New Zealand: Financial Markets Conduct Bill - Part 6 – Licensing and other regulation of market services

Last Updated: 29 April 2012

Regulated entity's QFE status should be determinative for market services licence.
88 Section 395 of the Bill rightly acknowledges that the FMA must, in making its decision as to whether or not to grant a market services licence, have regard to whether the applicant is a QFE or a registered bank.

89 We submit that there is a compelling case for registered banks, or insurance companies regulated under the Insurance (Prudential Supervision) Act 2010 (IPSA), that are also QFEs to be automatically granted a market services licence for all those services for which they require one. As an alternative, such entities could be exempted under section 387(2).

90 In support of this submission we make the following points

90.1 registered banks and insurance companies are already subject to an extensive governance and disclosure regime under the RBNZ Act and IPSA respectively

90.2 compliance with those regimes is a comprehensive indicator of sufficient compliance controls to cover all those areas for which a market services licence would be required

90.3 these regimes are underpinned by the QFE requirements under the FAA, for banks and insurance companies which are also QFEs (or a member of a QFE group)

90.4 the combined effect of the RBNZ Act and IPSA, and QFE requirements, is that banks which are QFEs already have sufficient systems and processes in place to address those matters which would properly be expected of a market services licensee

90.5 these entities underwent an extensive process to demonstrate to the FMA that QFE status was appropriate under the FAA (including the preparation of extensive documentation, and implementation of enhanced compliance practices and procedures). Requiring a further exercise in order to obtain subsequent market services licences would be duplicative, and result in repetition of compliance planning exercises, at considerable cost, and

90.6 limiting automatic licences to banks or insurance companies who are also QFEs means that those that are not QFEs would not automatically receive such licences – which appropriately recognises that those entities have not gone through the QFE vetting process and compliance enhancements.

91 As an alternative, if this submission is not accepted, we submit that:

91.1 at a minimum, reference to an insurance company regulated under the IPSA be added to section 395, so that the FMA must have regard to that fact

91.2 there should be a streamlined licensing process for registered banks and insurance companies that are QFEs, in order to minimise any duplicative costs involved in applying for a market services licence in addition to the QFE application

91.3 licensing costs should be minimised for these entities, given that they have already faced (and will face on an ongoing basis, through levies under the Financial Service Provider (Registration and Dispute Resolution) Act 2008) significant licensing costs as QFEs.

Licence should be able to cover related bodies corporate
92 We support the provision in the Bill (section 398) which recognises that a licence may cover one or more subsidiaries of a licensee. We submit that this should be extended to allow the licence to cover "related bodies corporate" (in the same way that group QFE licences under the FAA are able to apply to "associated entities").

93 In addition we recommend the inclusion of machinery (whether in the Act itself or in regulations) requiring the FMA to facilitate centralised compliance for corporate groups holding multiple licences. This would ensure that group members are able to implement a "consolidated" compliance regime, which would improve efficiency for multiple licence holders within a corporate group, while at the same time ensuring consistency of compliance across the licensed entity.

DIMS licensee –DIMS requirements should not duplicate FAA requirements
94 In our submission on the Exposure Draft we commented that, if a provider chooses to obtain a DIMS licence for DIMS, those services should be governed solely by the Bill (and the terms of the licence) and not through importing of FAA requirements in the conditions of the licence.

95 As an example, there should be no discretion for the FMA to impose, as a term of the licence, that personalised DIMS must be provided by an authorised financial adviser under the FAA. Were a condition of this nature to be imposed, it would expose the DIMS licensee to "duplicative" regulation through both the Bill and the FAA, defeating the policy intention that these be stand-alone regimes in their own right.

96 We therefore submit that the regulations must ensure that conditions cannot be imposed which require personalised DIMS provided under a DIMS licence to be provided only by an AFA, or which otherwise import FAA criteria.

Client agreements
97 Section 428(4) requires derivatives issuers to have written client agreements. In most cases the client agreement that derivatives issuers will have with retail investors will be a derivative master agreement (e.g. an ISDA Master Agreement). This will often be amended verbally at the time that a derivative transaction is entered into between the derivatives issuer and the retail investor. The amendment will normally be subsequently confirmed in writing between the parties – but not always, and even then there is often a time delay in this occurring.

98 We submit that section 428(4) provide flexibility for the client agreement to be other than in writing in certain circumstances.

Related party transactions – allow for generic certificates from DIMS licensees
99 Sections 437 to 439 provide a similar regime in relation to related party transactions involving DIMS licensees to that applying to managers of registered schemes (see paragraphs 66 to 71.

100 We submit that sections 437-439 should be amended in the same way, that is to:

100.1 exclude from the definition of related party benefits any fees or expenses paid or reimbursed to any investment manager or administration manager, and

100.2 allow certificates required of DIMS licensees for related party investments to be general or specific.

Associated custodians should be allowed for DIMS services.
101 Section 442(2)(b) provides that the custodian for investors preparing the subject of a DIMS service held on behalf of retail clients may be an associated person of that DIMS licensee only if it is permitted by the conditions of the DIMS licence, and those conditions are observed.

102 This appears to be predicated on an assumption that an independent custodian will always produce a better consumer protection outcome than an associated custodian. In our view, this is not always the case, and proper emphasis should be on the governance, compliance and management surrounding the custodian arrangement rather than on the ownership or association relationship.

103 Accordingly, we believe that section 442(2)(b) should be deleted. If the FMA decides that it is undesirable for the custodian to be associated with a DIMS licensee that can be controlled through the terms of the licence, but it should not be the default.

DIMS licensee should not have joint and several liability with custodian
104 In our submission on the Exposure Draft, we recommended removal of the provision that a DIMS licensee should not be jointly and severally liable with any custodian for the holding of investment property under a DIMS licence – now section 442(3).

105 The provision fails to recognise that the custodian already owes fiduciary duties to those investors for whom it is holding investments. These fiduciary duties provide adequate consumer protection.

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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.

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