Summary of CMD Taskforce's final recommendations

Objectives

Recommendations

Introduction

Overview

• Consider capital markets as a "system" and improve coordination of policy development through a dedicated Cabinet Minister (or group of Ministers), supported by officials.
• Organise a forum for ongoing dialogue between industry and government.
• Facilitate the import of experienced overseas market talent.
• Protect property rights to lower the cost of capital – including by improving certainty around the Overseas Investment Act regime.

Part A: A healthy market for investors

Chapter 1: Better informed retail investors

Improve information available to investors

• Replace investment statement and prospectus with a two-part disclosure document.
• Include a health warning on disclosure documents where investment products are particularly risky or complex.
• Create a centralised website for disclosure documents – to facilitate comparisons.
• Improve transparency of managed funds (particularly fees, assets holdings, conflicts of interest and returns).
• Improve and standardise periodic statements to managed fund investors.

Improve financial advisory services

• The label of 'independent adviser' should:
  • be limited to those who are paid solely a service fee by investors and do not receive commissions from issuers; and
  • carry a clear fiduciary duty for those who use the title.
• Regularly monitor the quality of financial advisers.

Raise investment literacy

• Promote key investment messages and include investment literacy in the school curriculum (with government agency support).

Chapter 2. Better products

Improve the quality of existing products

• Improve and standardise the duties owed to investors in managed funds by requiring supervisors and managers to owe a duty to act in the best interests of investors and explicitly disclose those duties to individual investors (including an annual declaration that they have not been breached).
• Require funds to establish (and disclose) entry/exit/pricing rules that are fair to all investors.
• Change the mandate of KiwiSaver default schemes from a conservative strategy to one that is better suited to long-term investment needs.

Fill gaps in the market

• Undertake a partial listing of central and local government-owned companies, which need not compromise long term control.
• Remove impediments to foreign-controlled financial services firms (e.g. banks) undertaking partial listings of local subsidiaries.
• Build on our strengths to position New Zealand as a market hub in the agricultural sector.
• Explore options for government intervention to develop the annuities market.
• Investigate options for government issues of new or novel securities to utilise the government's unique role in the economy.

Part B: Making capital markets an 'engine of growth'

Chapter 3: Market design

Improve commercialisation and start-up

• Achieve a critical mass of commercialisation of government-funded research by consolidating the commercial activities of Crown Research Institutes and universities.
• Explore scope for replacing some grant funding with investment, using commercial instruments and commercially-focused organisations such as the New Zealand Venture Investment Fund (NZVIF).
• Continue support of venture capital through NZVIF fund of funds model.
• Encourage NZVIF to look for new ways to attract private sector investment.

Free up private markets

• Review the Securities Act and revise existing exemptions to provide a set of clearer, broader, exemptions – specifically for:
  • registered investors – who invest as a professional business activity;
  • other professional investors – according to specified criteria;
  • investors who have received a recommendation from an independent financial adviser;
  • a clearer exemption for relatives and close business associates;
  • wealthy investors; and
  • small offers,

  (and investors should be able to provide certification of status themselves – rather than requiring third party certification).

• Exclude from the Financial Advisers Act people who are advising investors who are outside the scope of the Securities Act.
• Change the thresholds for the application of the Takeovers Code (so that the Code applies to companies with more than 50 shareholdings and more than 50 share parcels).

Create stepping stones to public markets

• Enable unregistered and exempt stock exchanges to develop their own rules to foster the development of directors and intermediaries and capital raising.
• Allow registered stock exchanges to own and operate unregistered exchanges – to develop a pipeline to fully-fledged public markets.
• Support the Institute of Directors' project to improve governance in the SME sector.

Fill gaps and deepen public markets

• Develop a proposal for an analyst research scheme that would extend coverage to small and newly listed entities.
• Work to have Australian funds treat NZ-listed securities as part of their Australasian mandate – furthering harmonisation.
• Encourage the Debt Management Office to expand the range of government securities and make publicly-listed, retail issues.
• Coordinate the development of a local government bond bank.
• Improve the clarity of the regulation of derivative products.
• Work with NZX to develop derivative products (starting with dairy futures).
• Develop an energy derivatives market to facilitate developments in the energy sector.

Develop exports

• Pursue opportunities to export high-value mid and back office services for the funds management industry.

Chapter 4. Infrastructure and information

Develop market infrastructure

• NZX and Reserve Bank to work together to improve clearing and settlement infrastructure.

Use better information

• Investigate using the information advantages possessed by New Zealand (e.g. on agricultural exports) to develop financial products – including by obtaining support from Statistics New Zealand.
• Develop improved data on household financial assets to improve policy making for household savings and investment choices.

Chapter 5. Rules and regulations in New Zealand's capital markets

Define clearer objectives for regulation

• Make facilitating capital market activity the overriding objective of securities legislation.
• Emphasise monitoring and enforcement capability and activity (rapid public enforcement is critical to build confidence and participation in capital markets).
• Balance the drive for greater international capital market integration against the clear (long-term) benefits for New Zealand, such as better allocation of capital, improved risk management and increased competition.

Review and consolidate regulators

• Review and clarify the roles of regulatory agencies to reduce overlaps and ensure that the focus is on facilitating capital market activity – this may include having an ongoing monitoring role for all public securities (listed or not).
• Move to a "twin peaks" model with a market conduct regulator and a prudential regulator (requiring a consolidation of some functions between the Securities Commission, NZX and the Companies Office).
• Enable the regulator to issue 'no action' letters (with reasons), make binding rulings and issue a rule book setting the approach to the application of legislation and regulations.
• Enable the regulator to seek civil remedies on behalf of investors and to initiate and coordinate class actions.

Chapter 6. Tax

Reduce tax biases between different savings and investment options

• Reduce tax biases between different investment products.
• Review the tax treatment of profit distribution plans as part of a broader view of tax settings, taking into account any adverse impacts on capital-raising costs.
• Review the thin capitalisation rules for non-resident controlled companies to reduce the incentive for full takeovers of NZ companies by foreigners so that they can strip out profits with interest.
• Adopt the proposal to reduce the approved issuer levy from 2% to nil for some public debt issues (to develop the public debt market and attract foreign capital).
• Do not adopt an exemption from non-resident withholding tax (NRWT) for foreign sourced income of New Zealand companies distributed to non-resident shareholders.
• Provide guidance to reduce uncertainty in how non-resident partners of New Zealand limited partnerships are taxed on the partnership's offshore income in certain circumstances.
• Consider options that would tax annuities in a similar manner to other substitutable investments.
• Remove a number of differences in the treatment of raising debt and equity capital (including allowing a tax deduction for the costs of raising debt finance).