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Financial Regulation Update – September 2017

Home Insights Financial Regulation Update – September 2017

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Published on: September 04, 2017

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FMA settles proceedings against Prince & Partners Trustee Company

Instead of commencing a five week hearing on 21 August, the FMA and Prince and Partners Trustee Company reached a settlement on 18 August. Under that settlement, Prince agreed to pay $4.5 million and agreed that it would not act as a supervisor of any regulated offer of debt securities for a period of five years. 

The FMA had alleged in the proceeding that Prince had breached the obligations it owed to Viaduct Capital Limited investors and to the Treasury (the Crown) under the Retail Deposit Crown Guarantee. The proceeding was issued in 2014 after the collapse of Viaduct.

The case represents a number of 'firsts': 

  • It was the first enforcement action instituted by the FMA under section 34 of the Financial Markets Conduct Act 2013. Section 34 being the section under which the FMA may exercise rights of action that private persons may have under financial markets legislation. 
  • It was also the first claim filed by the FMA against a trustee.  At the time the proceeding was commenced, the FMA said that: “Trustees play a critical role in protecting the rights of investors and it is vital the public have confidence that a trustee’s obligations will be discharged”.

In relation to the role of trustees, Prince's admissions in the settlement agreement include an acknowledgment that it owed investors a duty to carry out its functions as a trustee with the skill, care and diligence to be expected of a reasonably competent and prudent professional trustee. Prince also admitted that it had a duty to exercise reasonable diligence to ascertain whether or not:

(a) Viaduct had committed any breach of the provisions of the Trust Deed or terms of offer of the debt securities; and

(b) the assets of Viaduct were sufficient or likely to be sufficient to discharge the amounts of the debt securities as they became due. 

The settlement agreement sets out further admissions from Prince, including that it did not make adequate inquiries or seek independent legal advice on particular points identified in the settlement agreement and that it did not exercise the level of "professional scepticism" required in the circumstances of the case.

Proceedings brought under s 34 may only be settled with the approval of the High Court and so, in another 'first', Van Bohemen J handed down a judgment approving the terms of settlement between the FMA and Prince on 25 August. The judgment provides some practical insights to the settlement of enforcement proceedings – for instance, the judge recognised that the settlement agreement being recorded in plain and clear language was important in circumstances where the agreement should be accessible to those members of the public who have an interest in the financial markets.

A copy of the High Court judgment can be found here. A copy of the settlement can be found here.  Note that the settlement concerned the functions of trustees of regulated securities under the Securities Act 1978, licensed supervisors are now subject to more stringent regulation under the Financial Markets Supervisors Act 2011 and the Financial Markets Conduct Act 2013.

FMA publishes annual corporate plan

The FMA has recently published its first annual corporate plan for the year ahead (July 2017 to June 2018). The annual corporate plan is one of the FMA's core strategic documents which also comprise its Strategic Risk Outlook, Statement of Intent, Statement of Performance, and Annual Report.

The plan has taken into account findings from the International Monetary Fund's recent independent assessment of the New Zealand financial system and outlines the FMA's priorities for the coming year across each of its strategic priorities, including:

  • organisational objectives and planned activities for 2017/18;
  • activities to support those objectives; and
  • areas of future focus.

In terms of examples of signalled activities, among other things, the plan identifies the following thematic reviews as being planned:

  • reviews of the governing documents of Managed Investment Schemes and Statements of Investment Policy and Objectives (SIPOs), as well as outsourcing arrangements and the use of wholesale investment managers;
  • a review on incentive structures and conflicts management in vertically integrated firms (such as qualifying financial entities);
  • a review on the impact of conflicted remuneration (including soft commissions) on advice; and
  • a review of supervisors oversight of custody arrangements (and, in the future, consideration of the case for licensing and supervision of custodians).

The FMA intends to provide an update on the work outlined in its 2018 Annual report. A copy of the annual corporate plan can be found here.

Commerce Commission charges Harmoney with CCCFA breaches

On 25 August 2017, the Commerce Commission filed civil proceedings against peer-to-peer lender Harmoney Limited and Harmoney Investor Trustee Limited. Harmoney facilitates an online lending marketplace and charges borrowers a "platform fee". Since December 2015, the fee has been a one-off payment added onto each loan. Prior to this, the fee was set at a percentage of the total loan. 

The Commission alleges that the platform fee is regulated by the Credit Contracts and Consumer Finance Act 2003 (CCCFA) is a credit fee and that Harmoney is a creditor. Harmoney says, however, that because it facilitates lending between other parties, rather than undertaking the lending itself, it is not a creditor and that its fees are not within the scope of the CCCFA.

See the Commission's media release here.

Mobile lenders remain a Commerce Commission target

Two recently released District Court decisions demonstrate the Commerce Commission's continued commitment to crack down on mobile traders under the CCCFA following its August 2015 Mobile Trader report.

  • Zee Shop Limited was recently fined $108,000 after pleading guilty to seven charges under the CCCFA relating to failing to disclose key information and failing to concisely express key information. The Commerce Commission has stated that Zee Shop’s standard contract failed to disclose key information, including the total number of payments required and an accurate statement of the consumer’s right to cancel the contract. Further, the Commission has said that a number of other contracts did not disclose the amount of each payment nor how frequently consumers would be required to make a payment. See the Commission's media release here.
  • Macful International Limited (trading as Ezitruck Shopping) was fined $126,000 on 16 charges under the CCCFA and the Financial Service Providers (Registration and Dispute Resolution) Act 2008. The CCCFA charges related to Ezitruck's failure to disclose key information in relation to accurate payment information and details of securities taken. The FSPA charges related to Ezitruck not being registered as a Financial Service Provider and not being a part of an approved dispute resolution scheme when undertaking lending services. See the Commission's media release here.

Autonomous Sanctions Bill introduced to Parliament

The Autonomous Sanctions Bill was introduced to Parliament on 10 May 2017. The Bill intends to create a New Zealand framework for implementing autonomous sanctions in situations where there is no United Nations Security Council resolution to do so. Autonomous sanctions made under the Bill would be able to place prohibitions that restrict dealings with assets or services as well as specified people travelling to, entering, or remaining in New Zealand.

One significant element of the Bill is the positive duty it would impose on registered banks (as defined in the Bill) to report suspicious activity to the Commissioner of Police. Registered banks would be required to report suspicious activity if they are in possession or control of assets to which sanctions apply as soon as it is reasonably practicable to do so. 

While the Bill has been introduced into the House, it did not have its first reading before the House rose prior to the election. The Bill can be accessed here.

RBNZ proposes changes to offshore banks' authorisation

The Reserve Bank of New Zealand (RBNZ) is proposing changes to the way in which it permits offshore banks that are not registered in New Zealand to carry on activities in New Zealand. 

Section 64 of the Reserve Bank Act prohibits persons who include "bank" in their name or title from carrying on any activity in New Zealand without being a registered bank. Current practice is for the RBNZ to issue a letter of "non-objection" to a bank carrying on certain activities in New Zealand if the RBNZ is of the view that s 64 was not intended to apply to those activities.

The RBNZ is now looking to replace the current practice with a formal authorisation process using its powers under s 65 of the Act. This new process would likely include:

  • a publicly accessible record of non-registered banks which are authorised by the RBNZ to carry on activities in New Zealand; 
  • an authorised bank providing the RBNZ with a contact person; and
  • the RBNZ using its powers under s 36 of the Act to obtain further information about the activities of the authorised bank in New Zealand.

As a part of this process the RBNZ is also looking to publish guidelines on what it views to be activity which is and is not caught by s 64. 

The RBNZ has indicated that it will not be processing any new applications for letters of non-objection until the new process has been determined. The RBNZ is aiming to have the new process in place by about the end of the year.

Green Bonds

Green Bonds are growing in prominence internationally and in New Zealand, as investors seek transparent and credible green investments and issuers wish to demonstrate their commitment to addressing environmental issues and diversify their investor base.

To address investor concerns about transparency and the integrity of Green Bonds, issuers can voluntarily comply with published standards. We have prepared a briefing paper which further explains these standards as well as the required documentation for issuers. To view this, click here.

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