New Zealand: First phase FMCA begins 1 April: a new financial markets conduct regime

Brief Counsel
Last Updated: 3 April 2014
Article by Roger Wallis, Ross Pennington, Bradley Kidd, John Holland, Cathryn Barber, Penny Sheerin, Tim Tubman, Tim Williams, Josh Blackmore, Geof Shirtcliffe and Mike Woodbury
Most Read Contributor in New Zealand, September 2016

1 April 2014 marks a significant milestone in the reform of New Zealand's capital markets law, with the commencement of Phase 1 of the Financial Markets Conduct Act 2013 (FMCA) and the coming into force of key elements of the Financial Reporting Act 2013 (FRA).

Special regulations to part plug the perceived gap in oversight of custodial regulation following the failure of Ross Asset Management also take effect from 1 April.

We highlight the main things to look out for in the early weeks of the new regimes.

Phase 1 FMCA commencement

The provisions discussed below are provided for in the regulations to implement Phase 1 of the FMCA. An updated map to the FMCA is available here.

Part 2 – Fair dealing

Part 2 (fair dealing), including the key prohibition on misleading and deceptive conduct (s 19), will commence 1 April 2014, except for a prohibition on unsubstantiated representations and the unsolicited meeting regime.

The unsubstantiated representation prohibition for financial products and financial services commences on 17 June (the same time as parallel changes to the Fair Trading Act for unsubstantiated representations about goods and non-financial services). The unsolicited meeting regime commences 1 December.

The Phase 1 Regulations make it clear that credit regulation will remain governed by the Commerce Commission under the Fair Trading Act, rather than FMA (at least for now).

The s 19 prohibition is arguably the most powerful feature of the FMCA. It will apply broadly to conduct by issuers and other market participants through the life cycle of a financial product or service, except in a few instances where more specific regulation will apply1.

Importantly, FMA will be able to use new powers in Part 8 to make stop orders, halting 'restricted communications' governed by Part 2. Interim orders can be made (if urgent, without notice) for up to 30 working days.

Direction orders, requiring compliance, corrective or additional disclosure, can also be made if FMA considers Part 2 has been breached. Offences apply if the FMA orders are ignored.

Although similar in effect to an injunction, the Court will only become involved in a stop order or direction order if a party seeks judicial review of FMA's decision.

Part 3, early adoption of key exclusions

Phase 1 accelerates commencement of new exclusions in Schedule 1 to facilitate new capital raising and to cut compliance costs.

Prescribed intermediary services: crowd funding and peer-to-peer lending

Crowd funding and peer-to-peer platform providers will be able to obtain a licence to operate platforms. The Government decided not to impose investor caps, beyond limiting money raised by a particular issuer from crowd funding or peer-to-peer lending to $2 million per annum.

Employee share purchase schemes

Listed, and unlisted, issuers will be able to issue equity securities for up to 10% of their capital base without a prospectus or investment statement. Instead employers will need to provide employees with:

  • a warning statement about the nature of the employee share purchase scheme and the implications of the exclusion
  • basic information about the scheme, such as its terms and conditions
  • access to the employer's most recent annual report and financial statements (if any).

For most employers, the new exclusion is significantly more liberal than the current Securities Act exemptions, particularly for unlisted issuers.

Dividend reinvestment plans

The current Securities Act exemption for dividend reinvestment schemes is replaced. Importantly, under the new exclusion the DRP plan document is no longer treated as an "advertisement" for which directors are automatically deemed liable for defective disclosure.

Small personalised offers

Issuers will be able to raise up to $2 million within any 12 month period from up to 20 investors, without a prospectus or investment statement. The new exclusion operates alongside other exclusions, for example the $500,000 or more minimum investment exclusion in the Securities Act, but does operate to reduce the $2 million cap if undertaken in conjunction with a crowd funding raising.

While the FMCA does not allow such offers to be generally advertised, the compliance obligations are light handed – prospective investors will need to be given a warning statement, and issuers will need to report to FMA in the financial year after using the exclusion.

Same class offers of quoted financial products

Listed issuers will be able to issue equity securities, or debt securities, of the same class as already listed securities with minimal documentation. A 'cleansing notice' will need to be sent to NZX confirming the issuer is in compliance with its financial reporting and continuous disclosure obligations, as the main precondition to use the new rules.

Debt securities will be treated as being of the same class where they have identical terms to existing securities but a different interest rate or maturity date.

The new regime will allow listed issuers to extend placements to retail investors, become involved in market sell-down or 'block trades' and undertake share purchase plans or rights issues without a prospectus or investment statement. Importantly, directors will not be automatically deemed liable if there is defective disclosure under a same class offer, and due diligence processes should be focused around the adequacy of continuous disclosure.

For debt, seasoned issuers should be able to issue further tranches of debt to retail investors with much simpler disclosure.

Issues of same class products to retail investors should be undertaken more quickly, reducing issue and underwriting costs, particularly if issuers and market participants adopt non paper-based technology.

Simple bank products

Registered banks will be able to offer term deposits, or interests in cash or term PIEs, without needing an investment statement or prospectus. Instead, general terms and conditions will simply need to be available (e.g. via website or from a bank branch). This exemption should significantly reduce printing and postage costs for banks.

Part 6

From 1 April market participants will be able to seek licences for activities that will need a licence from 1 December (subject to transitional arrangements).


The final element required for Phase 1 fell into place with regulations made last week to set licence fees for licences required by Part 6 (including for crowd funding and peer-to-peer lending platforms) and consequential updates to the Financial Markets Authority (FMA) fees.

The Government has taken the opportunity to lift the FMA's standard hourly rate charges for exemptions, designations and other matters from $167 per hour to $178 per hour.

Phase 2 FMCA

Submissions recently closed on a second Phase of regulations to implement the new governance regime in Part 4 and financial product market issues in Part 5.

We understand the Ministry of Business, Innovation and Employment (MBIE) is aiming to provide exposure drafts of regulations for the new PDS and register entry disclosure requirements required by Part 3 in late April, with a view to all regulations being finalised by August 2014.


The FRA commences progressively from 1 April 2014. In the short term most activity will occur from the External Reporting Board (XRB) and FMA finalising guidance and procedures for the new regime.

Generally the new FRA will only apply to financial periods commencing 1 April. So, for a 31 March balance date entity, the new requirements will apply for the period ending 31 March 2015 and the existing law will apply to the 31 March 2014 period.

However, some changes to the solvency test applying to distributions and amalgamations will commence earlier. Some issuers may also become "FMC Reporting entities" to which the new ongoing conduct requirements of Part 7, and the liability regime in Part 8 of the FMCA will apply, if they offer further securities, particularly after 1 December 2014.

For more detail see our Brief Counsel on the FRA available here.

New custody regulations commencing 1 April

The Financial Advisers (Custodians of FMCA Financial Products) Regulations 2014 applies to a person who carries on a business of providing custodial services to retail clients and (from 1 December 2014) some smaller wholesale clients for client money or client property that relate to "FMCA financial products". An "FMCA financial product" means any equity security, debt security, managed investment product, or derivative as defined in the FMCA.

The regulations, in broad terms,—

  • require custodians regularly to provide clients with specified information relating to client money and client property; and
  • allow for clients to receive that information electronically and to make written requests for that information; and
  • provide for the reconciliation of records of client money and client property held by the custodian; and
  • require custodians to obtain assurance engagements with qualified auditors and prescribe requirements that apply to an assurance engagement; and
  • require persons who are treated as having broker obligations, but do not themselves provide custodial services, to ensure that their service providers comply with these regulations (for example, providers of discretionary investment management services).

These changes are intended to plug gaps identified following the collapse of Ross Asset Management.


1For example, until 1 December 2014, the Securities Act 1978 will still govern content of investment statements and prospectuses. Thereafter Part 3 of the FMCA will govern the content of new product disclosure statement (PDS) and online register entries, in parallel with the Securities Act through an up to two year transitional period. However financial product advertising will primarily be governed by Part 2.

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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Roger Wallis
Bradley Kidd
Penny Sheerin
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