New Zealand has just received good feedback from the International Monetary Fund (IMF) in its latest regulatory review of our financial services sector.
The IMF considered that the quality of our securities markets regulation was now ‘well developed’ due to the implementation of such improvements as minimum standards of conduct for collective investment schemes, strengthened oversight of intermediaries, improved reporting and strengthened standards and penalties.
These changes, all of which had been advocated by the IMF, were implemented through the Financial Markets Conduct Act 2013 (FMCA), which came fully into effect on 1 December 2016 – making this a significant milestone for New Zealand capital markets law.
The transition process, while not always smooth, has been largely successful. The Financial Markets Authority (FMA) has issued approximately 200 practice licences, and market participants are increasingly confident of the integrity of New Zealand’s regulatory structure.
But there is more work underway, and the IMF is recommending further consideration of the regulation of supervisors, custodians, wholesale asset management and tighter controls on conduct in the insurance industry.
So, where to from here for New Zealand’s financial markets regulation?
The regularly conveyed FMA message is that the FMCA has created a number of obligations with which financial service providers must comply on an ongoing basis. The FMA is also signalling that it will back up its supervision and enforcement roles with site visits beginning this year.
The FMA has recently issued guidance and amendments on a number of key regulatory compliance obligations, including:
• quarterly fund updates for managers of registered managed investment schemes;
• limit breaks and calculation of returns for discretionary management investment service providers;
• disclosure of fees for KiwiSaver providers and managed funds; and
• a good conduct guide outlining a set of customer-focused expectations that financial service providers should reflect in their governance and compliance processes and behaviours.
Licensed financial service providers must ensure that they understand and are meeting their ongoing compliance obligations, and that their policies, procedures and internal controls are in order.
Financial Advisers Act and Financial Service Providers (Registration and Dispute Resolution) Act Review
The Financial Advisers Act 2008 (FAA) and the Financial Service Providers (Registration and Dispute Resolution) Act 2008 (FSPA) are currently being reviewed and significant reform is expected.
The objective is to produce a simpler system, which is easier for the public to understand, more modern to the extent that it will permit ‘robo-advice’, and better aligned to the FMCA.
Current proposals are to:
• allow for robo-advice platforms by removing the requirement that personalised advice be provided by natural persons and do away with the class/personalised advice distinction and the dual categorisation of financial products;
• classify financial advisers into Financial Advice Providers (FAPs), Financial Advisers (FAs), and Financial Advice Representatives (FARs) (though these titles may change);
• require all FAPs to be licensed at the entity (or sole trader) level to give financial advice to retail clients via a robo-advice platform or its FAs and FARs;
• create new duties for FAPs, FAs and FARs to place the interests of their clients first (for both retail and wholesale clients), agree to the nature and scope of services, and meet the expanded Code of Conduct obligations (for retail clients only);
• require FAPs to ensure that their FAs and FARs comply with the new duties, including effective processes and controls to ensure FAR compliance, and ensure that incentives they pay to their FARs are not 'inappropriate'; and
• prevent misuse of the Financial Service Providers Register by permitting financial service providers to register only when they are genuinely in the business of providing financial services and promoting those services in New Zealand.
The draft Financial Services Legislation Amendment Bill outlining the above changes was released earlier this year for consultation and is expected to go through without substantial change. The Bill is expected to be introduced to Parliament soon and to commence (on a transition basis) from February 2019.
Currently, the FAA requires that personalised financial advice be provided to retail clients by a natural person, effectively prohibiting robo-advice platforms or digital channels.
The FMA is now consulting on a proposed interim exemption to avoid New Zealand falling behind international progress in the development of robo-advice platforms. The proposed exemption would allow providers to offer robo-advice under limited circumstances and would allow for a transition to the new financial advice regime at a later stage.
The FMA's current proposal for a robo-advice class exemption:
• would be limited to financial advice or investment planning services (i.e. it would not extend to discretionary investment management services);
• would be limited to advice on products which are easy to exit including highly liquid or readily transferrable products (like KiwiSaver);
• may include a client investment limit restricting the service to clients seeking advice on assets for investment under a certain amount;
• may include a total investment limit restricting the total value of products that a robo-advice service can advise on (aimed at reducing the level of harm if a robo-advice service fails), and;
• would provide a two-year transition period to the new financial advice regime.
With the continued focus on developing the regulatory regime and ensuring ongoing compliance, New Zealand financial markets should continue to be well regulated and keep up with international best practice.
An expert in financial services laws, Chapman Tripp Partner Penny Sheerin advises extensively on the full range of legislation affecting financial service providers, including financial advisers under the new Financial Services Legislation Amendment Act. Penny also advises fund managers, insurers, brokers, discretionary investment management scheme providers, derivatives issuers, non-bank deposit takers and payments system providers. She counsels clients on the establishment, restructuring, distribution and compliance of financial products, including KiwiSaver. She is experienced in obtaining licences, and has managed numerous applications to, and negotiations with supervisors and regulators, including the Financial Markets Authority, NZX, Companies Office and Reserve Bank of New Zealand.