Penny Sheerin highlights the 'once in a generation' reform of the New Zealand capital markets system following the enactment of the New Zealand Capital Markets Law.
Jersey: Future Proofing
The Financial Markets Conduct Act 2013 has been described by the New Zealand Government as the centre-piece of “a once in a generation” reform of capital markets regulation. The Act replaces five Acts and parts of a sixth Act, and introduces a number of fundamental changes in regulatory design:
A single product disclosure statement (PDS) to replace the prospectus and investment statement (unless the investor or the issuer is exempted, in which case no PDS is required).
A shift to regulating products according to their economic substance rather than their legal form.
A shift from regulating only those securities that are offered to the public to a system in which all offerings are regulated unless specifically exempt.
Simplified securities advertising rules.
The creation of a collective investment scheme framework under which all schemes must comply with a common set of substantive requirements, including on-going disclosure provisions.
A licensing framework for certain financial market participants, including derivatives issuers, fund managers, discretionary investment managers, certain intermediaries and financial product market operators.
Wider regulation of financial product exchanges with flexibility around the rules to accommodate different markets and to encourage the development of a ‘stepping stone’ exchange for smaller companies.
Civil liability and sanctions focused on compensation for loss rather than strict liability offences.
Infringement notices for lesser offences.
Serious criminal offences are reserved for the most egregious breaches of the law, such as where the conduct in question involved knowledge or recklessness.
Four categories of financial product are defined within the Act. They are, in order, debt securities, equity securities, managed investment products and derivatives.
The regulator – the Financial Markets Authority (FMA) – has the power to categorise products, re-designate a product from one category to another as appropriate and ‘call in’ a security which might otherwise, or may have been designed to, escape the net.
The main purposes of the Act are to promote fair, efficient and transparent financial markets and to promote the confident and informed participation of businesses, investors and consumers in those markets.
Additional purposes are to avoid unnecessary compliance costs and to promote innovation and flexibility. A broader range of exemptions has also been introduced to cover situations where more limited compliance is appropriate.
Innovations specifically provided for in the Act include provision for crowd funding and Peer to Peer (P2P) lending platforms to become ‘licensed intermediaries’ – a status which enables companies to use them to issue shares or to raise money from the public without having to go to the expense of supplying a full PDS.
Unlike in the UK and the US, there is no limit on how much investors may invest or lenders lend through these formats. But there is a NZ$2million a year cap on how much a company may raise or a borrower may borrow.
Simplified processes are also available, for example, for small personalised offers (no more than 20 investors and seeking to raise no more than NZ$2million in any 12-month period) and employee share purchase offers (for up to 10 per cent of the company’s capital base).
Complete relief from the regime is also available for offers of listed securities (rights issues, dividend reinvestment and other same class offers), and – on the debt side – for simple bank products.
Another driver of the reforms was to bring the legislation up to date with modern technologies. The Act does this by establishing a new electronic securities register and through the ability to receive and disseminate information online.
The Act is being implemented progressively between 1 April 2014 and 1 December 2014, with certain transitional arrangements.
Changes effective from 1 April 2014 include:
The ‘fair dealing’ prohibitions on misleading or deceptive conduct (the unsubstantiated representations provision commences on 17 June 2014 and the prohibition on making certain offers in the course of unsolicited meetings on 1 December 2014).
The new exclusions relating to crowd funding, P2P lending, small offers, listed securities and simple bank products.
The FMA is open to receive licence applications, although the licences will not be required until 1 December 2014 at the earliest.
To assist the transition to the new regime, the Act allows issuers to continue to prepare and use the old form offer documents for a further 12 months (24 months for continuously offered products), and continued recognition for most existing authorisations and approvals for up to two years, pending the issue of a licence.
With these reforms, New Zealand financial markets should continue to be well regulated and keep up with international best practice.