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Brief Counsel

A navigational guide to the Financial Markets Conduct Act

16 September 2013

​This Brief Counsel provides an overview of the key components of the Financial Markets Conduct Act (Act) and assists you to navigate the detail.  Chapman Tripp has produced other commentaries on the Act available here. An outline map to the Act is available here.

Purposes

Main purposes

The main purposes of the Act are to:

  • promote the confident and informed participation of businesses, investors, and consumers in the financial markets, and
  • promote and facilitate the development of fair, efficient, and transparent financial markets.

Additional purposes

In addition the Act is intended to:

  • provide for timely, accurate and understandable information to be provided to persons to assist those persons to make decisions relating to financial products or the provision of financial services
  • ensure that appropriate governance arrangements apply to financial products and certain financial services that allow for effective monitoring and reduce governance risks
  • avoid unnecessary compliance costs, and
  • promote innovation and flexibility in the financial markets.

These purposes are consistent with the main objectives of the Financial Markets Authority Act 2011 and key functions of the Financial Markets Authority (FMA).

Commencement and transitional arrangements

The Act will commence progressively from April 2014. From 1 April 2014:

  • Part 2 "fair dealing" provisions of the Act will come into effect
  • FMA will start to receive licence applications (although licences will not be required to be in place until later); and
  • some of the new exclusions in Schedule 1 of the Act may be recognised as exclusions from offers to the public under the Securities Act 1978

From 1 December 2014, the rest of the Act will commence:

  • the Part 3 disclosure rules, online register of offers of financial products and online register of managed investment schemes will become operative
  • expanded exclusions in Schedule 1 of the Act will become available
  • new managed investment schemes will be able to seek registration, and
  • the full liability regime will commence, particularly for defective financial product disclosure.

Some market participants will no longer need authorisations to conduct their business, and some ‘participatory securities’ without an investment element will fall outside the scope of the Act – for example, rights to use common facilities in some property developments.

Part 1 – Preliminary provisions

Key definitions

Part 1 defines the key term financial product as comprising a

  • debt security 
  • equity security
  • managed investment product, or 
  • derivative

in that order of priority.  The definitions focus more on the economic substance of the financial product rather than just its legal form.  For example, a redeemable preference share is treated as a debt security rather than equity.  Under Part 8, the FMA can:

  • ‘call in’ a security that might otherwise (as a matter of form) escape the net, if necessary or desirable to promote the purposes of the legislation, and
  • re-designate a financial product from one category to another (with prospective effect).

These powers would be exercised where a product does not fall neatly within one category, or where the economic substance of the product requires it.  For example, a ‘Blue Chip’ type property investment scheme could be brought into the regime even if it is structured as an investment in land and ordinarily would be excluded.

Part 2 – Fair dealing

Part 2 provides for fair dealing matters, including:

  • prohibiting misleading or deceptive conduct, false or misleading representations, and the making of unsubstantiated representations, in connection with financial products and financial services; and
  • prohibiting certain offers of financial products in the course of unsolicited meetings. 

The provisions are modeled on the Fair Trading Act 1986 (FTA) and include some provisions also contained in the Consumer Law Reform Bill.

Misstatements in product disclosure documents (PDS) (see below) are carved out of Part 2, as they are regulated by specific requirements in Part 3. 

Part 3 – Disclosure of offers of financial products

The basic rule in Part 3 is that offers of financial products for issue, and certain offers for sale, require disclosure using a PDS unless the investor or the issuer is exempted under Schedule 1.

The purpose of the PDS is to provide key information to investors to help them make investment decisions.  Most of the content is to be prescribed by regulations – allowing for differing disclosure requirements depending on the financial product.

The Act provides for other material information relating to the offer to be contained in a register entry for the offer (the register entry) in an online register of offers of financial products.  Material information is defined as information that:

  • a reasonable person would expect, or would be likely to influence persons who commonly invest in financial products in deciding whether to acquire the products on offer.
  • relates to the financial products on offer, or particular issuer or offeror, rather than financial products, issuers or offerors generally.

Part 3 also contains detailed rules on offer advertisements, including relaxed requirements for pre-regulated offer publicity.

Part 3 also contains a mechanism for ongoing disclosure by issuers, intended to focus on debt and managed investment products: 

  • a duty to notify the Registrar of relevant changes to keep the register up to date – particularly relevant to continuous issuers
  • a duty to disclose information to particular investors (on request or in prescribed circumstances), and
  • a duty to make information publicly known in prescribed circumstances.

These obligations are intended to take the pressure off point of sale disclosure documents (as investors will be informed of the status of their investment on an ongoing basis) and may facilitate more accurate pricing of the investment where there is a secondary market for trading.

Part 4 – Governance of financial products

Part 4 provides for the governance of regulated products, including:

  • the governance of debt securities (including the need for a trust deed and a supervisor)
  • the governance of managed investment products (including the need for registration of the managed investment scheme, a governing document, and a supervisor)
  • the duties of persons associated with debt securities or registered schemes to make protected disclosures
  • the powers of intervention to enable the supervision of debt securities and registered schemes by a supervisor or the FMA; and
  • ongoing duties of issuers of all regulated products (for example, to maintain registers of regulated products).

Part 5 - Dealing in financial products on markets

Part 5 provides for matters relating to dealing in financial products on markets, including:

  • prohibiting insider trading and market manipulation
  • providing for continuous disclosure by listed issuers
  • providing for the disclosure of interests of substantial product holders in listed issuers 
  • providing for disclosure of relevant interests by directors and senior managers of listed issuers
  • providing for the licensing of markets for trading financial products
  • providing for the transfer of financial products, and
  • the making of regulations setting rules for unsolicited offers to purchase financial products.

Apart from beefed-up requirements for the licensing of financial markets, most of Part 5 carries forward the Securities Markets Act 1988, with some improvements. 

Part 6 – Licensing and other regulation of market services

Part 6 regulates certain financial market services, including:

  • the licensing of certain financial market service providers (for example, managers of registered schemes, certain issuers of derivatives, and providers of intermediary services)
  • providing for disclosure obligations and the need for client agreements in connection with some of those financial market services
  • imposing other conduct obligations on providers of discretionary investment management services and on their custodians, and
  • providing for the making of regulations regulating the holding and application of investor funds and property by issuers of derivatives.

Part 7 – Financial Reporting

Part 7 provides for financial reporting obligations, and the keeping of proper accounting records. 

Part 7 will be expanded when the Financial Reporting Bill is enacted to also include substantive financial statement preparation and audit obligations for “FMC Reporting entities”.

Part 8 – Enforcement, liability and appeals

Part 8 addresses enforcement and liability, including:

  • providing the FMA and the High Court with certain powers to avoid, remedy, or mitigate any actual or likely adverse effects of contraventions of the legislation
  • the imposition of civil remedies (including pecuniary penalty orders and compensation orders), and
  • offences.

The focus of the Act sanction provisions is on civil remedies, including pecuniary penalties.  Serious criminal offences are reserved for the most egregious conduct.  An infringement notice regime is intended to provide more effective means of enforcing minor breaches. 

Part 9 – Regulations, transitional provisions and miscellaneous provisions

Part 9 provides for:

  • regulations and exemptions, including powers to prescribe matters relating to the form and content of product disclosure statements, and
  • powers for the FMA to designate financial products and offers, and to grant exemptions, where this is necessary or desirable in order to promote the purposes of the legislation, and
  • various miscellaneous matters.

Schedule 1 – Exclusions and extension to certain sale offers

Schedule 1:

  • specifies that offers to particular persons do not require disclosure under Part 3 (although disclosure to other persons may be required) or compliance with certain governance requirements under Part 4
  • specifies that certain offers as a whole do not require disclosure under Part 3, whether as a result of the nature of the offer (for example, a small offer) or the nature of the issuer (for example, an offer by the Crown), and
  • extends application of the legislation to offers for sale of certain existing financial products.

The exclusions have been changed to include more ‘bright line’ tests.  Issuers will be able to rely on self-certification by wholesale investors that are exempt unless they know, or ought to know, the certification is untrue.

Schedule 2 – Registers

Schedule 2:

  • establishes the register of offers of financial products
  • establishes the register of management investment schemes, and
  • contains procedural requirements for maintaining, searching, and lodgment of documents on the registers.

Schedule 3 – Self-managed superannuation schemes

Schedule 3 provides for the statutory recognition of single person self-managed superannuation schemes.

Schedule 4 – Transitional provisions

Schedule 4 contains detailed transitional provisions.  In addition regulations made under Part 8 will further detail transitional arrangements.

Repeals and consequential amendments

The Financial Markets (Repeals and Amendments) Act 2013 provides for the repeal of the Securities Act 1978, the Securities Markets Act 1988 and certain other enactments, and for consequential amendments.

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