as opening the door to potential competition to the ASX from other market operators, including an entity which is part-owned by NZX.

The changes in Australia are due to come into effect in the third quarter of 2010.

Enquiries and information

For more information on any of the cases, articles and features in Commercial Quarterly, please email Diane Graham or call her on 64 9 916 8849.