Reform of New Zealand's financial sector law

David Craig, Journal of International Banking and Financial Law

 

Four separate reviews of New Zealand's financial sector law are currently being undertaken, with nine discussion documents having been released.

New Zealand is currently undertaking four separate reviews of New Zealand's financial sector laws:

• Review of Financial Products and Providers;
  
  
• Review of Domestic Institutional Arrangements;
  
  
• Review of Anti-Money Laundering and Countering the Financing of Terrorism Laws; and
  
  
• Review of Financial Intermediaries.

Nine discussion documents have been released, and broadly, the following proposals have been made:

• the financial sector will become considerably more regulated than it is now - in particular, non-bank deposit takers and insurers will be subject to much more onerous regulatory regimes;
  
  
• in addition to the costs associated with the proposed new licensing regimes, financial institutions will also face costs associated with more extensive disclosure; and
  
  
• the regulators (in particular, the Securities Commission but also the Reserve Bank of New Zealand) will have significantly broader responsibilities and powers (and, presumably, will need more resources) than they do now.

The nine headings below replicate the subject matter of the nine discussion documents.

Registration of financial institutions

The Ministry of Economic Development has proposed that the Companies Office register financial institutions that are not otherwise subject to a registration regime. As part of the registration process, the Companies Office would collect base level information about the institution and undertake negative assurance checks relating to directors, senior management and significant shareholders (e.g., that a director does not have a criminal record and is not a recent bankrupt).

By contrast, positive assurance checks (e.g., that a director is a "fit and proper person") would be undertaken by the relevant regulator - most likely the Reserve Bank or the Securities Commission. This register would, like the current Companies Office register, be electronic and publicly available for searching.

In terms of what "financial institutions" will need to register, it is clear that the list will include those institutions required to be registered as part of New Zealand's international anti-money laundering/countering the financing of terrorism obligations. However, the discussion document suggests that other institutions, such as general insurance providers, will also need to register.

Securities Offerings

It is proposed that the Securities Act be amended to clarify what "the public" is in terms of offers of securities "to the public". In particular, the scope of the existing exemptions for "relatives and close business associates" and "professional and habitual investors" would be clarified.

As a related point, feedback has also been sought on whether investors under exempt offers should nonetheless have the protection of certain parts of the Securities Act. For example, while the disclosure regime in the Act would not apply to exempt offers, the misstatement liability regime would apply.

It is also proposed that the offer document must contain educational material on financial concepts so that the target audience can understand what is being disclosed.

Finally, a contentious issue raised by the discussion document is whether a continuous disclosure regime should be extended beyond listed securities to all securities where there is an established secondary market. If adopted, this proposal would significantly increase the cost of capital for non-listed issuers.

Supervision of Issuers

The general conclusion seems to be that the current regime of trustee supervision for debt and collective investment scheme issuers is sound. There appears to be little appetite for a single Government regulator to replace trustees as the frontline monitor of these issuers. However, it is proposed that trustees be subject to entry approval, and general oversight, by the Securities Commission.

In the interests of consistency, it is also proposed that trust deeds disclose certain mandatory matters and contain certain minimum protections for investors in debt securities.

Collective Investment Schemes (CISs)

CIS products include unit trusts, superannuation schemes, KiwiSaver schemes, life insurance policies with an investment component and participatory securities. They are currently regulated under a number of unrelated pieces of legislation. The proposal is that there should be a uniform set of rules applying to CISs. The only exception would be for existing employer stand-alone and defined benefit superannuation schemes, which would be subject to a transitional structure to minimise scheme wind-up.

The single regulatory framework for CISs would involve, among other things:

• oversight by an independent trustee supervisor;
  
  
• entry and ongoing requirements for issuers;
  
  
• clearer and more effective powers for trustees and the Securities Commission; and
  
  
• consistent trust deed requirements.

Non-Bank Deposit Takers (NBDTs)

The discussion document for NBDTs proposes significant change. NBDTs are financial institutions, other than banks, whose core business involves borrowing money from the public to lend to others. The category includes finance companies, credit unions and building societies. The clear premise of this discussion document is that NBDTs pose additional risks to investors (over and above those of other debt issuers), which justify special treatment. The key proposal is that there be two tiers of NBDTs:

• Tier one - authorised deposit takers (ADTs). ADTs must meet licensing and supervisory requirements similar to those applied to registered banks. ADTs are likely to be regulated by the Reserve Bank, which would have the power to require a deposit taker to become an ADT where the size or nature of its business makes it systemically important.
  
  
• Tier two - other deposit takers. This group would be supervised under an enhanced trustee-based model. It would be regulated by the Securities Commission and its members would be required to disclose prominently that they are not ADTs.

It is proposed that a special case be made for credit unions and building societies that do not become ADTs. These entities would be regulated by the Reserve Bank, but under a modified model that reflects their small size and mutual nature.

Insurance

New Zealand's insurance legislation is piecemeal and often arbitrary in its application to particular providers or products. The main proposal of this discussion document is a single regulatory regime to apply to all insurance products and providers. The features of that regime would include:

• licensing and prudential requirements for all insurance providers (including "fit and proper person" vetting for directors, senior management and significant shareholders, a start-up solvency support plan and a start-up capital requirement);
  
  
• the requirement of a physical presence in New Zealand to obtain a licence to operate as an insurer in New Zealand;
  
  
• monitoring and supervision by the Insurance and Superannuation Unit, which focuses on disclosure and director attestation; and
  
  
• potentially, mandatory ratings for all insurers and a requirement for accounting separation (with segregated funds) for life, general and health insurance businesses.
  

Mutuals' Governance

Mutual financial institutions include friendly societies, insurance mutuals, credit unions, industrial and provident societies and building societies. Currently, each of these entity types is regulated under its own legislation. This discussion document proposes that one statute set out base-level corporate governance standards for mutuals, but recognises that there may need to be some flexibility in the application of these statutory standards given the special features of each type of mutual.

Consumer Dispute Resolution and Redress

At present, the two main mechanisms for consumer redress in the financial services sector are the Banking Ombudsman and the Insurance & Savings Ombudsman schemes. This discussion document notes that there are gaps where aggrieved consumers have no real alternative to seeking redress through the courts.

Rather than proposing a single regime to deal with this issue, the discussion paper presents a series of options for reform. These options range from the "do nothing" option to compulsory membership of an industry-based dispute resolution system.

Platforms and Portfolio Management Services

Platforms and portfolio management services are computerised administration services that are designed to hold, trade and report on investments. They bundle together the functions of a financial adviser, a custodian and, in the case of a platform only, an administrator.

The services offered through these internet-based platforms, as distinct from the securities that may be traded through them, are largely unregulated in New Zealand.

This discussion document proposes to change that by:

• requiring platform providers, portfolio service providers and custodians to be registered, and to be approved and supervised by the Securities Commission;
  
  
• specifying statutory duties for platform providers (e.g., to appoint a registered custodian and ensure the platform is operated in a proper and efficient manner) and custodians (e.g., to hold assets as bare trustee on behalf of investors and to have independent audits conducted); and
  
  
• requiring service providers to send investors a disclosure statement. That statement would set out information about the service and its associated costs and risks, and the identity and responsibilities of the service provider and the custodian.
  
  

What next?

Following receipt of submissions on the discussion documents in December 2006, the Ministry of Economic Development will develop policy proposals for consideration by Cabinet by April 2007. Assuming Cabinet endorsement, the supporting legislation will then be drafted. The Government hopes to have the legislation in force by 2008.

Enquiries and information

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