TransTasman mutual recognition, but not mutual benefit

High hopes were held of the trans-Tasman mutual recognition of securities offerings regime, introduced in June 2008.  Certainly our Securities Commission is keen to make the regime work, and to expand its scope.

Jane Diplock, the Commission Chairperson has commented: “Where do I see things going in 15 years' time? I would hope to see a networked agreement across the Atlantic, New Zealand and Australia connected to Asia and I would like to see us part of a networked relationship between Australia and the United States." 

But, if we are going to unlock full benefit from such arrangements, a number of issues will need to be addressed because the track record to date shows that New Zealand issuers are only rarely extending their offers to Australia using the mutual recognition regime and that most of the traffic is running in the opposite direction.

Research by the Australian Securities and Investments Commission (ASIC) in August showed that, of the 217 offers under the regime, only six were by New Zealand issuers.  Also, while many of the inbound offers were of interests in Australian managed investment schemes, there was no evidence of Australian investors investing in New Zealand managed fund products.

The October IPO of New Zealand company Kathmandu also contributed to the one-sided flow as, although made under the regime, it was made from Australia to New Zealand rather than from New Zealand to Australia, as might have been expected. 

The mutual recognition regime permits eligible New Zealand issuers to offer into Australia using their New Zealand offer documents, and vice versa, provided minimal requirements (such as document lodgement, warning statement and contemporaneous offering) are met.  The regime can be used for most securities offers, including shares, debt securities, managed funds and certain derivatives over these products.  Life insurance, superannuation schemes and some other derivatives cannot be offered. 

The streamlined regulatory requirements and accompanying reduced compliance costs should allow more offerings to reach the market more quickly.  On the face of it, one would expect issuers on each side of the Tasman would be eager, at minimal additional cost, to increase their potential investor base by offering into the other market. 

So why is it that New Zealand issuers are not taking the opportunity to offer to Australian investors?

ASIC comments in its report that a New Zealand firm it studied thought “broader commercial reasons and the effect of the global financial crisis, rather than the structure of the mutual recognition regime … led to New Zealand firms not using the mutual recognition regime”.

Clearly, there have been a number of successful capital raisings in New Zealand this year ( Fletcher Building, SKYCITY, Telecom, Genesis Energy, Auckland International Airport, Contact), but they have primarily been confined to the New Zealand market. 

This may reflect of the relative size and depth of our capital markets, the amount of capital sought to be raised, that the Australian leg has been limited to wholesale investors, or New Zealand issuers relying on existing Australian exemptions for limited issues into Australia (such as the PGG Wrighston rights issue), and – indeed – the relatively low number of public offers available for investment in New Zealand.

But there are two other significant roadblocks to participation.  These are the Australian financial services licensing rules and, of particular significance to managed funds issuers, differences in tax policy between the two countries.

Distributing a securities offer in Australia generally requires a licence from ASIC.  Obtaining this is a lengthy and costly process, one that is inconsistent with the simplicity suggested by the mutual recognition regime.  While this requirement could be avoided by having a non-licensed New Zealand issuer engage a licensed distributor in Australia, few have bothered to do so.  (The New Zealand and Australian governments have future mutual recognition of financial advisers on their work programme.  This is likely to be pursued once significantly reformed New Zealand laws on financial advice become effective in late 2010.)

For managed funds, the tax issue is the real stumbling block.  Australia does not tax non-Australian investors in Australian schemes, to the extent that their income is from sources outside Australia.  So, a New Zealand investor seeking exposure to, say, Asian assets, can invest through an Australian fund without paying Australian tax.  

New Zealand, by contrast, taxes all foreign income of a New Zealand managed fund, regardless of whether the investors are New Zealanders or not.  As a result there is a significant disincentive for Australian investors putting their money into New Zealand based funds.

We have been working with Craig Stobo, Appello Services and the IRD for around 9 months on a proposal which would remove this disincentive by exempting foreign investors from tax on international investments managed in New Zealand in portfolio investment entity (PIE) funds.  Fixing this anomaly in our tax law would give a significant boost to the New Zealand managed funds industry, and open the door for outbound international offerings, including under the mutual recognition regime. 

There are other, more technical examples within the regime that mean mutual recognition is not offering mutual benefits to Australian and New Zealand issuers.  For example, a foreign incorporated company registered as such in Australia can use the regime to offer into New Zealand but not foreign incorporated companies registered as overseas companies in New Zealand. 

Similarly, where an offer of a New Zealand managed investment scheme is made into Australia, the issuer must have an Australian compliant dispute resolution service, but there is no similar requirement for offers of Australian managed investment schemes into New Zealand.  The timing requirements for meeting the ongoing document filing and notification conditions in the regime also differ depending on the offer’s direction.  

Not until these problems are addressed, will truly mutual opportunities and benefits be available to issuers from each jurisdiction. 

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