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Financial Regulation Update – July 2017

Home Insights Financial Regulation Update – July 2017

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Contributed by: Polly Pope, Will Irving, Joanna Khoo and Alex Mackenzie

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Published on: July 14, 2017

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Guidance

Time for lenders to review credit fees

On 30 June 2017, the Commerce Commission released the final version of the Consumer Credit Fees Guidelines, which set out the Commission's view on the law relating to the reasonableness of credit fees under the Credit Contracts and Consumer Finance Act 2003 (CCCFA). The draft Guidelines had been released in September 2016.

Following the completion of the Sportzone appeals, and the release of the final Guidelines, a lender now has all of the information that they need – and all the information from the Commission that they will get – to conduct a review of the reasonableness of their credit fees to ensure that they comply with the transaction-specific cost recovery approach required under the CCCFA. The Guidelines provide that such reviews should happen "regularly" (ideally, in the view of the Commission, annually) and notes that failing to review fees risks the fees becoming unreasonable over time.

The Guidelines are likely to be the first port of call for a lender when considering questions of reasonableness, and provide a comprehensive account of the Commission's interpretation of the law. General points of note include the following:

  • The Commission's view is that the CCCFA does not require exact precision for fees that are estimated in advance, but reasonable efforts to ensure that the fee is as accurate as possible. The Commission places importance on robustly and consistently reviewing, and documenting the review of, the reasonableness of fees.
  • The Commission's view is that averaging is permissible (for appropriate classes of contract) when setting any cost-based fees, and not only establishment fees. This is not expressly permitted by the CCCFA but is a logical and consistent approach.

The Guidelines are available here.

Time for registered managed investment schemes to prepare annual reports

The first annual report for many registered managed investment schemes with balance dates of 31 March will need to be prepared by the end of July. A copy of the annual report, or a notice informing scheme participants of their right to receive an annual report, must be sent to scheme participants within 28 days of the annual report being prepared.

The content requirements of the annual report are set out in part 5 of schedule 4 of the Financial Markets Conduct Regulations 2014. These include details as to whether there have been any material changes to the governing document or SIPO (among other things). For example, any changes made to trust deeds as a result of the transition into the Financial Markets Conduct Act, would need to be described.

For further information, see part 5 of schedule 4.

RBNZ and FMA welcome new foreign exchange market Global Code of Conduct

The Bank of International Settlements recently released the new 'Global Code of Conduct for the Foreign Exchange'. The Global Code outlines 55 principles that set out good practices in global foreign exchange markets. These include ethics, transparency, governance and information sharing.

The Code of Conduct was developed by central banks and foreign exchange market participants from 16 international jurisdictions and was chaired by the Reserve Bank of Australia's deputy governor Guy Debelle.

The RBNZ and FMA issued statements in support of the Global Code, and Garth Stanish, the FMA's Director of Capital Markets, encouraged industry participants to adopt the code (the statement can be found here).

The Code of Conduct can be found here.

Enforcement

High Court dismisses appeal against FMA's decision to direct deregistration of Innovative Securities

The High Court has ruled the FMA was correct to deregister Innovative Securities Limited's (ISL) registration on the financial service provider register (FSPR) as a financial service provider (FSP).

Central to the Court's analysis was that ISL's clients were exclusively outside New Zealand, and it was not regulated in New Zealand for the financial services it offered. The High Court referenced the recent Vivier decision, emphasising that whether or not the company is generating any financial activity in New Zealand is more material than whether it is incorporated in, or has a place of business in New Zealand (see our summary of the Vivier decision here). The Court ruled that the Auckland office's activities were purely administrative and could not be characterised, whether individually or collectively, as constituting "financial services" under the Act.

This case is the third appeal by a company against a decision by the FMA to direct deregistration from the FSPR in as many years, and the FMA's third straight success. The High Court in 2015 dismissed the appeal brought by Excelsior Markets Limited, and last year the Court of Appeal overturned the High Court's decision that Vivier and Co Ltd not be deregistered.

This decision reaffirms that the FMA is willing to take action where it suspects a company's registration on the FSPR is likely to mislead its consumers about the extent to which it is regulated or damage the reputation of New Zealand's financial markets.

The FMA's press release on the case can be found here.

Penalties set for insider trading and market manipulation

In June, the District Court sentenced a former Eroad employee to six months' home detention in the first criminal prosecution in New Zealand for insider trading. The employee had pleaded guilty to sending text messages to another ex-employee that contained confidential information regarding the company's performance – such messages constituting a breach of section 243(1)(a) of the Financial Markets Conduct Act. The employee also sent another message to a second ex-employee, suggesting that individual sell Eroad shares.

The Court emphasised the strong public interest in protecting the integrity of the securities market. However, the Court decided against imposing a prison sentence, including on the basis that it considered the defendant's actions were a one-off mistake of judgment.

Nevertheless, the FMA has sent a clear message to the market that it will not tolerate insider trading, even where the loss avoided is small (one of the recipients of information avoided a $5,000 loss by selling the Eroad shares). 

The FMA's press release can be found here.

In June, the High Court imposed a $400,000 penalty on Mark Warminger for two counts of market manipulation in contravention of section 11B of the Securities Markets Act 1988. The finding of manipulation and the penalty have been appealed by Mr Warminger, with the appeal expected to be heard later this year.

Russell McVeagh partners Polly Pope and Marika Eastwick-Field spoke at the 13th Annual Financial Markets Law Conference in June, on the topic of key recent decisions affecting financial market laws, including:

  • the FMA's civil market manipulation proceedings (Warminger);
  • recent cases involving the liquidation of Ross Asset Management; and
  • the Commerce Commission’s civil proceedings testing the application of the CCCFA to peer-to-peer lenders.

Law reform

FMA seeks feedback on robo-advice exemption

The FMA is currently considering using its exemption powers to allow entities to provide automated personalised financial advice ("robo-advice"), generated by a computer program or algorithm, and is seeking feedback on this proposal.

Currently, personalised robo-advice cannot be provided in New Zealand, as the Financial Advisers Act 2008 requires that such advice is given by "a natural person". The Financial Advisers Act is currently in the process of reform, but changes will not likely come into effect until 2019. Robo-advice is increasingly being used overseas and the FMA's director of regulation Liam Mason says the FMA is worried that New Zealand may lose an opportunity to keep pace.

The FMA is therefore proposing a class exemption, to allow certain forms of robo-advice to be provided prior to the legislative reform.

For further information, see the FMA media release and the consultation information. Submissions on the proposal are due on Wednesday 19 July 2017. To view Russell McVeagh's submission, this is available here.

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