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Financial Regulation Update – July 2019

Home Insights Financial Regulation Update – July 2019

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Contributed by: Deemple Budhia, Will Irving and Joanna Khoo

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Published on: July 30, 2019

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Transitional licences open 4 November

From June 2020, anyone providing financial advice to retail clients will need a financial advice provider (FAP) licence. There are two phases to the licensing process: 

  • Transitional licensing will be available from 4 November 2019 to June 2020. If a provider does not obtain a transitional licence by June 2020, they will not be able to provide financial advice to retail clients until they have a full licence.
  • Financial advice providers will need to obtain a full licence by June 2022. The FMA will provide further detail on full licensing in due course.

The FMA will assess a number of factors when considering transitional licence applications, including:

  • the type of service and products in respect of which advice will be provided;
  • how the FAP will provide the advice (eg, whether financial advisers or nominated representatives will be engaged to provide regulated financial advice on behalf of the FAP);
  • whether the FAP will engage authorised bodies;
  • whether the FAP will provide regulated financial advice to another business's retail clients on their behalf and vice versa; and
  • whether directors and senior managers are fit and proper.

Transitional licence standard conditions

The FMA has released a consultation document on proposed standard conditions for these transitional licences. Two standard conditions are currently proposed:

  • a FAP must maintain adequate written records in relation to their financial advice service; and
  • a FAP must have internal processes for resolving client complaints in relation to their financial advice service.

The written records must show how the provider has complied with the legislation, regulations and Code of Conduct. This would include any information or documents given to clients, including copies of disclosure statements or transcripts of verbal disclosure. Records must be available to the FMA on request, and will be an important tool for the FMA in monitoring compliance and assessing who is operating in the market before full licence applications open.

The complaints process must allow:

  • complaints to be acknowledged as soon as practicable;
  • retail clients to be given information about the process;
  • complaints to be resolved and a response given to the client as soon as practicable; and
  • a written record to be kept of the complaint and process.

The Application Guide for Transitional Financial Advice Provider Licences is available here. The FMA has also released an online ‘Explore your options’ tool to help advisers decide how they wish to operate under the new regime, which is available here.

Annual Corporate Plan 2019/2020 and Strategic Risk Outlook 2019

The Financial Markets Authority released its Annual Corporate Plan (ACP) and its Strategic Risk Outlook (SRO) on 23 July 2019. The ACP and SRO, designed to be read together, set out the FMA's assessed risks in the industry, strategic priorities and the plans for each specific sector in the industry.

The key change in the latest ACP released by the FMA is a move to a new "sector-based approach". While both the SRO and ACP describe general cross-sector strategy and risk profiling, they also describe the risks and strategies for specific industries in greater detail. The FMA has identified the following sectors:

  • Capital Markets;
  • Investment Management;
  • Sales, Advice and Distribution; and
  • Banking and Insurance.

Strategic Risk Outlook

The SRO provides the FMA's medium-term view (three–to-five years) of the most significant risks to, and opportunities for, promoting fair, efficient and transparent financial markets.

The FMA has identified the following risks, which apply across all sectors:

  • Governance and culture: poor governance is leading to increased likelihood of harm to customers;
  • Incentives and conflicted conduct: incentives structures create conflicts of interest that drive misconduct;
  • Investor and customer engagement and capability: low investor engagement is leading to the uptake of unsuitable products and thus poor long term outcomes;
  • Anti-money laundering (AML): entities failing to meet their AML obligations; and
  • Perimeter: risks at the perimeter of the FMA's regulatory responsibility, such as misuse of the Financial Service Providers Register and unlicensed entities undertaking regulated activity.

In light of these risks, the FMA has identified its strategic priorities. These priorities will guide the focus of the FMA's activity, and the allocation of its resources. The priorities are:

  • Governance, culture, systems and controls: regulated firms required to exhibit a customer-centric culture that serves the needs of customers. In particular, firms must have appropriate governance, incentive structures, sales and advice processes, and systems to manage conduct risk;
  • Credible deterrence of misconduct: deter misconduct through effective enforcement, particularly in relation to trading misconduct (insider trading, market manipulation etc.), misconduct at the FMA's perimeter, failure to meet AML requirements, and misleading and deceptive conduct;
  • Successful implementation of potential remit changes: deliver policy objectives while minimising transitional costs to firms and risks to customers – particularly in relation to the Financial Services Legislation Amendment Act (FSLAA) and potential changes to the conduct regulation of banks and insurers;
  • Investor and customer decision-making: ensuring investors and customers are engaged and make active choices based on clear, concise and effective information; and
  • Promoting trust and confidence in capital markets: through improved quality of audit, disclosure and financial reporting, and effective oversight of NZX and other licensed capital-raising platforms.

The SRO can be found here.

Annual Corporate Plan

The Annual Corporate Plan for 2019/20 outlines the FMA's activities for 2019/20 that will promote its strategic priorities, address regulatory risks and harms, and deliver sector outcomes.

The FMA is expecting to undertake a number of activities that affect all sectors mentioned above.  These include:

  • following up with all of the entities that were involved in the conduct and culture review in relation to banks and life insurers;
  • working with the Government on law reforms that impact financial markets to promote policy outcomes;
  • improving the monitoring and enforcement of compliance with AML/CFT monitoring;
  • monitoring the activity on the regulatory perimeter to identify risks of harm to customers;
  • developing information for investors and customers to improve their outcomes;
  • continuing the work of the Innovation Strategy Group in its response to updates in financial technology; and
  • establishing the Green Working Group to lead the FMA's thinking in response to climate change issues.

A summary of the risks identified by the FMA in the SRO and the activities the FMA expects to undertake in 2019/20 to address these risks as outlined in the Annual Corporate Plan is set out below.

Sector

Risks

Activities for 2019/20

Capital Markets (covering both primary and secondary debt and equity markets)

  • inadequate, incorrect or misleading disclosure and poor quality information and reporting
  • participants failing to act with honesty and integrity, including in the context of insider trading and market manipulation
  • poor quality auditing
  • potential loss of market confidence due to significant outages of key pieces of market infrastructure
  • a 2020 NZX Obligations Review to assess NZX's compliance with its licensed market operator obligations
  • engagement, monitoring, investigation and enforcement activity in relation to insider trading, market manipulation, crowdfunding, peer-to-peer lending and AML/CFT
  • disclosure and financial reporting reviews, engaging with issuers, monitoring of disclosure documents and investigating and enforcing disclosure and financial reporting breaches
  • facilitating growth and innovation
  • audit monitoring and strategy through working with the industry and conducting audit quality reviews

Investment Management (including fund management, discretionary investment management and associated support services)

  • high and complex fees and charges
  • Managed Investment Scheme (MIS) managers' insufficient processes and controls to respond to liquidity crisis events
  • poor product design and insufficient or ineffective disclosure
  • supervisors' capacity and capability to proactively monitor and identify risks
  • working with MIS supervisors to development MIS sector risk assessment
  • monitor providers of KiwiSaver (especially default providers) to ensure regulatory requirements are met
  • have input into Government policy reviews to improve outcomes of KiwiSaver
  • promoting transparency and improved understanding of fees
  • follow up on the 2017 IMF recommendations to enhance the regulatory regime
  • work with supervisors to test the readiness of MIS managers to respond to a liquidity crisis event

Sales, Advice and Distribution

  • sales and advice services not aligned to the needs of customers
  • investors subject to fraud and scams
  • implementation of new financial adviser regime
  • undertaking a risk assessment to understand how licensed derivative issuers manage risk
  • development of information for investors and customers to help them understand investment risk and protect themselves
  • raising awareness of scams
  • ongoing monitoring of AML/CFT Act compliance, as well as contributing to the Financial Action Task Force review of NZ AML/CFT policies and practices
  • monitoring the regulatory perimeter

Banking and Insurance

  • inadequate systems for dealing with misconduct
  • insufficient consideration of customer needs with regard to products
  • problems with remediation of conduct issues
  • improving use of IT systems
  • absence of conduct powers and FMA regulatory oversight
  • follow up work with RBNZ on the expectations for banks' and life insurers' conduct and culture, and the banks' incentive structures
  • working with the Government and industry to prepare for any changes to the conduct regulation of banks and insurers

The full Annual Corporate Plan can be found here.   

New Zealand launches 'investment passport'

New Zealand has finished its preparation for the Asia Region Funds Passport (ARFP), which makes business easier for investors and managed funds in Australia, Japan and Thailand. 

The ARFP was signed in 2016 and allows local schemes to apply to be registered as a passport fund.  Passport funds can apply for permission to offer eligible products in each member country, increasing investors' choice. The ARFP was also signed by Korea, which is continuing to make progress with legal and regulatory requirements.

The implementation steps involved changes to the Disclose register, new forms, guidance and regulations under the FMCA. The ARFP is incorporated into New Zealand law through the Financial Markets Conduct (Asia Region Funds Passport) Regulations 2019.

A New Zealand fund can apply to the FMA to become a registered passport fund through a thorough application process including, amongst other required details:

  • permitted investments and their limits;
  • exposure limits and risk management;
  • derivative and loan conditions;
  • valuation of assets;
  • fee structures;
  • financial reporting; and
  • qualifications, record and financial resource of the operator.

A passport fund will have to comply with the passport rules, New Zealand law (other than the FMCA Part 3 disclosure requirements) and applicable foreign law (eg, disclosure requirements in relation to the offer).

A foreign passport fund will have to apply to the FMA to offer products to New Zealand investors. This application involves providing details of processes to:

  • allow complaints from New Zealand investors;
  • comply with New Zealand laws, including disclosure, advertising and marketing laws;
  • reporting to New Zealanders in compliance with New Zealand law; and
  • ensuring all relevant information is provided to the FMA.

Further information on the ARFP, including application forms and guidance for foreign passport fund operators is available here.

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