Financial sector regulatory and legislative reforms now in play are the most important in New Zealand’s history. But are they enough to deliver better
governance?
The plethora of reforms to New Zealand’s financial sector have followed in the wake of the global financial crisis (GFC) and high profile finance company collapses and resulting litigation involving many of those companies. They include Bridgecorp, Lombard, Nathans, Capital + Merchant and, more recently, Ross Asset Management.
While some of these reforms began prior to the collapses, the bulk of them have occurred since. They will help New Zealand align with similar regimes internationally. They will also increase directors’ exposure to liability and strengthen good governance requirements in the financial services sector.
Summary of changes
The most significant reforms will introduce more than 15 pieces of new legislation, some of which consolidate historic legislation. There will be new requirements for disclosure, registration, licensing, compliance and governance. New, complementary regulations will provide the detail for practical implementation. The new “super regulator” Financial Markets Authority (FMA) was also introduced in 2011. It has already shown it means business.
Under the reforms, board governance demands are heightened, there is stronger requirement for directors to be fit and proper for their role as director of an issuer and their responsibility is greater. Consequently, regulators and supervisors require more from directors and directors are making greater demands on senior management.
All market participants must be registered and many licensed. They must meet more rigorous tests and compliance is more demanding. Companies must set up and adhere to business processes and historic documents. Processes must be realigned and reassessed to meet the new requirements. The bar has undoubtedly been lifted.
The Financial Markets Authority
FMA is the second ‘peak’ in financial ‘twin peak’ regulation and enforcement system – the other being Reserve Bank of New Zealand.
FMA is both policeman and regulator. It has greater reach, with broader search and seizure powers and more resources through an industry-funded levy system.
FMA has already increased its profile with the industry and issued guidance notes on effective disclosure and KiwiSaver performance. It has also delivered warning notices to low ball offerors and commenced court action against finance company directors. It is clearly not afraid to make its presence felt.
Part of the organisation’s mission is to improve the competency and compliance of financial market participants. It’s also charged with ensuring that investors are better informed and have access to accurate information.
Financial Advisers Act 2008
This Act regulates and licenses financial advisers. All those who provide financial advice must be registered, and the Act regulates the level and type of financial advice given to ‘mum and dad’ investors and prescribes disclosure requirements.
Financial Service Providers Register
This is web based, publicly available, compulsory register for anyone providing financial service in New Zealand. The Registrar has already refused to register overseas entities where they cannot produce evidence of having actual business operations in New Zealand. Considerations include whether the organisation has physical premises in New Zealand, the suitability of their nominated directors and proof of their identity.
Anti-Money Laundering and Countering Financing of Terrorism Act 2009
This legislation is designed to detect and deter money laundering and terrorism financing. It will come into force from 30 June 2013. Reporting entities must appoint compliance officer and complete compliance programmes and risk assessment. New Zealand has been slow to comply with its obligations as signatory to the international OECD Financial Action Task Force (FATF) recommendations. We have, as result, fallen behind. This legislation has jolted New Zealand into assessing these risks and businesses are now responding.
FATCA
“FATCA” is an American statute designed to stop US tax evaders from hiding assets in offshore financial institutions. It impacts on all New Zealand financial institutions. The New Zealand Government has begun negotiations with the US Inland Revenue Service to enter into an inter-governmental agreement that will require all organisations to report to IRD or face 30 percent withholding tax on income and gains from US investments. The compliance burden with this legislation is large.
Trustee and Supervisor Licensing
This was fully operational from 30 September 2012, with FMA licensing 11 applicants. Under the Securities Trustees and Statutory Supervisors Act 2011, trustees and supervisors of debt securities, unit trusts, participatory securities, retirement villages and non-restricted KiwiSaver schemes must be licensed. Licensed supervisors and trustees are now regulated by FMA and required to produce regular and ad hoc reports to FMA on their performance and on the performance of the issuers they monitor and supervise.
Insurance (Prudential Supervision)
Act 2010
The Act requires everyone who accepts risk for New Zealand policy holder under contract of insurance to be licensed. New Zealand’s transitional licensing phase will end on 7 September 2013 when full licences will be issued by the Reserve Bank which will also monitor compliance.
Financial Markets Conduct Bill
This Bill represents total overhaul of New Zealand securities law. It abolishes and consolidates the Securities Act 1978; the Securities Markets Act 1988; the Unit Trusts Act 1960; the Superannuation Schemes Act 1989; and parts of the KiwiSaver Act 2006. It passed its second reading in late 2012 and is expected to pass into law in early 2013, with full implementation by 2015/16.
The Bill establishes licensing regime for fund managers, independent trustees, custodians, derivatives dealers and peer-to-peer lenders. For managed investment schemes there are stricter requirements on governance, new duties for fund managers and supervisors and requirements regarding custodianship of the assets of the scheme. The Bill abolishes the need for investment statements and prospectuses and requires issuers to prepare single product disclosure statement for all products. Each ‘scheme’ or ‘offer’ must be registered and viewable on web-based register.
The most significant changes are contained in enforcement and liability provisions, including move from criminal to civil liability provisions for directors – with higher maximum penalties for criminal liability. The Bill will be complemented by in-depth regulations. consultation paper of proposed regulations was released last year.
Non-Bank Deposit Takers Regime
In September 2008, the Reserve Bank of New Zealand Act 1989 was amended to include new requirements for non-bank deposit takers such as building societies, credit unions and finance companies. raft of changes was ushered in. These include requirements around issuing credit rating, having an independent chairman and at least two independent directors, gaining trustee approval for risk management plans and limiting related party exposure and setting liquidity limits in the trust deed.
A Bill was introduced in August 2011 and proposes to add to the 1989 Act by requiring non-bank deposit takers to be licensed, placing fit and proper requirements on directors and management and granting the RBNZ extended powers – such as consents to ownership, and the ability to appoint and remove directors. This is expected to come into force on 1 October 2013.
Companies and Limited Partnerships Amendment Bill
This Bill will take effect from late 2013 and proposes tougher measures for directors by amending the Companies Act 1993 and the Limited Partnerships Act 2008. The Bill requires New Zealand registered companies to have director who l
