2018 consultation sought to better understand the impacts and prioritisation of the seven risks for stakeholders
In 2018, the Government identified and consulted on seven market governance risks* relating to bad advice, transparency issues with trading, and misconduct in the NZU market. Table 3 outlines the seven identified market governance risks and their corresponding themes.
Table 3: Market governance risks and themes
Theme
|
Risk
|
Theme A:
Governance of advice
|
Risk 1: Inadequate, false or misleading advice relating to NZUs
|
Risk 2: Conflicts of interest involving the NZETR
|
Theme B:
Governance of trading
|
Risk 3: Potential lack of transparency, oversight and monitoring of trades in the secondary NZU market
|
Risk 4: Credit and counterparty risks
|
Theme C:
Governance of market conduct
|
Risk 5: Insider trading and information asymmetry
|
Risk 6: Manipulation of NZU prices
|
Risk 7: Money laundering and financing of terrorism in the NZU market
|
In general, submitters were more concerned about future misconduct than current behaviour.
One submitter noted, “As the market becomes more mature and the volume and value of trading increases, it will become important for units to take on some of the features that ordinary financial products have, as well as a more sophisticated compliance monitoring and enforcement regime”.
Some commented that initiatives to address risks and improve governance could have unintended consequences for engagement in the NZU market, or lead to higher compliance costs,** especially for smaller participants. They therefore recommended carefully considering any change, ensuring any proposed regulation is proportionate to the risks and not too onerous.
2018 Cabinet in-principle decisions
In 2018, alongside the decisions to introduce auctioning in 2020 and subject to the wider market governance decisions, Cabinet agreed in principle to address the risks of insider trading and market manipulation as a priority, because of the increased likelihood of misconduct.***
Cabinet agreed in principle that insider trading and market manipulation should, as much as practicable and appropriate, be treated in the same manner as in the FMC Act and have offences and penalties that mirror those in that Act.
Cabinet noted that Ministry for the Environment officials will do further work to determine the most appropriate regulator to enforce this conduct, including careful consideration of which regulator could be adequately resourced to deal with this conduct.****
2021 consultation informed policy options
In July 2021, the Ministry for the Environment consulted on options to address the seven identified market governance risks.***** The full range of options considered is provided in Appendix A.
The consultation adopted a first-principles approach. The first-principles approach allowed the Ministry to establish the prevalence of market governance risks and consider the most appropriate regulatory and non-regulatory tools to address these risks, without being restricted to the types of tools that already existed in the market, the legislation or any prior policy assumptions.
In the consultation document, the Ministry:
- investigated the prevalence of the market governance risks and whether they still existed under the status quo
- presented a range of regulatory and non-regulatory options that would address the market governance risks (these options were not mutually exclusive)
- presented different combinations of options (market governance scenarios) which could apply in the NZU market (including low-regulatory, balanced, and high-risk-mitigation scenarios, to show a range of possible intervention levels)
- did not consult on the appropriate legislation to implement the changes, or on whether NZUs should be regulated as financial products (either under an existing or new framework).
The approach allowed stakeholders to express their opinion on their preferred direction and the types of tools that would be useful for addressing market governance risks, and it helped the Government gather a range of perspectives before making policy decisions.
Stakeholder feedback from the 2021 consultation confirmed the existence of the seven identified market governance risks to the NZU market, under the status quo, and informed our consideration of several options to address those risks. The market governance options below, for addressing misconduct, are modified versions of what was consulted on but are actively being considered based on stakeholder preference.
The following were identified as the appropriate types of tools to address the market governance risks, grouped by their risk themes (advice, trading, conduct):
- Governance of advice: education campaign, code of conduct, licensing and registration of NZU advisers
- Governance of trading: optional centralised exchange platform for NZU trades (modified from the mandatory centralised exchange proposed in 2021)
- Governance of conduct: Improved transaction reporting (modified from full transaction reporting proposed in 2021)
The 2021 consultation also showed stakeholders favouring the appointment of a skilled regulator, with market design and market compliance powers, to oversee the NZU market.