2018 continues to be a busy year for financial regulation. In this edition, we highlight:
- Regulator priorities emerging from the FMA's 2018/2019 Annual Corporate Plan and the Commerce Commissions' 2018/2019 Priorities;
- An update on the Australian Royal Commission;
- Financial advice law reform with the latest on the Financial Services Legislation Amendment Bill; and
- AML/CFT enforcement, with the recent High Court decision in Department of Internal Affairs v Qian DuoDuo Ltd.
FMA – Annual Corporate Plan 2018/2019
The Financial Markets Authority released its Annual Corporate Plan on 9 August 2018. The Plan sets out the FMA's planned work, strategic priorities, and developing themes. Chief Executive Rob Everett explains that in publishing the Plan the FMA's "intention is to be transparent about where we focus our activity and resources" and that "[i]ndicating our priorities, and the risks we see, helps us influence behaviour within the industry".
The strategic priorities are the same as included in the FMA's 2017 Annual Corporate Plan, with the addition of "Perimeter" conduct as a standalone priority (which had previously been identified as a developing theme):
- Governance and culture: an organisational culture that places customer interests at the centre of their business and reflects high standards of corporate governance;
- Sales and advice: providers demonstrate appropriate capability, due skill, care and diligence, and practices are designed (and implemented) to meet the needs of customers;
- Conflicted conduct: conflicts are identified and mitigated, and incentive structures and practices are designed and implemented with a focus on customer outcomes;
- Investor decision-making: investors receive clear, concise and effective disclosure;
- Capital market growth and integrity: accessible and dynamic capital markets with resilient infrastructure, where participants act with integrity;
- Frontline regulators: frontline regulators contribute to well-regulated financial markets through effective oversight;
- Perimeter conduct: identify significant misconduct risk outside the FMA's perimeter and deal quickly with abuse of the Financial Service Provider Register and unauthorised business; and
- FMA effectiveness and efficiency: focus on continuous improvement, with the FMA as an efficient and effective intelligence-led regulator.
The theme of conduct risk permeates the Plan, with the FMA stating (under the Governance and culture priority) that it would like "to see firms adopt an approach that goes beyond legal minimums, and sees firms focusing on investors and consumer outcomes". The FMA also noted the joint FMA and RBNZ review into the conduct and culture of New Zealand banks and life insurers, stemming from concerns that issues highlighted by the Australian Royal Commission into financial services may be present in New Zealand. The FMA/RBNZ will release a report detailing their initial findings and next steps in late October 2018.
Developing themes on the FMA's "risk radar" are:
- Regulating for technology change: key issues are ICOs, a class exemption for digital advice, monitoring developments and cyber-resilience;
- Helping investor decision-making in changing market conditions: this is related to the FMA's work on investor decision-making (noted above);
- Retail investor uptake of complex and risky products: the FMA has signalled it will monitor product developments, particularly for complex and/or leveraged products, and take regulatory action where justified; and
- Review of the regulatory framework: the FMA added this new developing theme to reflect the significant review and reform activity currently underway, much of which is led by other agencies, including the:
- Financial Services Legislation Amendment Bill (discussed below);
- Review of insurance contract regulation;
- Review of consumer credit regulation; and
- Review of the Reserve Bank Act.
The FMA's operating budget for 2018/19 is $37.2 million (up from $36.3 million in 2017/2018 and $30.7 million in 2017/2017) with average full time-equivalent staff of 187 across the year (up from 186 in 2017/2018 and 166 in 2016/2017). The Plan is available here.
Commerce Commission Priorities 2018/2019
- The Commerce Commission also released its Priorities 2018/2019 on 9 August 2018, identifying the following priority focus areas:
- Identifying and addressing consumer harm;
- Retail telecommunications, including specific areas of service quality and the anticipated implementation of new consumer provisions;
- Responsible lending and the credit sector, with a focus on the conduct that has the most impact on vulnerable consumers;
- Online retail, including carrying out work to increase the Commission's understanding of the issues associated with online purchasing;
- Motor vehicle sales, with a focus on systemic issues faced by consumers;
- Quality of service provided by electricity distributors, including consultation on revenue limits and quality standards, and providing assistance on the Government's review of the electricity market; and
- Investigating non-notified mergers, following an increase in non-notified mergers over the last two years.
These 2018/2019 priorities are in addition to the Commission's enduring priorities, including: cases that involve significant actual or potential harm to consumers; credit issues and those impacting vulnerable consumers; cartel and anti-competitive conduct with the potential to have a significant impact on consumers and markets; merger clearance and authorisation applications; and the Commission's regulation work.
The Commission is also taking steps to increase its understanding of emerging technology and the digital economy, and their implications for consumers, competition and regulation. The Priorities are available here.
Australian Royal Commission
In Australia, the Australian Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry continues. The fifth round of public hearings, relating to superannuation, will run until 17 August 2018.
There are two further rounds of public hearings scheduled:
- 10 September – 21 September 2018 on insurance; and
- November – 30 November 2018 on policy questions arising from the first six rounds.
The Commissioner (the Honourable Kenneth Madison Hayne AC QC) will provide an interim report no later than 30 September 2018, and will provide a final report by 1 February 2019.
Financial Services Legislation Amendment Bill
On 31 July 2018, the Economic, Development, Science and Innovation Committee reported back on the Financial Services Legislation Amendment Bill. The Select Committee has not made extensive amendments to the Bill, but has recommended changes to seek to clarify the policy intent of the Bill. Generally, while the recommendations help to improve the Bill, much will now turn on where the Code Working Group lands with the Code of Conduct for Financial Advice Services.
In terms of timing, the Bill is on track with its original timeline to be passed later this year. After the Bill is passed, and the supporting regulations and Code of Conduct are approved, it is expected that there will be at least nine months before the new regime would come into effect.
Below we set out the main amendments recommended by the Select Committee.
Definitions of financial advice
Definition of "financial advice" broadened
The definition of financial advice has been broadened in the new Bill to include two particular scenarios:
- where a person makes a recommendation or gives an opinion about switching funds within a managed investment scheme; and
- where a person provides financial planning of a kind prescribed by the regulations.
Given that one of the most common types of financial advice relates to switching KiwiSaver funds, the Select Committee wished to ensure that advice given on switching between funds within the same managed investment scheme was not excluded from the scope of the Bill by a technicality.
The definition of "financial advice" in the Bill originally included a situation where a person "designs an investment plan for another person". The Select Committee considered this definition too narrow, and that other planning advice about financial products could be included (such as insurance). Instead of defining the types of financial planning advice to be included at this stage, the Select Committee proposed to confer powers to extend the regime to specific financial planning services to a regulation-making body.
Definition of "financial advice service" and exclusions from regulated financial advice
The Select Committee found the definition of ''when financial advice service is provided'' to be too narrow, as it excluded companies providing financial advice on behalf of another company. The Select Committee recommended amendments to include entities giving advice on behalf of a financial service provider, as well as individuals.
The submissions on first reading of the Bill raised concerns that there was a lack of guidance on the meaning of "engaged" in the context of subcontractors, and accordingly a definition has been added into the Bill. These broader definitions for subcontracting and engagement are incorporated throughout the Select Committee's amendments to the Bill.
Financial advice provided by lawyers, accountants and journalists will continue to not be regulated under this regime, provided that such advice is given as an ancillary part of providing the primary service.
Duty to give priority to client's interests
The new Bill provides for amendments to the duty to give priority to a client's interests. The Bill inserts a list of people connected with the giving of financial advice, who might have an interest in the advice. To satisfy this duty, the person giving regulated financial advice must give priority to the client's interest by taking all reasonable steps to ensure that their advice is not materially influenced by his or her own interest, and the interests of persons listed as connected with the giving of financial advice.
Despite this, the Select Committee acknowledged that this duty should not require providers to consider every product on the market when making recommendations, and that advisers may give advice on a single product, provided the adviser discloses this and manages any conflict of interest. The Select Committee has also recommended changes to clarify that advisers are not required to take unreasonable steps to give priority to the client's interests.
Under the Bill, financial advice providers (ie organisations) may engage nominated representatives to give advice on their behalf. Nominated representatives are exempt from many of the obligations and standards in the Bill as the intention is that financial advice providers should ultimately be responsible for the conduct of their nominated representatives.
The Select Committee has recommended an amendment to clarify that the activities of nominated representatives are required to be tightly controlled by the processes and systems of the provider. This includes requiring financial providers to have in place processes and controls allowing them to regulate the advice given by nominated representatives, and requiring financial providers to monitor nominated representatives to ensure that each person complies with such processes and controls.
The amendments also clarify that neither the provider nor any interposed person may give, or offer to give, any nominated representatives any payment or incentive that is intended or likely to have the effect of encouraging them to engage in conduct which would contravene their duties.
Misuse of Financial Service Providers Register
The current "place of business" test for registration under the Financial Services Providers (Registration and Dispute Resolution) Act 2008 has been a cause of concern as the register has been used as a vehicle for overseas operating companies to "mislead" customers into believing the overseas companies are fully fledged, licenced and regulated New Zealand financial service providers.
The Bill assisted with this by amending the FSP Act to remove the "place of business" test and permitting entities to register only if they are in the business of providing financial services to persons in New Zealand or are otherwise required to be licensed or registered under any other New Zealand legislation.
There was concern that this could result in the loss of oversight of some providers that genuinely provide services from New Zealand to persons overseas, and risk the Government failing to comply with international standards on money laundering and financing of terrorism. Accordingly, the Select Committee has recommended an amendment to the Bill which ensures that all New Zealand financial service providers to which the Anti-Money Laundering and Countering Financing of Terrorism Act 2009 applies are still required to register on the Financial Service Providers Register.
The process for issuing transitional licences is expected to be straightforward under the proposed regime. Accordingly, the Select Committee has recommended an amendment in the Bill to the requirement in the Financial Markets Conduct Act 2013 to enable the FMA to disregard whether applicants hold a transitional licence when considering full licence applications.
The original Bill forbids persons other than QFEs or members of QFE groups, from engaging nominated representatives under a transitional licence. However, submissions on the original Bill raised concerns about the consistency of this prohibition with the current regime under the Financial Advisers Act 2008, which allows non-QFE businesses to provide class advice through non-registered employees or agents. Therefore, the Select Committee recommended an amendment in the new Bill to accommodate these providers to allow them to continue to engage non-registered staff as nominated representatives through the transition period. The Select Committee Report is available here.
Recent decision of the High Court
On 27 July 2018, the High Court released its decision in the second enforcement case under the Anti-Money Laundering and Countering the Financing of Terrorism Act 2009. In Department of Internal Affairs v Qian DuoDuo Ltd  NZHC 1887, Qian DuoDuo was ordered to pay a pecuniary penalty of $356,000 for breaches of various provisions of the Act.
The case addresses a number of important issues under the Act, including wire transfers, "persons on whose behalf a transaction is conducted" and managing intermediaries, and reporting entities' ability to place reliance on advisors. These issues and more will be discussed in our upcoming CPD sessions on AML enforcement, in Auckland on 17 August 2018 and in Wellington on 20 August 2018 (both at 1:00 pm). If you haven't already, please click here to RSVP.
For more information, please contact us.