On 31 March, following its consultation on phase 2 of the “fit for purpose” financial services regulation reform agenda, the Government released three amendment Bills, two of which we discuss here:^[1]

• the Financial Markets Conduct Amendment Bill (FMC Bill); and
• the Financial Service Providers (Registration and Dispute Resolution) Amendment Bill (FSP Bill).

FMC Bill

The FMC Bill is an omnibus Bill introduced to amend the Financial Markets Conduct Act 2013 (FMCA) and the Financial Markets Authority Act 2011 (FMAA). The broad purpose of the FMC Bill is to streamline and ensure the effectiveness of financial services regulation. The FMC Bill increases regulation where necessary to mitigate significant risks to consumers, while aiming to simplify administrative complexity.

1.  Minimum requirements for fair conduct programmes (FCPs)

What the FMC Bill does

The FMC Bill simplifies and clarifies the minimum requirements for FCPs in section 446J of the FMCA, including:

• removing the requirement for an FCP to enable the financial institution to meet its legal obligations to consumers (seen as unnecessary duplication);  
• removing the requirement for a financial institution to regularly review the effectiveness of its FCP (seen as already covered in the obligation to maintain an effective fair conduct programme);
• making it clear that the requirements to provide distribution methods for providing services or products to consumers or to mitigate adverse impacts from incentives only apply if the financial institution use such methods or incentives;
• clarifying that the requirement to communicate with consumers in a timely, clear, concise, and effective manner expressly includes communicating the price of services or products (ie making coverage of price transparency explicit as part of minimum FCP requirements);
• requiring resolution of consumers’ complaints in a timely and effective manner, including adding a definition of “complaint” consistent with the financial advice regime definition in the Financial Markets Conduct Regulations 2014 (ie making coverage of complaints resolution explicit as part of minimum FCP requirements);
• simplifying the training, supervising, and monitoring requirements to focus on ensuring employee support of the financial institution’s compliance with the fair conduct principle (to make the obligation more flexible by reducing prescription and to clarify the purpose of the training obligation).

Our view

Financial institutions with fair conduct programmes already in place will be able to consider whether their staff training provisions could be changed while maintaining effectiveness. Otherwise, the changes are unlikely to substantially reduce what is needed to deliver an effective FCP, and may require enhancements if complaints management and price transparency is not already addressed. 

The removal of the explicit requirement for regular effectiveness reviews risks providers unwittingly overlooking this requirement (seen as covered by the obligation in section 446G of the FMC Act to “maintain” an effective fair conduct programme).  Further, providers should keep in mind that the requirement to include controls in the programme is fundamentally targeted at maintaining effectiveness (if controls are effectively developed, eg across three lines of defence). The requirement to address deficiencies promptly also serves as a limited safeguard to mitigate the risk of effectiveness failures. 

2.  Consolidating market services licences

What the FMC Bill does

• The FMC Bill consolidates the existing licensing regime (which requires financial service providers to obtain a licence for each market service they provide) into a single licence regime by requiring the Financial Markets Authority (FMA) to issue a single licence covering all classes of market services under the FMCA. 
• Existing licenses will be consolidated into a single licence with automatic effect on commencement of the legislation. Licence conditions will not initially change.

Our view

The single licence should streamline compliance and eliminate overlap, improving efficiency for regulated entities.  Over time, we anticipate consolidation of the standard conditions for each licence class, further streamlining compliance obligations.

3.  Ensuring the FMA has effective tools to monitor compliance

Change in control approval

What the FMC Bill does

The FMC Bill requires FMA approval of any transactions where:

• a person obtains a “significant influence” over a licensee or an authorised body;
• a licensee or authorised body enters into a “significant transaction”; or
• a licensee or authorised body is to be amalgamated with 1 or more other persons.

Where these provisions are triggered, the person obtaining influence, or the licensee or body entering into the transaction or amalgamation, must obtain FMA approval prior to entering into the transaction.

A “significant influence” means (in summary) a person (person A):

• is assuming control of 25% or more of the voting rights in a licensee or authorised body (entity B); or
• obtaining the ability to appoint 50% or more of the directors of entity B.

A “significant transaction” means:

• transferring all or a material part of the business to another person or 2 or more associated persons; or
• acquiring all or part of a business that, immediately after the acquisition, will be a material part of the licensee’s or body’s business.

Overseas licensees or authorised bodies must notify the FMA if a person obtains significant influence or there is an amalgamation.

The FMA has the power under the FMC Bill to impose conditions on its approval to a change in control and must consult with the Reserve Bank of New Zealand if the licensee or authorised body is regulated by the Reserve Bank.

Our view

This change will increase compliance and parties to a transaction will need to factor this into deal planning. It is to be hoped that for entities regulated by both the FMA and the Reserve Bank, the two regulators will apply a consistent approach and timeframe, except where relevant to their different respective areas of focus (the Reserve Bank’s being financial stability and the FMA’s being good conduct).  For changes in control or amalgamations occurring overseas, it appears that there will be no requirement for approval in advance.  This creates an interesting disparity in how onshore and offshore entities will be supervised, and it will be interesting to see if the FMA develops guidance in this space.

On-site inspections

What the FMC Bill does

The Bill gives the FMA the power to carry out an onsite inspection of a financial markets participant’s (FMP) place of business without notice or consent if it is necessary or desirable for any of the following purposes relating to compliance monitoring:

• assessing the adequacy of an FMP’s policies, processes, controls, or other arrangements;
• verifying an FMP’s compliance with financial markets law obligations;
• verifying the reliability of information or a document supplied by an FMP to the FMA;
• examining any matter relating to an FMP’s business, operation, or management in order to understand and identify risks;
• examining the FMP’s financial position, financial performance, or cash flows;
• reviewing all, or 1 or more classes of, FMP in connection with conduct under financial markets legislation; and
• doing any other thing that is incidental and related to, or consequential on, any thing that the FMA does under the above paragraphs.

The FMA must exercise the power at a reasonable time and in a reasonable manner.

Comments

This power will facilitate routine monitoring of FMPs to ensure regulatory compliance and enable the FMA to act quickly to reduce potential harm to consumers, while not including the additional power for the FMA to require an expert report (as originally consulted on). On-site inspections without consent or notice are generally not welcomed by institutions, but timely action to reveal actual compliance as opposed to what documents say is being done can be an important tool.

Although the FMA will have to exercise the power at a reasonable time and in a reasonable manner, we would have preferred to see additional privacy and confidentiality protections in the FMC Bill (as the Government originally signalled during consultation).

Other amendments

The FMC Bill includes some welcome updates to make certain exemptions permanent, and to cut red tape and improve the operation of the legislation, eg allowing for electronic registers.

What wasn’t included

It is disappointing that the Government elected not to give the FMA the ability to rely on assessments by the Reserve Bank.  This power would have potentially reduced duplication for institutions falling under the FMA and the Reserve Bank in relation to fit and proper, operational resilience, business continuity and outsourcing requirements and assessments.

Next steps

It is important for financial service providers to be familiar with these Bills, due to the significant regulatory changes they will make. 

There will be an opportunity to make submissions on these Bills when they are at the Select Committee stage, which we anticipate will occur relatively soon (based on the most recent CoFR Regulatory Initiatives Calendar).

Get in touch

Please reach out to one of our experts if you want to know more, are unclear about the Bills’ implications for your business or would like assistance to make a submission to the Select Committee.

Special thanks to Isabel Van Tuinen and Sam Chaytor-Waddy for their assistance in writing this article.