The Financial Markets Authority is having a bad year. Its chair resigned in May. Its chief executive has been suspended. And the Ministry of Business, Innovation and Employment is investigating its culture.

Some will see this as a failure of the FMA’s board model. It is better seen as a reminder that New Zealand only ever built one part of the system needed to govern regulators well.

The system requires three parts. A regulator needs a board that can hold its management to account. There needs to be a sound and independently scrutinised process for choosing board members. And somebody independent needs to check periodically whether the regulator is doing its job well.

Parliament built the first part for the FMA in 2011. The old Securities Commission had blurred the line between governing and managing, because its chair was effectively also its chief executive. The people making the decisions were the people meant to be checking them. The FMA separated the two roles, giving a part-time board the job of holding a chief executive to account.

At first the change looked successful. When the Initiative surveyed New Zealand's largest businesses in 2018, rating regulators against 23 measures of good practice, the FMA outperformed every other major regulator, and its board was rated more highly than the Commissioners it replaced.

But the second and third parts were never built.

Boards hold considerable power, yet nobody independently scrutinises how their members are chosen. Britain has a Commissioner who does exactly that. We have no equivalent.

Ministers, departments and select committees are poorly equipped to judge whether a regulator is regulating well. Australia has created an independent body to assess its financial regulators. Again, we have no equivalent.

Our later research suggests these gaps matter. By our 2022 survey, the FMA had slipped from its pedestal. And across all the regulators we surveyed, appointment processes rated among the weakest parts of the system. Accountability was worse. We asked businesses whether anyone holds regulators to account when they perform badly. Only 21.8 per cent thought so.

Fifteen years later, the other two-thirds are still missing. We are surveying New Zealand's largest businesses again this year, and their ratings will tell the FMA's new chair where he is starting from.

But a think tank survey is no substitute for the institutions we lack. Until Parliament builds them, we will keep learning how our regulators are performing by reading about it in the newspapers.