Object reference not set to an instance of an object.
  • Home
  • >
  • Publications
  • >
  • Financial markets licensing – much more than just box ticking
Brief Counsel

Financial markets licensing – much more than just box ticking

20 November 2013

Download:2013 PUB BC Financial markets licensing much more than just box ticking - 20 November.pdf

A PDF reader is required to read this file.
Download the free Adobe Acrobat reader here

​If you want a say on the new licensing requirements under the Financial Markets Conduct Act (FMCA) regime, the time to move is now.

The Financial Markets Authority has released consultation papers relating to the six licence categories with submissions due by 12 December 2013.

Licence categories

The licence categories, with links to the relevant consultation paper, are:

Proposed minimum standards

At a high level, there is a large measure of commonality in the proposed minimum standards relating to the requirements around:

  • "fit and proper" directors and senior managers
  • the capabilities required to provide the service
  • operational infrastructure
  • financial resources and professional indemnity insurance, and
  • governance and compliance culture.

However, in practice, the matters which FMA will have to be satisfied about in respect of each category of licence will differ markedly. 

Under the broad heading of “financial resources”, for instance, licensed independent trustees are required only to ensure that either they or the scheme for which they act have an adequate level of professional indemnity cover and the ability to meet any policy excess.

In contrast DIMs licensees (and other licensee types including crowd funding and peer-to-peer lending providers) must also:

  • have positive net tangible assets
  • be able to pay their debts as they fall due
  • maintain an appropriate level of liquid assets for their business equal to three months of actual or projected outgoings, on a rolling basis with allowance for contingencies, and
  • have adequate and effective systems, policies, procedures and controls to, for example, constantly monitor their financial resource level.

Derivatives issuers are also subject to both capital adequacy and liquidity requirements.

Chapman Tripp comment

While the different criteria for the various categories of licences are to be welcomed, there are some potential hooks in this differential treatment.  The practical effect may be to limit the scope for synergies among the various licence types.  People will not be able to assume that, because they meet the requirements for one type of licence, they will automatically qualify for another type of licence.

All intending applicants (other than individual independent trustees) will be required to provide a comprehensive governance document and to conduct a thorough audit of (among many other things) their governance frameworks, IT, outsourcing arrangements, insurance, human resources strategies, training programmes, record keeping and compliance processes, and "culture".

Some of the proposed requirements, particularly with regard to human resources and staffing, will be a considerable challenge for smaller market participants who might otherwise have been interested in obtaining a licence. 

This is a particular risk in the peer-to-peer lending or crowd funding space, where the comparatively high level of prescription proposed - on many levels licensees will be subject to the same requirements as more “conventional” licensees (DIMS and MIS managers) – will require real focus from applicants.

Timing

Aspiring crowd funding and peer-to-peer lending service providers can start the application process now, and can be licensed from 1 April 2014.  However, until the licence criteria are finalised and the regulations behind the FMCA are implemented, they will be operating with incomplete knowledge of the regulatory environment in which their business will be operating.

The deadline for derivatives issuers and DIMS providers – 1 December 2014 – looms large, although the relevant regulations are at an early stage of development.

For MIS managers and independent trustees, the licensing deadline will be driven by the “effective date” at which the relevant MIS or restricted scheme intends opting into the FMCA regime.  MISs and restricted schemes have until
1 December 2016 to opt into the FMCA regime.  For these categories of licensees it will still be necessary to begin the licensing application process in plenty of time.

In all cases we would recommend early engagement because:

  • our experience with licensing applications is that collating all of the information and putting in place all of the procedures and systems to demonstrate compliance with the requirements can take much longer than parties expect, and
  • there is the possibility for bottlenecks given the large number of applications that will need to be processed.

Our thanks to Natan Karon for writing this Brief Counsel.

For more information, or for assistance with preparing a licence application or a submission, please contact the lawyers featured.

Contacts