Reforms to ground rules of finance markets gather pace

POSTED BY Andrew Wallace
02 February 2012

posted in Finance | Business



If you’re a regular investor, you’ll know that the rules governing the conduct of New Zealand’s financial markets are in the midst of a complete overhaul. Draft legislation was introduced into Parliament late last year. With industry input, the supporting regulations, which contain much of the detail of the new regime, are expected to be developed over the coming months.

A hot topic during this process is the development of the new investment disclosure document for public offers – that is, the product disclosure statement (PDS) that’s intended to replace the prospectus and investment statement. The Financial Markets Authority (FMA) has kicked off the discussion this year with its recently-released draft guidance note on effective disclosure.

In its research, the FMA identified a number of concerns with disclosure documents, including too much complex information, unnecessary length, marketing information dominating the documents, and directors failing to ensure that the documents give an accurate overall understanding about the offer and the business making the offer.

The guidance note calls for issuers to disclose a lot more information than is currently required. For example, the FMA proposes that the documents should set out details of the business model which underpins the offer, and more information about directors, senior management and auditors, risks - including the model used to assess risks, the scale for judging the likelihood and severity of impact of risks and the steps taken to mitigate risks, and related parties and related party transactions.

Overall, the FMA expects two fundamental components in effective disclosure documents: 

  • Truthful and complete information about the offer and about the issuer, that’s both relevant and material to an investment decision, and
  • Wording and presentation that’s clear, concise and effective.

The theory goes that improved disclosure will bring improved fairness, efficiency and transparency of the market which, in turn, will bring improved confidence and increased investment.

The FMA’s initiatives ought to be commended. The draft guidance note, however, has been criticised for the extent to which it wants to broaden disclosure requirements. Its timing has also been questioned, since it’s having industry participants discuss issues about the form and content of disclosure documents which would be better debated as part of the review of the details of the

PDS regime which are on their way. Also, issuers will be put to the time and expense of having to comply with a further tweak to the current regime which is on its way out – the costs of which are likely to be borne by investors. Several industry participants and associations are preparing submissions to try and pull the reigns in and have the guidance note better reflect current legal requirements in the meantime.

If the guidance note is adopted when proposed by the FMA, the changes will be felt by issuers and investors in the next few months. Australian regulators reported a significant improvement in disclosure practices following the release of an equivalent guidance note over there - no doubt the FMA will be expecting the same here.

For the time being, it’s a case of "watch this space” for investors. There are big changes ahead in the way that investments are sold and promoted. If you’re interested in the topic of effective disclosure, you should consider getting involved in the discussion process. The FMA is looking for feedback and I am sure would be interested to hear from you (

POSTED BY Andrew Wallace
02 February 2012

posted in FinanceBusiness



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