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FSAP -- An IMF-led mission team is to assess New Zealand's financial regulatory framework in October 2003 [2003] NZSecCom 2 (8 July 2003)

Last Updated: 8 November 2014

FSAP -- An IMF-led mission team is to assess New Zealand's financial regulatory framework in October 2003

Monique Egli Costi
Policy Analyst

One of the lessons learnt from the Asian crisis of 1998 was that resilient, well-regulated financial systems are essential for macroeconomic and financial stability in a world of increased capital flows. This prompted the International Monetary Fund (IMF) and World Bank to initiate and jointly develop a new surveillance mechanism, the Financial Sector Assessment Programme (FSAP).

The FSAP is designed to assess countries' financial systems, focusing particularly on the adequacy of their regulatory frameworks for promoting financial stability. The aim is to assess potential sources of vulnerability in their financial systems. By the end of 2002, no less than 66 countries had participated in the programme. As mentioned in The Bulletin last October, New Zealand has volunteered to be assessed later this year.

In New Zealand's case, the FSAP assessment will focus on banking supervision, securities market regulation, payment systems, anti-money laundering frameworks, and the transparency arrangements applicable to monetary policy and financial regulatory agencies.

A team of experts led by a high-ranking IMF official will visit New Zealand probably from 30 October to 18 November 2003 to conduct these assessments. Because the FSAP is meant to provide recommendations to policy-makers of the assessed country, these international experts are especially interested in identifying any underlying risks within our financial system. Their purpose is to discover any fundamental flaws in the regulatory arrangements and to suggest means of improvement.

A broad-ranging process

The Reserve Bank is co-ordinating the FSAP for New Zealand. An FSAP secretariat has been established at the Reserve Bank. Its purpose is to liaise between the relevant regulatory agencies, the IMF and World Bank, to assist in the preparatory work and to facilitate the FSAP mission team's visit.

As the statutory regulator of securities markets, the Commission acts as the principal contact in respect of the securities market module of the FSAP. Responsibility in this area is shared with the Ministry of Economic Development. The Commission is also involved in the securities sector part of the anti-money laundering module. As a financial regulatory agency, we also have a role in the module dealing with the transparency of financial regulation.

FSAP assessors are not only interested in the prescriptions of our regulatory framework as relating to financial markets. They are also interested in the implementation of this framework and the effectiveness of its enforcement. They will be interested to know if our securities law and regulations work in practice and if they are helping improve the quality of our markets. In all likelihood these international experts will wish to consult market participants, industry representatives, relevant professional bodies and others.

IOSCO Objectives and Principles of Securities Regulation

FSAP experts use international standards and codes as benchmarks, as well as a number of other analytical tools for conducting their assessments. Our securities market regulation will be assessed against the Objectives and Principles of Securities Regulation developed by the International Organisation of Securities Commissions (IOSCO Principles).

These Principles were adopted in September 1998 after many years of work. The FSAP mission team will include an international securities expert whose main task will be to assess how and to what extent New Zealand implements these IOSCO Principles.

The IOSCO Principles address three core objectives of securities regulation: the protection of investors; ensuring that markets are fair, efficient and transparent; and the reduction of systemic risk.

Regulation is necessary to ensure these objectives are achieved. Regulation should also facilitate capital formation and economic growth. The IOSCO Principles recognise that inappropriate regulation can impose an unjustified burden on the market and inhibit market growth and development. They also acknowledge that securities law and regulation cannot exist in isolation from the other laws and the accounting requirements of a jurisdiction.

The IOSCO document lays down 30 fundamental principles covering a wide range of securities-related areas. About half of the principles deal with the attributes of, and requirements for, the relevant regulatory agency, self-regulation and regulatory enforcement and co-operation. The other principles relate to issuers of securities, collective investment schemes (unit trusts, group investment funds, superannuation schemes, contributory mortgages and participatory securities), market intermediaries (sharebrokers, futures dealers and investment advisers) and secondary markets (securities and futures markets and trading on these markets).

In New Zealand, the evaluation of the implementation of the IOSCO Principles will naturally involve an analysis of the role, powers and functioning of the Securities Commission as the principal statutory regulator of the securities markets. However it will also involve other regulatory bodies, for example, the Registrar of Companies, the Takeovers Panel, the New Zealand Exchange (NZX) and the New Zealand Futures and Options Exchange (NZFOE).

Expected findings

The FSAP assessment will be the most comprehensive external assessment of the financial sector ever undertaken in respect of New Zealand.

Assessment against international standards and codes will inevitably involve the identification of areas where our regulatory arrangements differ from international practice or where there may be gaps in the regulatory framework. Of most interest to policy makers and others concerned is whether in the view of the mission team any such differences or gaps warrant further policy work or represent a justifiable decision by New Zealand authorities to comply with the fundamental Principles by adopting an approach which may differ from that prevailing in other jurisdictions.

Further references

A good summary of the requirements, benefits and risks of the FSAP for New Zealand is provided in the following article: Geof Mortlock and Ian Woolford, "Financial sector assessment programme", in Reserve Bank of New Zealand: Bulletin Vol. 66 No.1 (March 2003) - available on www.rbnz.govt.nz.

For more detailed information on the FSAP, you may visit the website of the International Monetary Fund (www.imf.org). General material relating to the FSAP can be found under the URL http://www.imf.org/external/np/fsap/fsap.asp. Reports on the observance of standards and codes of some countries who have undergone the FSAP, including the securities regulation module, are available on http://www.imf.org/external/np/rosc/rosc.asp.

For further information about IOSCO, its Objectives and Principles of Securities Regulation, and other publications and reports, please refer to IOSCO's website: www.iosco.org.