Financial Services Industry: Initiatives and Reforms Reviewed

Bulletin summarises the current status of a number of key initiatives and legislative reforms facing the financial services industry, and updates likely timing.
New Zealand Finance and Banking
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This bulletin summarises the current status of a number of key initiatives and legislative reforms facing the financial services industry, and updates likely timing.

PIE Funds

Budget changes

Legislation to amend the PIE tax rates for multi-rate PIEs has been passed as part of the 2010 budget. The changes to the PIE tax rates (contained in the Taxation (Budget Measures) Act) will be effective from 1 October 2010. The rates from 1 October 2010 will be as follows:

Taxable income Taxable + PIE income PIE tax rate
$0 – $14,000 $0 – $48,000 10.5%
$0 – $14,000 $48,001 – $70,000 17.5%
$14,001 – $48,000 $0 – $70,000 17.5%
$48,001 and over Any 28%
Any $70,001 and over 28%

People who invest in PIEs before 1 October 2010 will automatically shift to the new equivalent rate on 1 October 2010, so that they do not need to re-elect their rate with the PIE. If an investor does not notify the PIE of their PIR, the 28% rate will apply.

The new legislation is expected to receive Royal assent this week.

Legislation to correct current PIE tax rates

Legislation to correct an error in the current prescribed investor rates (PIR) has been approved by the Finance and Expenditure Committee. It is expected that these changes will apply retrospectively from 1 April 2010. Given the 2010 budget has introduced further changes to PIE tax rates, the corrected PIRs will only apply from 1 April 2010 to 30 September 2010. The changes, contained in the Taxation (Annual Rates, Trans-Tasman Savings Portability, KiwiSaver, and Remedial Matters) Bill, allow a 21% PIR to be nominated by people who derive $48,000 or less in taxable income and $70,000 or less in taxable income plus PIE income - under current legislation, the 21% rate is only available to people who derive between $14,000 and $48,000 in taxable income and $70,000 or less in taxable income plus PIE income.

PIE & non-PIE Funds

Employer superannuation contribution tax rates (ESCT) - PIE & non-PIE

The budget has also brought reductions to ESCT applying for the first pay period post 1 October 2010. ESCT is the tax on employer contributions to superannuation schemes or employer contributions to KiwiSaver schemes that are not already exempted from ESCT. This will apply to both PIE and non-PIE funds.

Fund Withdrawal Tax - PIE & non-PIE

FWT will not apply to withdrawals that relate to contributions made on or after 1 October 2010. FWT does not currently apply to permitted withdrawals from KiwiSaver schemes or complying superannuation funds. This change will apply to both PIE and non-PIE funds.

Non-PIE Funds

The budget also reduced the tax rate for a number of non-PIE widely held funds from 30% to 28% (including unit trusts, GIFs and superannuation funds). These changes will apply for the 2011-12 and subsequent income years.

Registration of Financial Institutions & Dispute Resolution

Awaiting release of dispute resolution scheme framework from Ministry of Consumer Affairs. Financial Service Providers (Pre-Implementation Adjustments) Bill (Bill) was introduced to Parliament on 8 December 2009 and Supplementary Order Paper 113 was released on 18 March 2010. Proposed changes include:

  • Employers are exempted from the Act so far as they provide services for their employees to enable them to join superannuation or KiwiSaver schemes in which the employer participates (ie participating employers).
  • A change in the territorial scope of the Act. The Act will now apply to all 'licensed providers' and persons required to be registered under the Financial Advisers Act, even when they are outside New Zealand. 'Licensed provider' is defined in the Act and includes entities such as registered banks.

A Cabinet Paper released in late April (and endorsed by the Commerce Committee) recommends a number of amendments to the Bill. In particular it is proposed that:

  • Persons who provide financial advice to only wholesale clients be exempted from the requirement to join a dispute resolution scheme (but would still need to be registered).
  • Financial advisers based offshore providing financial advice to wholesale clients would not be required to be registered or join a dispute resolution scheme.

We are currently awaiting the release of an MED Departmental Paper indicating further likely changes to the Bill.

Financial Services Complaints Limited and the Insurance and Savings Ombudsman Schemes have been approved as dispute resolution schemes under the Act. The Banking Ombudsman Scheme has submitted its application for approval of its Scheme.

Financial Adviser Regime

The Financial Service Providers (Pre-Implementation Adjustments) Bill (Bill) proposes the following changes:

  • Bonus bonds, call building society shares, call debt securities and term life insurance policies are now prescribed as category 2 financial products.
  • Qualifying Financial Entities (QFEs) will be able to nominate representatives (ie contractors and agents) for whom they will take responsibility for.
  • Exemptions relating to companies, organisations and Crown organisations have been extended to employees of these entities.
  • The ability to provide financial advice or conduct investment transactions in relation to a QFE's category 1 products (without being an authorised financial adviser) will be extended to the QFE's named representatives. This is currently only permitted in respect of the QFE's employees.
  • QFE employees and named representatives will be able to provide financial advice or conduct investment transactions in relation to products for which the QFE is promoter under the Securities Act. Currently, the Financial Advisers Act allows this only if the QFE is the issuer of the product.

Additional proposed changes in the Supplementary Order Paper include:

  • Investment transactions are split into investment management decisions and broking services.
  • Making an investment management decision on behalf of a client is defined as a financial adviser service.
  • Specific provisions regulating the performance of broking services are introduced.

A Cabinet Paper released in late April (and endorsed by the Commerce Committee) recommends a number of amendments to the Bill. In particular it is proposed that:

  • Persons who provide financial advice to wholesale clients be exempted from certain obligations under the Financial Advisers Act.
  • Amendments be made to the QFE model to allow 'group' QFEs. This would streamline the QFE model by enabling one QFE to take responsibility for other related entities (rather than every entity in a related group needing to be a QFE).
  • Generic advice be able to be issued in the name of an entity - rather than an individual adviser.
  • Exemption powers be expanded. The Securities Commission and Minister will have the power to exempt entities and activities from the regime.

The Minister has also announced that the implementation period for the financial advisers regime has been extended. Advisers will have until 30 June 2011 to be fully trained with the registration timeline similarly extended to 1 December 2010.

Antimoney laundering

Regulations discussion document released. Regulations expected to be released near the end of 2010.

The AML/CFT co-ordination committee (Securities Commission, Reserve Bank, Internal Affairs, Police, Customs and Justice) are continuing to work on implementation and are meeting on a monthly basis.

It has been recommended that all affected entities continue to assess business risk in preparation for submitting their risk assessments.

The implementation period is likely to be 2 years from the release of the Regulations (so fully in force by late 2012).

Securities Act/ Regulations

Awaiting discussion document on the Securities Act and Regulation review (was expected before Christmas - now expected in June 2010). We are expecting a number of the recommendations from the Capital Market Development Taskforce report to come forward and form part of this review.

The Securities Regulations 2009 are now in force although issuers can elect to comply with the 1983 Regulations, on a transition basis, until 30 June 2010.

Trans-Tasman Mutual Recognition

Current ARMIS notice expires 30 September 2010. Any issuer of an Australian registered managed investment scheme relying on this notice will need to opt into the new trans-Tasman mutual recognition regime before this date.

Crown Retail Deposit Guarantees

A new Securities Act (Crown Retail Deposit Guarantee Schemes) Exemption Notice 2010 revokes the 2008 Exemption Notice.

Retail deposit guarantee scheme extended to 31 December 2011 on the basis of stricter criteria (primarily credit rating). A new form of guarantee deed applies from 1 January 2010 for those entities continuing to offer securities subject to the guarantee. Some institutions have opted out of the scheme.

Regulation of Nonbank Deposit Takers

From 1 September 2009 NBDTs required to comply with risk management programme guidelines. From 1 March 2010 NZD, long term issuer credit rating required.

Consultation paper on policy options for liquidity released 2 February - submissions sought by 15 March. Consultation paper on proposed capital ratios and related party exposures regulations released 5 February and submissions were sought by 12 March – with the intention of having regulations in place by September 2010.The Securities (Moratorium) Regulations 2009 prescribe additional disclosure for offer documents in moratorium proposals, imply terms into trust deeds and require additional reporting.

Insurance (Prudential Supervision) Bill

Introduced October 2009. Bill has been read a first time. Referred to Finance and Expenditure Committee. Submissions due 10 February 2010. Report due 8 June 2010.

Settlement Systems

Legislation passed.

A policy document (Designation and Oversight of Designated Settlement Systems (DSS1)) explaining the roles and policies of the Reserve Bank and the Securities Commission in relation to the designation and oversight of designated settlement systems has been released.

The application process, the application fee, and information that should be submitted with an application for designation are set out in the joint regulators' Application Guidelines for Designation under Part 5C of the Reserve Bank of New Zealand Act 1989 (DSS2).

These can be found on the Securities Commission website.

The Reserve Bank and the Securities Commission are now accepting applications from settlement systems seeking designation under Part 5C of the Reserve Bank of New Zealand Act 1989.

Trustee Supervision

The Securities Trustees and Statutory Supervisors Bill received its first reading on 23 March and submissions to the Commerce Committee closed on 6 May. The Commerce Committee is due to report back to Parliament on 24 September.

The Bill removes the automatic statutory approval for the existing 6 trustee companies and requires all debt trustees, statutory supervisors and unit trustees to be licensed by the Securities Commission. The Securities Commission will consider a number of factors in deciding whether to grant a license, including the experience, skills and qualifications and financial resources of the applicant together with the applicant's independence from issuers of securities covered by the licence and the applicant's governance structure. Licences will be tailored so that they fit the purpose and impose obligations that reflect the characteristics of the issuers being supervised. Ongoing monitoring will be the responsibility of the Securities Commission.

Simon Power has recently announced the intention to amend the Securities Act so as to provide that the manager of a retail KiwiSaver scheme is the 'issuer'. In this announcement the Minister has also confirmed trustees of retail KiwiSaver schemes will be subject to the Bill.

Trans-Tasman portability of retirement savings

The Taxation (Annual Rates, Trans-Tasman Savings Portability, KiwiSaver and Remedial Matters) Bill is expected to be passed and in force second half of 2010.

The changes in the Bill will give effect to the Trans-Tasman portability of retirement savings.

The Finance and Expenditure Committee reported back to the House on the Bill in May 2010, and recommends that the Bill is passed with amendments.

Regarding the Trans-Tasman portability of retirement savings, the Committee recommends:

Reallocation or transfer back to Australia of savings if membership is declined or invalid - amending the Bill to refer to the 'amount transferred' rather than 'net' amounts to be paid if an individual's superannuation membership is found to be invalid. The Committee also recommends amending the Bill to ensure that in situations where KiwiSaver account amounts must be transferred back to the original Australian complying scheme, because the KiwiSaver enrolment is deemed invalid, an individual could nominate another superannuation scheme in Australia if their original scheme would not accept a transfer, or the scheme no longer existed.

Fees first deducted from New Zealand-sourced savings - deleting the clause from the KiwiSaver scheme rules that requires fees to be first deducted from the net value of amounts not transferred from Australia.

Other matters - The Committee considered amending the Bill to take account of concerns about the transfer of superannuation funds that exceed Australia's contribution threshold. However, the Committee concluded that this issue is not of great concern at present because of the relatively small amounts in KiwiSaver accounts that may be transferred.

The Committee's full report is available at:


Managers to become issuers of KiwiSaver schemes

The Government has confirmed that amendments will be made to the Securities Act 1978 to make the manager of a KiwiSaver scheme the issuer, rather than the trustee. The trustees of the scheme are currently the issuer. This change places more responsibility and accountability on the manager. Amendments will also be made to ensure that trustees are responsible for supervising managers and making sure they comply with the trust deed and their other responsibilities.

Trustee licensing

As mentioned under 'Trustee Supervision' above, proposed changes to the Securities Act mean that the Securities Trustees and Statutory Supervisors Bill currently before Parliament will require retail KiwiSaver scheme trustees to be licensed. Trustees will be supervised by the Financial Markets Authority (FMA).

First home deposit withdrawal and first home deposit subsidy

The first home deposit withdrawal and first home deposit subsidy will be available from 1 July 2010 onwards, once members have belonged and contributed to KiwiSaver for three years.

The qualifying criteria are detailed on the Housing New Zealand website. The criteria will be reviewed annually from June 2010. Application process details will be available on the Housing New Zealand website before 1 July 2010. Processes and procedures need to be put in place.

The Taxation (Annual Rates, Trans-Tasman Savings Portability, KiwiSaver and Remedial Matters) Bill (Tax Bill) contains proposed amendments to the KiwiSaver scheme rules that will ensure that individuals with an interest or past interest in a leasehold estate, such as a residential tenancy, will not be excluded from the first home withdrawal.

KiwiSaver Act amendments

The Tax Bill will make a number of technical amendments to the KiwiSaver Act 2006. The most significant amendment clarifies the way in which persons under the age of 18 may enrol in a KiwiSaver scheme:

  • Children under 16 years old may only be enrolled by their legal guardians, and may not enrol themselves in KiwiSaver.
  • Children aged 16 to 17 must co-sign with their legal guardians in order to enrol in KiwiSaver. They will not be able to enrol themselves, and a legal guardian may not enrol a child aged 16 to 17 into KiwiSaver without the child's consent.

Annual Reports via hyperlink

The Tax Bill also contains proposed amendments to the KiwiSaver Act 2006 that will allow scheme providers to fulfil the requirement to provide an annual report by sending a hyperlink in an email which links to the annual report, if the member has agreed to this in writing.

New Zealand as a funds domicile

The Government has announced an initiative to look at the feasibility of establishing New Zealand as an Asia-Pacific funds domicile. A private sector group called the Fund Services Development Group has been formed and is currently looking at what steps are required to achieve this. Officials from the Department of the Prime Minister and Cabinet and MED are working with the group. The group will be submitting their report to the Minister by the end of May. The report is expected to touch on such things as regulatory requirements, tax and incentives. Oliver Wyman has been engaged as a consultant to assist the group.

Financial Markets Authority (new 'super regulator')

On 28 April 2010, the Government announced the implementation of an integrated single regulator. The 'super regulator' will be called the Financial Markets Authority (FMA) and is expected to be operating by early next year, and will incorporate a wide range of existing regulatory powers and functions including those of the Securities Commission and some currently performed by the Companies Office and its National Enforcement Unit.

The FMA will also have the following functions:

  • Will have sole responsibility for enforcing securities, financial reporting and company laws.
  • Will regulate and oversee trustees, auditors, directors of financial service providers and financial advisers.
  • Sharemarket operator NZX will retain the power to make and enforce its own market rules but they will need to be approved by the FMA which will also have powers to formulate rules.
  • The functions of NZX's NZ Markets Disciplinary Tribunal will be transferred to a new statutory rulings panel serviced by the FMA.
  • All of the functions of the Government Actuary, including KiwiSaver regulation, will be transferred to the FMA.

Capital Market Development Taskforce

The Taskforce report was issued in December. The report covers:

  • Better informing retails investors.
  • Improving the quality of investment products.
  • Improving commercialisation and start up funding.
  • Freeing up private markets and expanding public markets.
  • Co-ordinating capital market infrastructure.
  • Addressing tax biases.

Commerce Minister Simon Power released the Government's plan for responding to the Capital Market Development Taskforce report on 18 February 2010. Some of the recommendations the Government has said that it is committed to implementing are


  • Introducing plain English into investment statements and prospectuses, with warnings on risky or complex products.
  • A more co-ordinated approach to the Government's role in improving the financial literacy of New Zealanders.
  • Ensuring the duties of fund managers and supervisors are clear and enforced.
  • Considering consolidating parts of the Companies Office, Securities Commission, and the NZX Disciplinary Tribunal into a new market conduct regulator.
  • Making it easier and cheaper for companies to raise capital privately by clarifying and broadening the exemptions to the Securities Act and Takeovers Act.
  • Improving risk management in the economy by supporting the development of derivatives markets in commodities and energy.

As well as steps to improve capital markets, the Government has started work on a business case to develop the Taskforce recommendation of establishing an Asia-Pacific financial services hub.

Investment Savings and Insurance Association (ISI)

The Investment Savings and Insurance Association (ISI) represents many investment and life insurance companies in New Zealand. ISI is looking at addressing concerns by self-regulation rather than regulation. Recently new standards and guidelines that have been released by the ISI for its members include:

  • Proposed policy to phase-out commissions (April 2010) - the proposed policy will include the discontinuance of volume-based performance bonuses or commission and ongoing renewal commissions. The policy will not be retrospective and there will be a transition period for members to comply. The ISI hopes the policy will result in consumers negotiating a fee for the service they receive which will ensure the consumer is fully aware of the cost and how that advice will be paid for.
  • Code of Ethics and Conduct Standards (April 2010) - the Standards contain ethical standards (for example: "Members will conduct themselves with integrity and in a manner consistent with fostering and maintaining the good reputation of their industry and will refrain from any conduct that may bring discredit to their industry") and conduct standards (for example: "Members must at all times safeguard the interest of their customers provided that they do not conflict with the duties and loyalties owed to the community, as expressed by its laws."

These standards and guidelines are all available on the ISI's website at:

Auditor Oversight

On 28 April 2010 the Government announced that auditor oversight as it relates to issuer audits is to be the responsibility of the new FMA.

The reforms will only affect audits of issuers of securities, along with banks, insurance companies and other entities that take deposits or hold assets for broad groups of investors.

The auditor-related oversight functions are likely to come into force in mid-2012.

© DLA Phillips Fox

DLA Phillips Fox is one of the largest legal firms in Australasia and a member of DLA Piper Group, an alliance of independent legal practices. It is a separate and distinct legal entity. For more information visit

This publication is intended as a first point of reference and should not be relied on as a substitute for professional advice. Specialist legal advice should always be sought in relation to any particular circumstances.

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