New Zealand: Financial Markets Conduct Bill - Part 4 – Governance of financial products

Last Updated: 29 April 2012

Extent to which superannuation scheme may provide non-retirement benefits
40 Section 116 prescribes that the requirements in section 115(1)(b) and (d) that a superannuation scheme:

40.1 must have the purpose of providing retirement benefits, and

40.2 must ensure that redemptions or withdrawals are for retirement purposes

do not prevent a scheme from providing insurance benefits or allowing withdrawals in defined circumstances such as financial hardship, ceasing employment or changing employment (or in accordance with other limited early partial withdrawal criteria defined in trust deeds).

41 Those other benefits or withdrawal facilities must be "merely ancillary" to the purpose of providing retirement benefits. This concept is given a narrow meaning adapted from the ancillary non-charitable purpose concept in section 5(4) of the Charities Act 2005.

42 Section 116 is potentially much more restrictive than the current "principal purpose" requirement in section 2A(1)(a)(i) of the Superannuation Schemes Act 1989.

43 Superannuation schemes feature a wide range of benefit designs. For example:

43.1 proportionately few of the benefits paid from an employment-related scheme will ever be paid as the true retirement benefits, instead most will be paid when members change employers

43.2 not all death or disablement benefits will have an insured component, and

43.3 retail schemes commonly allow full withdrawals from a prescribed age such as 55 without requiring proof of (or drawing a connection to) retirement.

44 Section 116 will therefore likely present compliance difficulties for a number of existing superannuation schemes. We submit that existing early withdrawal facilities in already-registered superannuation schemes should be grandfathered, given that all will already have had to meet the principal purpose test prescribed in the Superannuation Schemes Act 1989).

Governing document should only specify method for calculating price, not minimum price
45 Section 122(1)(a)(ii) requires a registered scheme?s governing document to prescribe the method of calculating the "minimum" price at which interests are to be redeemed.

46 We submit that the reference to "minimum" price is unnecessary, and that a simple reference to the "price" at which interests are to be redeemed is sufficient. In most cases, governing documents do not refer to a "minimum" price. They simply refer to a "redemption" price.

47 Requiring the contents of governing documents to specify the method of calculating a minimum price is unduly restrictive, and could restrict some issuers from specifying differential pricing where circumstances require it (which, while unusual, is not unheard of).

Governing document should only specify extent to which prescribed persons may be indemnified
48 Section 122(1)(f) requires a registered scheme?s governing document to provide adequately for any rights of a manager, investment manager, administration manager, supervisor or custodian to be indemnified out of scheme property.

49 Investment managers, administration managers and custodians will typically not be parties to the governing document and will be engaged under separate contracts for services. Subject to legislation, whether (and, if so, to what extent) they are indemnified from scheme assets will be a matter for commercial negotiation.

50 We submit that section 122(1)(f) should end with the words:

", and the extent to which any of those persons may be indemnified out of scheme property."

Limits on permitted exonerations and indemnities 51 The "proper performance" concept in section 123(2)(b) should be widened so as not to prohibit exoneration or indemnity protection for purely technical breaches, such as:

51.1 a SIPO breach (see section 130(1)(b)) occurring due to market movements despite proper management of trades, or

51.2 deviations outside permitted investment ranges which are restored within an appropriate period of time.

52 The exclusions also should not apply to overseas investment managers. Many overseas investment managers cannot deviate from their standard terms due to governance policies, and New Zealand investors should not be denied the opportunity to have those investment managers available to them.

53 In addition:

53.1 in assessing whether performance has been "proper", regard must be had to the characteristics of the scheme and the actions of investors – for example, there should be no suggestion that a manager has been imprudent for lack of spread of investments if the investment mandate of the scheme is limited or if a particular course of action has been approved by a special resolution of participants, and

53.2 the clause should not apply to existing schemes which already have indemnities embedded in their governing documents. These clauses were negotiated long ago taking into account the risks inherent at the time, and asking participants to revisit them is, in our view, overly intrusive.

Changes to governing document
54 For a superannuation or KiwiSaver scheme, section 126(3)(b) will be significantly more restrictive than the current legislation in that, as matters stand, benefits referable to future (as opposed to past) membership periods can be reduced without any prior member consents.

55 Employers sponsoring superannuation schemes should retain the flexibility to amend trust deeds or participation arrangements so as to (for example) reduce their future contributions:

55.1 in order to apply a progressively greater KiwiSaver contributions offset, as CEC rates increase over time, and/or

55.2 in order to put in place a revised remuneration structure which provides salary increases or other additional benefits to compensate employee members for a diminution in their future service superannuation entitlements.

56 We submit that amendment powers in existing trust deeds – for all types of managed investment schemes - should be permitted to be preserved with respect to existing subscribers, who subscribed based on that greater flexibility.

57 Changes should also be expressly permitted in order to address law changes or to prescribe amendments that are technical or administrative in nature.

Power to make FMA–approved changes
58 We submit that for certainty and flexibility, and for consistency with section 692, section 127(1)(a) should allow an FMA-approved amendment that is "necessary or desirable to enable, or in connection with enabling the governing document to comply" with the relevant sections or any enactment or rule of law.

Contracting out of management functions
59 It is common for trust deeds for managed investment schemes to provide that, where functions are contracted out (for example, custody, registry or investment management), the fund manager is not liable for performance by the contractee, as long as the contracting out is reasonable and has been appropriately monitored.

60 Section 133(2)(b) is inconsistent with this practice. It provides that the manager would continue to be liable for the contractee?s performance in a contracting out situation.

61 We submit that this provision should be amended so that a manager who has complied with sections 131 and 133(2)(a) in connection with the contracting out is not liable for the fault of contractees – so that this type of limitation is properly able to be included in trust deeds and governing documents, rather than being overridden by section 133(2)(b).

62 The scheme will have a contractual claim against the third party provider in cases of breach, which the manager must pursue in accordance with section 130.

Statement of Investment Policy and Objectives
63 Section 150(1)(c) of the Bill requires a Statement of Investment Policy and Objectives (SIPO) to include the methodology used for "measuring performance against... investment strategy".

64 Performance is generally not measured against the "investment strategy". Rather, the investment strategy is merely a contributor to a "performance objective" or "benchmark".

65 The terminology in this clause should therefore be changed so that the SIPO is required to include a description of how the scheme measures performance against a performance objective or benchmark, not the investment strategy.

Related party benefits

Fees payable to other parties should not be related party benefits
66 Section 158(1)(c) provides that fees or expenses payable or reimbursed to a manager of a registered scheme are not "related party benefits".

67 We submit that fees or expenses paid or reimbursed to any investment manager or administration manager should likewise not be related party benefits. It is not uncommon for these entities to be related to the manager, and we see no policy reason to distinguish them in this context.

General prohibition on related party benefits
68 In section 159(3)(a)(ii) and elsewhere in the Bill, references to approval by special resolution of the class of affected scheme participants should be supplemented (as alternatives) by references to approval arising from:

68.1 transactions of the relevant type being permitted in the governing document and PDS, and

68.2 investors subscribing on that basis.

General notifications should be possible
69 Sections 160(b) and (c) recognise that investments in other managed investment schemes or in category 2 products issued by a registered bank (or products prescribed which are issued by subsidiaries of registered banks) do not require supervisor consent as related party transactions. However, under section 159(2), the manager must still notify the supervisor of the transaction.

70 It is not uncommon for managed investment schemes to make initial and follow-on investments in other managed investment schemes (or category 2 products issued by banks or their subsidiaries). A good example is a bank cash PIE, where its sole investment is to invest in bank issued cash deposits.

71 We submit that section 159(2) should be amended to allow a notification to be given either generally or specifically in the context of a particular transaction. Without this amendment, multiple notifications in relation to repeated identical related party transactions would be required for related party investments by continuously offered registered schemes. This would be highly impracticable.

Additional restrictions on related party transactions of restricted schemes
72 We submit that in section 161 the prescribed 5% limit must be expressed in benchmark (not actual) asset allocation terms so that, for example, there are no accidental limit breaks triggered by related party investments? outperformance from time to time.

73 We also submit that it is inappropriately restrictive to treat as a "related party" every employer contributor to a restricted scheme which:

73.1 has restricted status under definable community of interest criteria, and

73.2 is therefore more widely offered than a single-employer or single-group scheme, including through various employers with no shared ownership or association either legally or in a business sense.

74 Certain superannuation and KiwiSaver schemes (such as faith-based schemes) with restricted status under the definable community of interest criterion will have numerous unrelated employer contributor; including, in some cases, stock exchangelisted companies. As section 158(2)(a)(iii) stands, all will be "related parties of the scheme" if they employ as few as one or two contributors to the scheme. We therefore submit that the "related party of the scheme" definition should exclude any employer which:

74.1 is not a party to the trust deed, and

74.2 has no role in relation to trusteeship or scheme management, and

74.3 is not an associated person of any party to the trust deed (or of any person or entity which has a role in relation to scheme trusteeship or management)

meaning that an employer whose only real connection to a scheme is (for example) making compulsory employer contributions under the KiwiSaver Act 2006 with respect to certain employees is not treated as a related party of that scheme.

75 We also submit that the 5% restriction should be refined so as to make clear that it applies only to investments in any particular related party of the scheme (and associated persons of that related party). This would mean that (for example) investments in businesses which:

75.1 were each a "related party of the scheme" as defined, but

75.2 were not associated persons of each other

would be counted separately for the purpose of testing compliance with the 5% constraint – i.e. such investments would be permitted so long as no one investment exceeded 5% of scheme assets.

76 The basis for this submission is that (in terms of the Explanatory Note to the Bill) the express policy underlying the 5% restriction was as follows:

"The intent of this limitation is to ensure that if an employee?s employer fails and they lose their job, there is a reduced likelihood of the employee also losing a significant portion of the value of their superannuation scheme."

77 In practical terms that concern simply does not arise where a scheme?s total exposure to any one employer (or to any one group of associated employers) is less than 5%, with all other assets more widely held.

Power of supervisor to remove manager
78 Section 169(1)(a) allows the supervisor to remove the manager if the supervisor considers that removal is in "the best interests of scheme participants".

79 Without some form of qualification, there is a concern that supervisors will need to periodically "test the market" to assess whether the manager is currently the optimal choice for participants, or whether there may be an alternative (and cheaper) manager available. It could also incentivise would-be managers to attempt to seize control of management rights by offering short term incentives (e.g. lower fees) to attempt to unseat the incumbent.

80 In our view, it should not be the intention (or effect) of this clause to require the supervisor to monitor the market, or encourage short-term anti-manager activism. Accordingly, we submit that there should be a requirement that clear evidence is required before this power can be used (i.e. effectively a presumption in favour of the current manager).

Power of supervisor or FMA to apply for order to remedy problem
81 Section 191(1)(d) allows a supervisor or the FMA to apply for orders if the financial position of a scheme is "otherwise inadequate".

82 We submit that, in order to provide more certainty in regard to whether a particular position is "otherwise inadequate", this standard should be determined by reference to frameworks or methodologies specified by the FMA under Subpart 4 at Part 8.

Related Topics

The information in this article is for informative purposes only and should not be relied on as legal advice. Please contact Chapman Tripp for advice tailored to your situation.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions