A tradition is developing that the Commerce Minister comes to the annual INFINZ awards dinner with something significant to say – and Simon Power didn’t disappoint last night. He confirmed the Government’s intention to move to a ‘Super Regulator’ for the financial markets, signalled that the concerns raised by Chapman Tripp and others regarding the new financial advisers regime will be addressed and outlined proposed changes to the KiwiSaver regime.
This Brief Counsel summarises the contents of the speech and provides some analysis.
The Financial Markets Authority (the ‘super regulator’)
The Financial Markets Authority (FMA) will take responsibility for the functions of:
the Securities Commission
the Companies Office, in relation to prospectuses and financial statements
the National Enforcement Unit of the Ministry of Economic Development, and
the Government Actuary.
The NZX Disciplinary Tribunal will become a rulings panel serviced by the FMA and will require the FMA’s approval to set rules. The NZX will continue to investigate any breaches of those rules but the FMA will have the ability to undertake its own surveillance.
The audit oversight functions that were to be carried out by the Accounting Standards Review Board (including accreditation of professional accounting bodies, quality review of auditor practices, setting minimum licensing standards, and enforcement functions) will now be carried out by the FMA. This will affect audits of issuers of securities, along with banks, insurance companies and other entities that take deposits or hold assets for broad groups of investors.The plan is to legislate for these changes this year and to have the FMA up and running in early 2011.
Chapman Tripp comments
An establishment board will be set up to design the structure of the FMA. Given the short timeframe between now and implementation at the beginning of next year, we expect that the board will be established shortly and will begin any consultations as soon as possible.
The “super-regulator” proposal is welcome to reduce apparent inefficiencies in the way different regulators have approached similar subject matter to date. The creation of a “one-stop shop” should also make compliance easier and more efficient for participants in the industry.
The key challenge is to ensure the “super regulator” initiative does not delay the Securities Act review. They are both important and complementary packages in terms of the Government’s aim to build confidence in the market regulators. And whoever the regulator is, effective enforcement needs sufficient resourcing, sensible prioritisation, and timely visible enforcement action to better enhance investor confidence.
Further changes in pipeline for the financial advisers regime
The development of the regime encompassed by the Financial Advisers Act and the Financial Service Providers (Registration and Dispute Resolution) Act has been a laborious and difficult process. Such was the concern, the Government had to introduce a “pre-implementation adjustments” Bill to deal with the worst of the problems; and then a Supplementary Order Paper (SOP) to fill the gaps the Bill failed to address.
But still there were concerns, expressed with increasing urgency by ourselves and others in the industry, and it seems that the Government has been listening. The Minister has promised further announcements in the near future in relation to:
the treatment of wholesale advice
the current prohibition on generic advice issued by institutions rather than individuals, and
the treatment of group corporate structures.
These areas are consistent with the main issues as we see them.
The Minister also announced a new “compliance pathway” for the regime’s implementation.
All financial service providers will still need to be registered and to be a member of an approved dispute resolution scheme by December 2010. Financial advisers will also need to have submitted their applications for authorisation (or, in the case of a QFE, for QFE status) and started any training necessary by this time. But they will now have an additional six months - until June 2011 - to complete that training.
Both the Code of Conduct for Financial Advisers and the Financial Service Providers (Pre-Implementation Adjustments) Bill will be finalised by July 2010.
Chapman Tripp comments
We commend the Minister for taking seriously the concerns which have been raised. Had the Bill been passed in its current form (even with the SOP), it would have caused significant upheaval to the financial sector. But – as always – the devil will be in the detail, so we hope there is further opportunity for input on the Minister’s promised solutions.
Hopefully also those changes will address other issues raised, such as recognition of foreign qualifications for advisers operating outside New Zealand.
The Minister also commented on the Investment Savings and Insurance Association’s proposal to voluntarily abolish commissions paid by any of its financial institution members to advisers, saying the Government would “do its bit with legislation, but business also needs to follow through”. This seems to keep the door open for possible legislative change down track to prohibit commissions being charged without the investor’s agreement.
Key changes are:
managers will become the issuers of retail KiwiSaver schemes, with primary responsibility for disclosure documents and advertisements issued under the Securities Act 1978 and with a direct duty of care to members (in other words, the current unit trusts model)
retail KiwiSaver scheme trustees will be subject to the new trustee supervision regime now before Parliament, and
all KiwiSaver schemes will be required to provide ongoing quarterly information to the public and regulators regarding their performance, fees and their asset allocations.
Chapman Tripp comments
The changes will not apply to non-retail (employer sponsored and vocational-based) KiwiSaver schemes, or to non-KiwiSaver superannuation schemes, but the Minister has left open this possibility at some later stage. It is not clear how certain of the proposed changes will operate for umbrella schemes that have a KiwiSaver scheme and registered superannuation scheme governed by the same trustee and the same trust deed.
The proposal that retail KiwiSaver scheme trustees be subject to the new trustee supervision regime would seem to impose additional compliance costs on those schemes that have a corporate trustee (but not one of the large trustee corporations) such that they may now reconsider their existing trusteeship model.
The aim behind requiring all KiwiSaver schemes to provide more frequent information to the public and the regulator is to ensure consistency and comparability between schemes as to the disclosure of returns and fees. It is intended that the public reporting requirements will be based on international best practice. The Securities Commission, in its recent Guidance Note on KiwiSaver Distribution and Disclosure, has said that international best practice standards in this context are captured in the “Global Investment Performance Standards” issued by the CFA Institute.
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Our thanks to Emma Harding, Senior Solicitor, for writing this Brief Counsel.