New Zealand: Guidance on governance frameworks under the FMCA

Brief Counsel

Download: 2014 PUB BC Guidance on governance frameworks under the FMCA - 7 Oct.pdf

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The Financial Markets Authority (FMA) has laid out its expectations for how issuers of debt securities and the managers and supervisors of managed investment schemes should approach their governance responsibilities.

The 18-page Guidance Note, released last week, relates to the obligations under Part 4 of the Financial Markets Conduct Act (FMCA). It follows a consultation in June 2014.

Part 4 of the FMCA sets out certain basic statutory duties, including the duty to act in the best interests of the investor, together with a framework for managers of managed investment schemes (MIS), supervisors and issuers of debt securities to manage their respective accountabilities and relationships with each other, investors and – ultimately – FMA.

The role of the supervisor

FMA is clear that supervisors are responsible for ensuring that they have the information and powers necessary to carry out their role as a front line compliance regulator. The Guidance Note suggests they should decline appointment unless satisfied that the governing document meets their minimum requirements and is "fit for purpose" in that it gives them the tools to do their job effectively. The onus, it is indicated, is on supervisors to ensure that they can respond to both business as usual and stress events.

FMA's expectation is that supervisors should be able to demonstrate that they are an "empowered supervisor" by:

  • showing evidence that they and the manager collaborated on developing the governing documents
  • that in those interactions, they focused on ensuring the governance arrangements would enable them to act in the best interests of investors
  • that the governance arrangements include a range of tools available for use by the supervisor if the interests of investors are not being met, and
  • that the governing documents for a given MIS meet their minimum requirements for accepting appointments.

The role of the MIS manager

FMA's view is that managers, including trustees of restricted schemes, share with supervisors (in the case of non-restricted schemes) an overarching duty to ensure governing documents and the overall governance arrangements are "fit for purpose". The Guidance Note states:

We expect you to meaningfully engage with your supervisor to empower them through the governing documents, to fully and effectively undertake their role under the FMC Act.

The Guidance Note is clear that this means putting investors' interests first and managers reconciling their commercial interests against their statutory duties.

Restricted schemes and the role of their trustees

Governance Structures

The Guidance Note provides a useful commentary on the options available to restricted schemes under the FMCA in relation to how they structure their governance arrangements. These include the option of licensing a corporate entity as an independent trustee.

FMA concedes that there may be circumstances in which it is appropriate for a restricted scheme to have a sole corporate licensed independent trustee but suggests that this is not within the normal contemplation of the FMCA and would be a matter for exemption on a case-by-case basis.

The Guidance Note also discusses whether an independent trustee should be a sponsor or member appointed trustee. FMA's position is that:

Other things being equal, appointing an independent trustee in substitution for a trustee appointed by scheme members, would undermine the effectiveness of the role of the independent trustee. It would also be inconsistent with section 9(b) of the Superannuation Schemes Act and section 119A(2)(b) of the KiwiSaver Act which protect the existing rights of members to participate in the management of their scheme.

Role of independent trustee on the board

For trustees of restricted schemes considering their FMCA transition programme, the Guidance Note provides a useful high level guide on how FMA expects their relationship with the licensed independent trustee should work.

In practical terms, this means the views of the licensed independent trustee should not necessarily override or be treated as more 'right', valid or expert than that of other trustees. Good governance allows for debate of issues. Trustees will not always agree. In that case, the scheme's voting procedures will apply.

How outsourced functions will be monitored

The Guidance Note sets out FMA's expectations as to how outsourced functions will be managed.

Minimum standards for trustees

The minimum standards trustees of restricted schemes will be expected to satisfy are:

  • capability – ensuring the individuals comprising the manager have the right mix of skills, experience and competence
  • an oversight functionality – in relation to the adequacy of the governance and compliance arrangements
  • governance culture – ensuring a robust compliance culture is implemented, supported by appropriate systems, policies, procedures and controls. In the context of a restricted scheme, the compliance role may be undertaken by a single person and may be less formal, and
  • compliance assurance – establishing a compliance assurance programme.

FMA's attitude as supervisor

Finally the Guidance Note sets out how FMA intends to approach its role as direct supervisor of restricted schemes. FMA's approach will depend on the:

  • size of the scheme. For example, the governance structures and processes that are needed for a large scheme will often be different than for a small scheme, and
  • nature of the scheme and membership.

Other factors relevant to FMA's level of engagement and monitoring include:

  • the role of the sponsor and the sponsor's willingness to support the scheme
  • how the sponsor views the importance of the role of the licensed independent trustee
  • how the sponsor manages the balance between those trustees it appoints, those appointed by scheme members and those who are independent
  • how the sponsor views FMA's role (FMA will not mediate in any disagreement between the trustees and the sponsor)
  • for schemes subject to actuarial valuation, the solvency and the actuarial assumptions adopted
  • whether the scheme is open to new entrants, and
  • whether issues have arisen in FMA's monitoring of a licensed independent trustee, even if this was for another scheme or matter.

Debt issuers and the role of their supervisors

Supervisors will need to increase the amount of time and effort they spend on issuers, more actively monitoring them and obtaining a deeper understanding of their activities and the risk of those activities impacting on future payment obligations.

FMA expects to work with and through the supervisor in the first instance, rather than directly with debt issuers.

For debt issuers, the new governance framework will have the following impacts:

  • more information – supervisors requiring more detailed reporting at more regular intervals by issuers
  • expanded intervention powers – supervisors wanting a broader range of investigation, review and direction powers so they can more effectively satisfy themselves that the issuer's assets are sufficient to meet its obligations as they become due – the ability to appoint a receiver on a default only may not be enough
  • increased resources – supervisors expanding their internal resources to cope with the new governance requirements, and
  • increased costs – both in negotiating trust deeds and meeting the supervisor's ongoing costs of performing its role. The expectation of increased interaction with the supervisor means that issuers will need to devote more management time to the relationship. Issuers are required to engage collaboratively with their supervisors.

There is likely to be a similar increase in supervisors' oversight and involvement in the non-restricted MIS space, with the transition of managers to compliance with the FMCA from 1 December 2014.

Non-bank deposit takers (NBDTs)

The Guidance Note notes that the Reserve Bank has recently provided a report to the Minister of Finance on the Bank's review of the prudential regime for NBDTs, which included a number of recommendations for the Minister's consideration. Once those matters have been settled, FMA will work with the Reserve Bank to provide further guidance, as required, on the relationship between NBDTs, their supervisors, and FMA, and as between FMA and the Reserve Bank.

More to come

FMA will be releasing guidance on SIPOs, a framework and methodology on SIPO limit breaks, and guidance on pricing errors and failure to comply with pricing methodologies.

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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Penny Sheerin
Mike Woodbury
Bradley Kidd
Emma Harding
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