It looked an innocuous little measure, with a tightly limited purpose. But the bill enabling the Stock Exchange (NZSE) to demutualise contains within it some meaty issues that go to the heart of the government’s approach to regulation of the markets.
The New Zealand Stock Exchange Restructuring Bill is a “private bill” — that is, a bill (pro forma sponsored by Environment Minister Marian Hobbs as MP for Wellington Central, where the NZSE head office is) to empower it do what it cannot otherwise do lawfully.
Usually private bills do not matter to anyone outside the organisation in question. This one exposes deep differences on business regulation.
At one end the Greens and the Alliance object to foreigners potentially buying up the Stock Exchange (NZSE). The bill will be, Greens co-leader Rod Donald, says, “a first step to the takeover of the exchange by a foreign exchange or exchanges. Other parliaments around the world have not permitted this to occur.”
At the other end ACT’s Stephen Franks, neoliberal to his shoelaces, is determined to preserve property rights from undue interference by the government.
In between the mainstream parties, Labour and National, are trying to respond to the NZSE’s desires and also maintain a generally light-handed regulatory environment but needing to respond to the fact that, with stronger securities laws, including insider trading laws, not due in Parliament until next month, the NZSE might demutualise into, as one Labour MP puts it, a “regulatory vacuum”.
So Parliament’s finance and expenditure select committee (FEC) injected into it a role for Commerce Minister Paul Swain.
The bill does not actually demutualise the exchange. It merely paves the way for it to do so, if 75 per cent of the members vote to do that. It was introduced to enable the NZSE to merge with the Australian Stock Exchange (ASX), a proposal stalled earlier in the year. It is possible demutualisation might not get 75 per cent because there are sharp divisions among brokers.
The bill permits NZSE members to determine their ownership entitlements and convert those into shares in a company, which will legally be the same corporate entity as the existing exchange.
That sounds straightforward. But the FEC decided there were “complex issues of wide public interest” and that it is “important that the capital markets conform to international best practice”, which requires, a majority on the committee said, “a structure that conforms closely with international norms”.
Which, the committee decided, required the listing and business rules to get approval from the Commerce Minister. (At present only the business rules do.) His role, however, is written tightly: he/she must approve the rules unless he/she decides they are not in the public interest.
Moreover, the committee decided to impose a limit on any one shareholding, to prevent a takeover by “dominant interests”. This limit, which the committee recommends should be 10 per cent, is also to require the minister’s explicit approval.
Any new exchange setting up here would have the same constraints.
The NZSE board accepts the changes — though chairman Simon Allen of ABN Amro, rejects “relaxed” as a description of its acceptance. Mr Allen told the Business Herald the NZSE had itself decided there should be an ownership cap, so the bill as redrafted “is broadly in line with our thinking” on that.
Ministerial approval for the listing rules are a “major change, from self-regulation to black-letter law”, Mr Allen said. But, he added, “having some checks and balances is a reasonable approach”.
The initiative remains with the exchange, since, under the bill as it now stands, the minister can only accept or veto — and not amend — proposed rules and amendments.
But that is not a tight enough constraint on the minister for ACT’s Stephen Franks (though his colleague, Rodney Hide, has gone along with the bill as it stands). Mr Franks is a past member of the Securities Commission and the NZSE market surveillance panel and, while not a member of FEC, is on Parliament’s commerce committee, which handles most business regulatory issues.
Mr Franks told the Business Herald that subjecting the listing rules to ministerial approval (which is the case in Australia) will limit the exchange’s flexibility because politicians have to be risk-averse — at the very time when international capital markets require more flexibility, not less.
Mr Allen reckons flexibility is not an issue in writing the rules but in administering them. “The market surveillance panel is where most of the flexibility occurs.”
But Mr Franks has a deeper concern: that adopting a regulatory approach closely similar to Australia’s will limit the exchange’s capacity to offer something different in the Australasian market.
This need for a distinguishing role for the New Zealand exchange at a time when stockmarkets are internationalising is part of the context in which the politicians have been dealing with the bill: that an Australian takeover is “maybe inevitable”, in the words of Mark Peck, FEC chair.
This could happen, he says, by the ASX setting up here and simply taking over NZSE business or by ASX members gaining control through subsidiaries here accumulating 10 per cent shares in the NZSE. There has been a recent trend for offshore-based broking houses to operate from Australia.
So, Mr Peck told the Business Herald, the NZSE may need to look at regional allegiances. Another MP on the FEC, declining to be named, thinks it might be possible for the exchange to develop a niche expertise — in, say, agri-forestry or fish.
So there is, in a sense, this MP said, a “sovereignty” issue: local firms need an efficient local capital market, which a foreign market might not supply. It is the prospect of foreign takeover which most rouses the left, which still sees the sharemarket as the “wild west” of Sir Geoffrey Palmer’s post-1987-crash description.
The Greens say the proposed regulation is too light. “Most overseas stock exchanges [are] subject to some degree of public scrutiny and supervision,” Mr Donald said. “These needs have not been adequately addressed in the bill.”
Mr Peck says the government’s concern is balance. “The minister sure doesn’t want to be interfering with other people’s property rights,” he said. But he said the committee was also much impressed by a submission by Lloyd Morrison of Infratil [subs: can you please check in your files he is Infratil] warning of the possibility that a demutualised exchange might aim to maximise return to shareholders to the detriment of an efficient local capital market.
Hence the bill’s new ministerial powers — as a stopgap until what Mr Peck calls “the quinella” of insider trading and securities regulatory reform gets through Parliament next year.
Mr Peck says the government’s concern is balance. “The minister sure doesn’t want to be interfering with other people’s property rights,” he said. But he said the committee was also much impressed by a submission by Lloyd Morrison of Infratil [subs: can you please check in your files he is Infratil] warning of the possibility that a demutualised exchange might aim to maximise return to shareholders to the detriment of an efficient local capital market.
Hence the bill’s new ministerial powers — as a stopgap until what Mr Peck calls “the quinella” of insider trading and securities regulatory reform gets through Parliament next year.