Funding for Securities Commission Providing Advice to the Minister of Commerce: Regulatory Impact and Business Compliance Cost Statement
[ Last Updated 7 December 2005 ]
July 2003
Contents
Regulatory Impact Statement
Statement of the Nature and Magnitude of the Problem and the Need for Government Action
The legislation enacted through the Securities Markets and Institutions Bill established, from 1 December 2002, a system of co-regulation between securities exchanges and regulators. This system gives the Minister of Commerce the power to recommend the approval of exchange conduct rules and to disallow rule changes where the Minister considers it to be in the public interest. The Minister also has the power to apply a restriction on operating a futures market or securities exchange and to exempt a securities exchange or futures market from the provisions of the Act.
To enable the Minister to make an informed decision, the legislation provides that the advice of the Securities Commission (the Commission) must be sought. To carry out the function of providing advice to the Minister involves costs for the Commission. It is necessary to ensure that the Commission is adequately funded to carry out its statutory functions. The level of government funding to the Commission has not increased to cover the cost of providing this function.
The cost of the Commission's advice on the initial rule approval for the NZSE rules, required under the NZSE Restructuring Act 2002, was in the order of $120,000. The NZX (as the NZSE is now known) is currently undertaking a number of initiatives, which will require changes to its rules. Several applications for approval of rule changes, involving substantive issues on which the Commission will be required to provide advice, are expected over the next few months. The Commission has estimated the cost of providing advice on three major NZX initiatives at a total of $70,000 (GST excl). In future years, the cost of rule approval is likely to be much lower, as the NZX's new markets and processes will be in place and rule changes will be less significant.
Statement of the Public Policy Objective
The objective is to ensure that the Commission is sufficiently funded to enable it to undertake the function of providing advice to the Minister under the Securities Markets Amendment Act 2002 efficiently and effectively.
Statement of Feasible Options for Achieving the Desired Objective
Status quo - The Commission would be required to carry out its statutory function of providing advice within its existing baselines. This would leave the Commission unable to effectively perform its other statutory functions under securities law.
Additional government funding for the Commission - A non-regulatory option is for the funding to be provided in full from general taxation. This option was rejected as it is not consistent with the government's cost recovery objectives of reducing reliance on funding from general taxation and charging private parties for services provided.
Third party funding - This involves a mechanism whereby the Commission has the power to fully recover its costs for providing advice to the Minister. The mechanism would involve using regulations in the Securities Markets Act which authorise the Commission to require payment of fees from a third party for advice provided by the Commission.
The mechanism would follow the same system which the Commission uses to recover its costs from third parties for work on exemptions, approvals and authorisations under the Securities Act 1978 and the Securities Markets Act 1988. This involves an application fee of $112.50, and an hourly rate for the time spent on preparing the advice ($225 for a Commission member and $163 for a Commission employee).
However, this option was rejected as it does not take into account the public benefits of the NZX's major initiatives under the new regime.
Third party funding with a transitional arrangement (preferred option) - This involves the third party mechanism as described above, with the addition of a transitional arrangement to alleviate the initial financial impact on the NZX. It is proposed that the cost of the Commission's advice in relation to three NZX initiatives which provide a significant benefit to companies and investors and hence to the economy be met by a one-off appropriation to the Securities Commission. The initiatives are:
- The development of the AX market (an alternative market for developing and non-traditional companies);
- The review of compliance and enforcement functions; and
- The introduction of a futures and options market.
This option is preferred as it allows the Commission to recover costs from third parties over the long term and recognises the public benefits of the NZX's three major initiatives associated with the new regulatory regime.
Statement of the Net Benefit of the Proposal
Net benefits for Government - The fees and the one-off appropriation will ensure that the Commission is adequately funded. The need for additional Government appropriation is limited to the cost of the transitional arrangement, i.e. $70,000 (GST excl).
Net benefits for Industry - The proposed charge out mechanism allows the Commission to charge the party which receives the most direct benefit, so that the key beneficiaries do not free-ride.
The mechanism is based on the framework currently used by the Commission in relation to its work on exemptions, approvals and authorisations, providing the benefit that there will be a high level of familiarity with the charging regime, as well as transparency as to the amount of time spent by the Commission.
Securities and futures exchanges will incur the cost of the fees under the proposed charging regime. These costs are more fully discussed under the Business Compliance Cost Statement.
Net Benefits for Investors - The charging mechanism may raise some equity issues i.e. persons other than the exchange concerned (for example, the investing public) may benefit from the Commission's advice on a rule approval but would not contribute to paying the costs. The inclusion of the transitional arrangement addresses this issue, in part, as the cost to the NZX arising from three rule approval applications will be met by the government. This recognises the public benefits of the NZX's major initiatives associated with the new regulatory regime.
Statement of Consultation Undertaken
A paper outlining a proposed third party funding method was circulated for comment in November 2002 to the NZX, the Law and Accounting industry bodies, and was made available on the NZX website. The Commission was consulted on the proposed method and agrees that it is appropriate.
The main issue raised by the NZX and other submitters was that it is inappropriate to charge a particular party for work, which benefits the public as a whole. This is based on the view that the policy requiring NZX to apply for rule approval is not to benefit the NZX but to benefit the securities markets generally. However, officials consider that overall there is a substantial private benefit to exchanges in the rule approval process. Consequently, there is a good case for charging the costs to the private parties.
A further issue was that securities and futures exchanges will not know the ultimate cost at the time of applying for an approval or exemption, and this may deter some applications for rule approval or exemption. It is proposed, however, that the Commission regularly update the exchange during the process in order to give it an ongoing indication of costs and how much work is required.
The following government departments and agencies have been consulted: the Department of the Prime Minister and Cabinet, the Treasury, the Ministry of Justice, the Parliamentary Counsel Office and the Securities Commission.
Business Compliance Cost Statement
The Source of Any Compliance Costs
Compliance costs will arise from the fees charged by the Commission.
A minor source is the cost associated with understanding the proposed fees.
The Parties Likely to Be Affected, by Sector and Size of Firm
Parties wishing to operate a securities or futures exchange in New Zealand will be affected. The NZX is currently the only securities exchange operator and there are currently no futures exchanges.
Quantitative/Qualitative Estimates of Compliance Costs
The Commission's fees will comprise :
- An application fee of $112.50 to cover administrative costs;
- An hourly fee for work in preparing advice, calculated at the following rates:
- $225 (GST incl) for work carried out by a Commission member ; and
- $163 (GST incl) for work carried out by an employee of the Commission qualified in accountancy, business, economics or law; and
- The cost of the Commission obtaining expert advice or assistance.
The NZSE Restructuring Act 2002 required the NZSE rules to be approved. The cost of the Commission's advice on the initial rule approval for the NZSE was in the order of $120,000. The Commission's advice on whether to disallow a minor rule amendment may cost in the range of $2,000-$5,000. The cost associated with understanding the proposed fees is minor as the market is familiar with the current fees regime.
The Longer Term Implications of the Compliance Cost for Business
Initial approvals of conduct rules will be one-off costs for securities exchanges. The approval/disallowance process will also apply to future amendments to the rules but the recurring cost is likely to be small compared with the initial approval.
An assessment of the risks associated with any estimates and the level of confidence that can be placed on the compliance cost assessment
As this model is currently applied by the Commission to applications for approvals and exemptions, a high level of confidence can be placed on the assessment.
The Key Issues Relating to Compliance Costs Identified In Consultation
Apart from the issues discussed in the consultation section of the RIS, no other compliance cost issues were raised during consultation.
Any Overlapping Compliance Requirements with Other Agencies
There are no overlapping compliance requirements with other agencies.
The Steps That Were Taken to Ensure That Compliance Costs Were Minimised
The major step taken was to include a transitional arrangement to alleviate the initial financial impact of the rule approval requirement on the NZX.
Also, this proposal aims to minimise compliance costs by implementing a charging mechanism that the market is already familiar with; and charging an exchange/market for the work that is directly attributable to the specific job. The Commission will make available on its website information on the fees to minimise the cost of learning about the new regime.
There is provision for the Minister to exempt securities markets from the registration and rule approval procedures. This will minimise costs to less formal types of exchange which fall within the definition of securities market but where the full registration/rule approval process is not appropriate.
The Memorandum of Understanding between the Commission and the NZX creates an incentive for the Commission to implement measures to promote transparency and accountability for the quality and timeliness of its service.
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