Reviewed by Rebeca Sellers
It is a widely held opinion that deep and strong capital markets would bring significant benefits to New Zealand’s economy and people. Business would have access to capital to fund growth, creating jobs and paying taxes; New Zealanders would have savings to fund their retirement. Industry and government have invested significant thought on how to facilitate capital raising, while promoting investor confidence. The process started by the Review of Financial Products and Providers and Capital Market Development Taskforce has resulted in a comprehensive rewrite of New Zealand’s securities law – the Financial Markets Conduct Act 2013 (FMC Act). Some of the changes reflect international best practice, such as the look and feel of disclosure documents. However in some areas New Zealand leads the way – licensing innovative ways for companies to raise capital.
Victoria Stace and her fellow authors have produced an admirable book, both in terms of its scope and timing. At its most basic, it will become an invaluable road map to the 479 pages of the FMC Act and nearly 700 pages of regulations. Yet the book goes beyond a simple review: the authors add depth and value in their analysis of the FMA’s expectations, case law and relevant Australian comparisons. The book was being proofread as the final form of regulations was released. The authors deserve commendation for providing the profession with a text that incorporates those regulations in their final form.
The authors’ voices in this text are very distinct. It is unusual for a text book to contain such different voices. However, readers may welcome the variety of viewpoints that replaces the usual approach of an academic tone. Some may consider securities law dry: but the authors deal to this barrier in an engaging manner:
“The (FMC Act) does not come into effect in one broad brush stroke; it is more of a staggered work, with pencil marks followed by inks and then colours. There is significant complexity to the transitional arrangements, and this chapter itself provides only a sketch of them…”
Why do governments the world over seek to protect people who buy financial products? We do not prevent people from buying junk food or clothes that do not suit them – what is so special about financial products and services? Thomas Gibbon’s opening chapter explains why securities law is different and provides rich context for the detail that follows.
All practitioners will appreciate the significant work that has gone into condensing, ordering and explaining the FMC Act and regulations. The structure, presentation and approach of the book mean that it is a good place for non-specialists to look for guidance.
A cornerstone of the new regime is the licensing of key market participants. The details of how to obtain and maintain a licence are set out in Chapter 17: Licensing and Other Regulation of Market Services. The analysis and comparison between the new and old regimes will be particularly valuable to practitioners familiar with the regime of the Securities Act 1978. Chris Holland outlines the difference in approach between the two regimes (Chapter 3: Types of Financial Product). This book will guide those practitioners familiar with the old regime in becoming confident with the new.
Effective disclosure is another cornerstone of the regime. Victoria Stace gives substantial and valuable guidance on how to comply with the new disclosure requirements for a regulated offer. She adds depth by reference to the industry consultation process which formulated the FMC Act regime (Chapter 5: Disclosure). Disclosure is not required to investors who are considered to be capable of accessing the information they need, for small offers of debt and equity or under employee share purchase schemes. Exclusions also apply where FMC Act governance requirements are unnecessary for specific offerors such as the Crown. These bright line exclusions and safe harbours are given special treatment in their own chapter (Chapter 6: Offers of Financial Products that do not Require Part 3 Disclosure). When Part 3 disclosure is required for debt securities or managed investment products, there are associated governance requirements which are examined in Chapter 7: Governance. As well as reviewing what is necessary to comply with the governance requirements, the chapter provides context, raising questions and drawing in strands from economics and other research.
Chris Holland analyses the common set of regulatory requirements for investment vehicles that pool investors’ savings. As well as examining the general requirements that apply to all managed investment schemes, he teases out the particular requirements for KiwiSaver, superannuation, workplace and restricted schemes (Chapter 8: Particular Issues Relating to Retirement). Together with Chapter 21: Transitional Provisions, this guidance will be invaluable as continuous issuers transition to the new regime by 30 November 2016.
The ultimate success of the new regime will depend on the enforcement and penalty regime and the FMA’s new powers to require fair dealing in relation to financial products and services. The old enforcement regime has been turned upside down. The FMA has a wealth of regulatory tools that can be used to intervene with market participants at the proverbial ‘top of the cliff’, before resorting to civil or criminal prosecutions. Under the FMC Act criminal liability generally requires a ‘guilty mind’ and criminal sanctions are reserved for the most egregious violations of the law. As well as examining these offences, Chapter 18: Enforcement and Liability contains a review of the finance company cases which is useful both in terms of its analysis of defective disclosure and the insight it provides on the courts’ view of the role of directors.
Chapter 19: Fair Dealing explains the scope and significance of the FMA’s new powers and highlights judicial guidance on the equivalent Fair Trading Act and Australian requirements. The exercise of these fair dealing provisions will shape and create well-functioning markets.
Issuers are ‘reporting entities’ under the Anti-Money Laundering and Countering Financing of Terrorism Act 2009. Once issued, financial products are distributed through financial advisers. Accordingly, the book extends its scope beyond the new FMC Act regime to examine how financial service providers can comply with their other obligations. The financial reporting requirements for FMC entities are dealt with in some detail – setting out the scope, practical application and transition to the new regime (Chapter 20: Keeping Accounts, Financial Reporting and Audit). This holistic approach to the business of an issuer will be particularly valued by the in-house counsel of banks, insurance companies and other market participants.
The FMC Act also regulates secondary markets such as the markets the NZX operates as a licensed market operator. Trish Keeper takes the lead in explaining the regulation of the secondary market. Her work has both academic depth and practical application. She explains the concepts on which the regulation relies, such as ‘material information’ and ‘generally available to the market’ before examining the continuous and other disclosure requirements, insider trading and market manipulation in more detail and giving practical guidance on how to comply. Nathanael Starrenburg provides detailed practical advice on takeovers and the licensing of financial products markets (Chapters 15 and 16) which will be useful to those advising code companies as well as academics. This section benefits from the inclusion of determinations and guidance of the Takeover Panel which goes back to the introduction of the Takeover Code in 2001.
The strength of this book is that it reaches beyond being a summary of rules, to examine the context, application and purpose of the regulation. The text is rich with examples from tribunals and courts in New Zealand and Australia – no easy task when seeking to provide context to new legislation. This book affords a view of emerging coherence, a hopeful sign for our financial markets.
The authors’ work will enable legal professionals and market participants to gain a mature and well informed perspective of the requirements of the new regime, its application and challenges. The authors should be commended for their part in developing the financial markets that New Zealand needs.
Financial Markets Conduct Regulation: A Practitioner’s Guide, LexisNexis NZ Ltd, December 2014, 978-1-927248-00-3, 644 pages, paperback and e-book, $184 (GST included, p&h excluded).
Rebecca Sellers is Special Counsel at EY Law and a member of the New Zealand Law Society’s Commercial and Business Law Committee.