New Zealand Law Society - Growing market confidence through competent market service providers

Growing market confidence through competent market service providers

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2014 marks the start of a new era for New Zealand’s financial markets – an ambitious and exciting period of change for market participants and investors. This is the second article in a series by the Financial Markets Authority (FMA) outlining the key changes, the impact they will have on the future of our financial markets, and the role lawyers can play in helping achieve that change. In this article we discuss the importance of competent market services providers and how we will support this through licensing and supervision.

Importance of competent market service providers

Investors rely on market participants to act with integrity in their dealings with them. This integrity is crucial to building customer trust and confidence, promoting the long-term success of participants and growing New Zealand’s capital base.

Market participants are continually developing their business models and strategies to increase profitability and control costs. And as markets change, we encourage innovation in both product development and distribution. Faced with this evolving landscape, retail investors can struggle to identify whether providers of market services have the right skill level, competency and capability to provide the financial services they offer.

If market participants do not meet minimum standards, this can lead to investors avoiding a particular class of product or service due to a high rate of poor customer experiences, failures or breaches. It can also lead to other adverse impacts on investors. It is vital for business and investor confidence that we have an effective and pragmatic licensing and supervision regime.

What’s changing?

The Financial Markets Conduct Act 2013 introduces licensing for six different types of financial services. From 1 April, the FMA will take on the role of licensing the following service providers:

  • managers of non-restricted and registered managed investment schemes;
  • derivatives issuers;
  • providers of discretionary investment management services (DIMS);
  • independent trustees of restricted schemes;
  • peer-to-peer lending; and
  • crowd-funding.

The licensing and supervision of these new types of participants brings New Zealand into line with other jurisdictions.

The introduction of peer-to-peer lending and crowd-funding platforms is an exciting change that will provide businesses with dynamic new means for raising funds. Issuers or borrowers using these platforms benefit from reduced disclosure obligations, but appropriate investor protection is maintained by obligations on the platform provider. These models have not been viable under the Securities Act 1978.

Another key change related to the Financial Advisers Act 2008 is new obligations on custodians to safeguard the money and property of investors in DIMS and managed investment schemes.

The changes to licensing criteria and obligations for existing participants affect Authorised Financial Advisors (AFAs) who currently provide DIMS services and custodians who look after assets of the AFA’s customers. In addition, securities trustees and statutory supervisors (now “supervisors”) will have broader responsibilities.

Setting standards and ongoing supervision

The FMA is proposing that providers will need to meet minimum standards in some or all of these key areas:

Fit and Proper – covers tests of integrity, trustworthiness, character and reputation;

Capability – addresses the skill and experience of directors, senior team and staff;

Operational Infrastructure – covers the functioning of the business, including systems and controls, client services and business operations;

Financial Resources – covers the requirement to have adequate financial resources to effectively perform the market service being provided;

Governance – covers the governance and compliance culture of the service; and

Licence Conditions – standard, and in some instances, specific conditions will apply.

For all of the new license types, the applicant must meet the minimum standards at the time of licensing and on an ongoing basis. Having consulted on these proposals last year, the FMA will shortly be publishing the application guides for each license type that will include the final minimum standards. All applications will be completed and submitted online.

Helping your clients get ready

Market participants need to start thinking about the new requirements and whether they will need to be licenced, and for what services, how they might need to address new disclosure rules or new governance requirements, and crucially, by when.

Keep an eye on the FMA website for more details or sign up to the FMA’s engagement site to receive regular updates.

Key dates for market service providers

February 2014 – FMA to report back on Consultation Feedback on proposed minimum standards for new license types.

March 2014 – FMA to publish application guides (these will include the final minimum standards) for new license types.

1 April 2014 – Applications can be made for new licenses, Phase 1 of Act comes into effect.

1 December 2014 – Conduct and license obligations apply, Phase 2 of Act comes into effect.

For more details about the timeline for change go to

Liam Mason is head of legal at the Financial Markets Authority.
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