The near-final draft of the Financial Markets Conduct Regulations 2014 deals with several concerns raised by KiwiSaver and superannuation scheme providers.
The timing requirements for certain reports and disclosures have been relaxed and provisions for on-line reporting and for restricted schemes generally are improved.
There’s a lot to digest, and we’re still doing it ourselves, but here are some highlights.
Product disclosure statements
There are still two alternative PDS length limits - pages when printed or number of words – but, while the page limit remains at 12 pages, the word limit is reduced to 6,000.
The length limits for the up-front Key Information Statement are two pages (no change) or 1000 words (down from 1200).
A PDS can include an application form at the end. It continues to be disregarded for length restriction purposes and can include instructions on how to apply – but it must not contain information not ‘directly related’ to applying.
The Regulations confirm that the PDS cannot be changed by a supplementary PDS and must, like an investment statement, be replaced if amended.
Incorporation by reference
The Regulations clarify that additional disclosures about certain member activity-based fees and tax can be incorporated in the PDS by reference to a document lodged on the offers register which contains those additional disclosures. That document must identify the PDS, use the same relevant headings (in the same order) and state that it forms part of the PDS.
While a scheme is still open to new joiners, an ‘annual confirmation notice’ is required, to the effect that:
- register entries have not become false, misleading or likely to mislead, and
- there are no omissions from the PDS or register entries concerning a matter materially adverse from a member’s perspective.
These are now required:
- quarterly within 20 (not 15) working days after each quarter-end in the disclosure year (1 April to 31 March), or
- for restricted schemes (superannuation or KiwiSaver schemes which are closed or which admit only a restricted group of employees or similarly restricted groups as members), annually within three months after the disclosure year-end or (if different) the scheme year-end.
‘Working days’ exclude 25 December to 15 January.
Fund updates must remain ‘publicly available’ (i.e. on-line, and in hard copy if asked) for two years. There must then be an on-line link to the place on the register where previous fund updates can be obtained.
A variant for ‘non-fund’ (e.g. life stages based) options is not yet covered by the Regulations. There are also no express carve-outs for closed or defined benefit schemes.
Annual reports and confirmations
Annual reports will now be required within four months post-balance date.
A member need not be sent a copy. As currently permissable for unit trusts, the manager can send the member a notice advising a right to receive a free copy if a request is lodged within 15 working days (and instructions on how to obtain a copy electronically).
An annual confirmation (i.e. member benefit statement) must be ‘made available’ to every member after the scheme year ends, either:
- electronically (on a substantially continuous basis), or
- by addressing it to the member within three months post-balance date (this was to have been 20 working days).
The confirmation need not include (as was proposed) total fees charged to the member.
Workplace savings schemes - portability
A workplace savings scheme trust deed must now allow a member who is eligible for and elects a full withdrawal to transfer to another workplace savings, superannuation or KiwiSaver scheme (or an ‘equivalent overseas retirement scheme’).
Reporting to trustee
A non-restricted scheme’s trust deed must ‘provide adequately’ for reporting by the manager to the supervisory trustee – but the frequency or content can be agreed either in the trust deed or in a ‘separate written document’.
A trust deed need not set out member meeting procedures if (or to the extent that) the ‘default’ procedures in the Regulations are considered adequate.
Whistleblower protection (restricted scheme)
Every restricted scheme’s trust deed will have implied into it a provision that no trustee (or any other trust deed party) may take any action against an independent trustee by reason of that trustee having made a report or disclosure to FMA under the conditions of the trustee’s licence.
The SIPO (and changes to it) need not be lodged on the register by a closed scheme, so long as a copy is available to members on request.
The Regulations continue to require reports to supervisors (or, for restricted schemes, FMA) as soon as practicable if a limit break occurs and is not corrected within five working days after the manager or trustee becomes aware of it.
The Regulations also continue to require quarterly reports of all limit breaks (except those already reported).
There are detailed reporting requirements relating to pricing errors and failures to comply with unit pricing or earnings rates methodology.
Reasonable steps must be taken to reimburse (and compensate) any disadvantaged current (and former) members. However, trust deeds can now prescribe (or allow for) ‘thresholds’ below which payments will not be required.
Related party transactions
Managers must provide quarterly certificates to supervisors (or, for restricted scheme trustees, FMA), within ten days after each quarter-end, on related party transaction certificates provided during the quarter.
Transitional and savings provisions – KiwiSaver
There are complex savings provisions for pre-transition KiwiSaver schemes but in practical terms (with minor exceptions):
- the current KiwiSaver legislation will continue applying to all pre-transition schemes where substantively amended by the FMCA, and
- the new KiwiSaver provisions which will apply to all KiwiSaver schemes from 1 December 2014 are those that are (in substance) identical to current KiwiSaver legislation provisions.
This will minimise FMCA impacts for pre-transition KiwiSaver schemes.
Detailed content requirements
Schedule 4 sets out the content requirements for:
- a PDS
- the register entry (when a PDS is lodged)
- updating a register entry
- fund updates, and
- annual reports.
Schedule 4 must carefully be reviewed and cannot practicably be summarised. Some key points though are set out below.
Where disclosures are prescribed word-for-word, the Regulations allow modifications:
- where particular information does not apply
- where additional or modified wording is needed to avoid being false, misleading, deceptive or confusing, or
- to ensure correct grammar.
A manager must use reasonable endeavours to obtain all fee information about an underlying fund, but to the extent that a reasonable estimate of such charges is not possible due to lack of data, a PDS need only point this out (with supporting explanations).
A non-fund investment option can be treated as one fund for certain disclosure purposes.
In explaining how to determine a portfolio investor rate of tax (PIR) a PDS can either:
- cross-refer to the application form (implying, sensibly, that a PIR rates explanation can be treated for length limit purposes as ‘directly related’ to applying), or
- specify a URL for the relevant page on the Inland Revenue website.
The description of a complex life-cycle option need now only show ‘enough life cycle stages to give a reasonable representation of the entire life cycle’.
An alternative PDS template incorporating (or allowing the use of) fund updates is ‘not yet’ provided for but is a work in progress.
Register entry when PDS is lodged
A restricted scheme now need not list/describe all individual assets of each fund or supply weekly/monthly returns since each fund’s inception date.
A unitised scheme’s annual report now need only state unit prices at the start and end of the year.