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Investors continue to be easily spooked despite efforts to reform local capital markets

Photo/Getty Images

A couple of high-profile corporate failures, let alone the risk of a tanking economy, can be all it takes to turn mum and dad investors off the sharemarket. Its appeal isn’t helped by the apparent guaranteed road to riches of real-estate investment.

“Safe as houses” has turned out to be true for many New Zealanders, for whom property has been a default investment option since the 1987 sharemarket crash. That event had a disproportionate hold on investors’ minds for two decades, and the finance company collapses of the late 2000s gave fresh impetus to investor wariness.

More recently, shocks to investors have come in the form of such high-profile cases as the Ponzi scheme run by Wellington investment manager David Ross. For years he bilked investors who took the advice of friends and family to place their money with him because of his reputation for generating investment returns that really were too good to be true.

Throw in the caution engendered by the 2008 financial crisis and investors could be forgiven for remaining jittery in almost every area. Even real estate isn’t immune, with the likelihood of rising interest rates over the next few years posing a risk to heavily indebted buyers.

Worrying disclosures can still come to light. In the trial of Milford Asset Management’s Mark Warminger, the High Court heard allegations that traders in institutional investors’ dealing rooms can push share prices around to hit their quarterly bonuses.

Wells Fargo’s former chief John Stumpf. Photo/Getty Images

Although the court has yet to rule on the alleged market manipulation at the heart of the trial, some of the evidence raised questions about whether the publicly quoted share price can be regarded as the stock’s “real” price when traders are fishing for the best possible deal.

Some may also have been surprised by the disclosure that traders at one of the country’s largest and most successful institutional investors, the Accident Compensation Corporation, are allowed to buy and sell shares on their own accounts.

Sure, the $35 billion fund’s trading team must have a boss’ sign-off to buy and sell shares. And they aren’t allowed to bet against what ACC is doing. But a small-time investor could be forgiven for feeling at a disadvantage.

However, our reputation as a clean place to invest is intact offshore, even if a fall in Transparency International’s global trust index to fourth place suggests it’s less than pristine. We have nothing on Wells Fargo, the American bank whose chairman and chief executive, John Stumpf, abruptly resigned in October over a scandal involving sales tactics that led to more than two million unauthorised accounts being opened.

And some evidence suggests we are becoming more confident about financial market regulation. After a decade-long process of reform, the Government will certainly be hoping so, with a new Financial Markets Conduct Act that came into force this month beefing up market oversight and compliance requirements across the board.

Ross Pennington, a board member of the financial services professional body Infinz, says New Zealand is much harsher on itself than the rest of the world. “In any group of 1000 people, you’re going to have one or two who are not doing things the right way, but this notion of a top-down cultural problem is far from the mark and certainly the ‘Wild West’ notion is now more or less absurd.”

Commerce Minister Paul Goldsmith. Photo/Simon Young

Faith in markets

That shows up in the Financial Markets Authority’s survey on the public’s confidence in the markets, which found more people had faith in them than not, with knowledgeable investors heavily weighting the positive score. Non-investors were evenly split between being not confident or pleading ignorance.

The hope is that the new regime will help reinvigorate the wider public’s con­fidence in capital markets and deepen the shallow pool of investment capital.

Chapman Tripp partner Roger Wallis says the FMA has become more effective at communicating with the market in the past two or three years, and is more focused on trying to prevent wrongdoing rather than chasing malfeasance through the courts after the fact. “Those are all quite good things, and, increasingly, directors are taking notice of that activity. Investors should be getting more confidence.”

However, regulators can’t protect against risk, and Wallis says there will still be failures, “particularly when someone’s being secretive and it’s hard to uncover”.

And there is still work to do. A relatively new regime intended to make the status of different kinds of financial advisers clearer has proved inadequate. The Government is now planning to do away with the present confusing range of similar-sounding titles with the intention of making it unambiguous when someone’s offering independent financial advice and when someone’s simply hawking a product.

Kensington Swan partner David Ireland, who’s been involved in the adviser regime, says the hurdles it put in the way of providers dissuaded many from offering advice. Industry figures show the average age of advisers is rising, many are leaving the industry and there are too few newcomers.

Partly as a result and partly because many New Zealanders have yet to adopt a financial planning culture, just three in a thousand people joining or switching KiwiSaver schemes get personalised advice. Yet as more people have a stake in the capital markets through KiwiSaver, such disengagement becomes increasingly problematic.

Commerce Minister Paul Goldsmith wants more people, especially those on lower incomes, looking for and able to access financial advisory services. The trick will be ensuring that the compliance costs of a more rigorous regime don’t eat too much into investment returns or attract high fees that become a turn-off to the consumer.

Ireland says the sector is on the right track. “These things could be far more challenging for business here, but equally New Zealand Inc should have a lot of confidence in the structures that have been put in place.”

This article was first published in the December 17, 2016 issue of the New Zealand Listener. Follow the Listener on Twitter, Facebook and sign up to the weekly newsletter.