Capital Markets 2029: A platform for change, confusion and plenty more debate!

I am all for change that improves the vibrance of our capital markets, as well as providing protection and opportunity for retail investors, but do we have that in the Capital Markets 2029 Report? 

With New Zealand retail investors accounting for 24% ($37.5 billion) ownership of the NZX capitalisation, you are the second largest investment group in our market (only just behind overseas investors). Any changes brought into effect for our market needs our educated input.

The Capital Markets report is wide ranging, encompassing 8 broad areas of ambition that deliver 42 recommendations in total.  18 of these recommendations are labelled ‘higher’ as they are seen to have a greater opportunity to improve the NZ capitals markets over the next 10 years. The report covers a lot of ground over its 109 pages, and to understand the initiates you need to dive deep into the detail as it is difficult to grasp the insights from the executive summary alone. 

My initial observations suggested there was optimism to be drawn from the report, but, many recommendations still fall short of what New Zealand is likely to need to truly prosper. I say this because many of the recommendations only bring us in line to where overseas markets are already at. If our capital markets are to thrive then we need to be thinking a step beyond this. That said, the report provides a platform for debate and further review which hopefully will lead to greater progress. 

There is a word of caution though from myself that was echoed from many of the stakeholders I have spoken with since the release of the report. The caution is that we must think strategically and consider any unintended consequence that might occur as a result of the recommendations, we must ensure the voice of the retail investor is heard. Indeed, it is time for all participants in the industry to further weigh in and see if any of the recommendations could be detrimental over the long term.

I must say, I was disappointed with the response from the government a day after the release of the report stating, “it wasn’t up to the government to fix the problems”. This was disappointing on many fronts as the capital markets absolutely need the government to provide the tools for the industry and investors to move things forward. Upon reading the report it became even clearer that we need the government to unlock certain areas to make this happen.

The summary chart depicts the 8 broad areas and where the ‘higher’ recommendations fall. My focus for this article has been on KiwiSaver, tax and regulation, as I consider these areas to have the more immediate interest to retail investors, and to fully cover the report would create a very very long article. 

KiwiSaver

As a retail investor, my hope is that the changes to KiwiSaver would lead to Kiwi’s becoming more engaged with selecting and managing their KiwiSaver fund, which in turn would increase their investment knowledge, savings/wealth and their investing wider in the capital markets. 

KiwiSaver eventually will be the largest pool of capital available for domestic investment, so getting this right is paramount for our market. However, 389,000 KiwiSaver members have never made an active fund choice and 1.2 million members were not making any further contribution. They need a push!

The 4 higher recommendations ask for greater choice for individuals and incentive through:

1. Allowing members to self-direct with multiple providers – this will give members greater choice and encourage an increased level of management
2. Mandate employer contributions and a stepped contribution rate for low income earners – this will ensure low income earners don’t miss out
3. Have default funds rather than default providers – this opens the market to a lot more opportunity and choice as the default funds could be spread across 20 or more providers
4. Reinstate a kickstart payment linked with an active choice fund – this will give a monetary incentive and encourage greater engagement of the fund

All four KiwiSaver recommendations get a big YES from me, but this is not enough by itself. Whilst a  greater increase in choice for investors is commendable, it is likely to fall short of sparking increased engagement from many Kiwi’s, except those that are already predisposed to actively manage their KiwiSaver. What is also needed is greater tax savings to encourage Kiwi’s to stay actively involved in their investment (at least once a year), because if they don’t, they will miss out on tax savings! 

No one wants to miss out on tax savings and the recommendation is something that many other countries already have.

KiwiSaver Tax Changes

New Zealand’s current approach to retirement savings is one of the harshest in the world, but the report calls for this to change and provide greater tax savings on how KiwiSaver is taxed. There are a few options outlined to improve this situation but the preferred option in the review calls to move KiwiSaver from a TtE (Tax on entry, tax gains, Exempt on withdrawal) to an EET approach (Exempt on entry, gains are Exempt during, Tax on withdrawal). This change should encourage Kiwi’s to participate in KiwiSaver, because if they don’t, they will miss out. It will also increase savings and boost investment into New Zealand’s Capital markets.

I am still working through why the government would be against this change, perhaps it is the significant delay to the tax income the government would receive? Even if this is the government’s concerns, KiwiSaver is far too important to New Zealand’s capital markets for nothing to be.

Tax

Two higher recommendations came from the tax area. Which follow other developed countries that make more use of tax concessions to boost the flow of money into financial savings and investment products.

The first recommendation I have already covered above under the KiwiSaver tax changes section. 

The second recommendation calls for the application of PIE taxation regime rates and exemption from tax on trading to all direct listed share investments – such income having capped rates at 28% or lower. This does not seem much to ask for when you consider the benefits obtained in other countries.

Regulation

Regulators have been accused of being too conservative post the global financial crisis in the CM2009 report. It goes on to say that how they have acted in applying the reforms is slowing down New Zealand’s capital markets.

Of course, as retail investors we want protection for our investments, but we also want more investment opportunities too. The case made by Capital Markets 2029 is that the current regulation is starving the public market of investment opportunities, and that with a minimal increase to investor risk, this can be changed.

I was a bit confused when I read the summary for this recommendation, but once I waded through the detail, I was comfortable with some of the recommendations but certainly not with others. The below 3 of the 5 higher recommendations got my attention.

Simplification of disclosure requirements for regulated offers

The report calls for simplification of disclosure requirements for regulated offers by reviewing the content required for the PDS (Product Description Summary) and what is required to be provided to investors. 

Instead of a retail investor having to view the PDS before making an offer, retail investors would only need to view a specified summary document. You would still have access to all other information via a web portal or website, including a full PDS.

The change makes sense, but I want to hear more from our members on this to understand if they really would be happier receiving a summary version as the report suggests.

NZSAs concern, like with many of the outcomes in the report, is that the recommendation is derived from input from issuers, advisors and institutions. Fortunately, this and many of the other recommendations call for an additional review to validate the findings.

Remove requirement to provide prospective financial information for first regulated offers (IPOs)

This would mean that IPOs and issuers would no longer need to provide 2 years of future financial information.

The report states that various market participants and prospective issuers find preparing these time consuming and costly. It also states that in the UK, US and in many European countries that this is not required.

I am uncomfortable with this recommendation. I understand how it would encourage more IPOs, but would they be quality ones? Would the risk to retailer investors be significantly increased?

I have worked for a few businesses over the years and there was never an occasion that the company said ‘here is the capital for that investment you want to undertake, don’t worry about the financial forecast, we will assume it is in line with our expectations’. Not once, not ever was this the case. I was expected to provide a roadmap, sometimes for the next 5 years, to gain confidence from the company that the direction was robust.

Again, I want to hear from our members on this point, so we will be surveying your views on this and on a few other areas soon. 

Undertake a review of continuous disclosure liability settings

What has come through in the report is that market participants are concerned about the liability for a breach of the NZ continuous disclosure rules. That is the whole point though, right? A healthy level of concern should be a good thing?!

The report argues that NZ has once again gone further than any other prominent listed market in this area, apart from Australia, and even they are looking to ease up on this front.

The market participants have quoted 5 negative consequences as a result of the NZ regime, these being:

1. Increase in class actions driven by litigation funders
2. Limiting the interest of companies in listing
3. Dissuading quality individuals from taking up directorship roles for public companies
4. Significant increases in director’s and officer’s insurance costs
5. Undue focus from board and management on continuous disclosure issues rather than strategy

I’m not sure how many investors (retail or institution) would have agreed with the above 5 negative consequences. Fortunately, the recommendation asks for MBIE (Ministry of Business, Innovation and Employment) to review the liability settings for continuous disclosure to see if they are appropriate, and to also seek input from NZX and the FMA. 

Should an MBIE review take place, NZSA will be requesting to participate also. This area is far too important for us not to be involved.

Right then, so where does that leave us with our investigation of the CM2019 report? We have only covered 9 of the 18 higher recommendations, and remember, there were 42 in total. NZSA and other market participants are still digesting the report and then we need to debate the outcomes. This is something that we must do with enthusiasm, vigour and caution as creating a vibrant capital market is paramount for all.