Enforcement by the Financial Regulators – December 2015

Home Insights Enforcement by the Financial Regulators – December 2015

Contributed by:

Contributed by: Polly Pope, Tom Hunt, Emmeline Rushbrook and Will Irving

Published on:

Published on: December 02, 2015


Points of interest last month

Amendments to AML regime

A number of amendments were made to New Zealand’s anti-money laundering laws in Bills passed in the last month. 

The amendments include that:

  • The threshold for reporting suspicious transactions has been lowered. A reporting entity must file a suspicious transaction report where they have reasonable grounds to suspect that the transaction may be relevant to the investigation or prosecution of any offence, not merely serious offences.
  • The substantive offence of money laundering is now easier to establish. For instance, it applies to dealing with the proceeds of any offence, and no longer merely serious offences. Further, an “intention to conceal” is no longer required.
  • From July 2017, reporting entities will be required to report certain prescribed transactions to the Police’s Financial Intelligence Unit, in addition to suspicious transactions.

All reporting entities subject to AML laws will wish to familiarise themselves with the changes. If you would like to view a mark-up of the legislation showing the changes, please email us here for a copy.

FMA releases sales and advice report

The FMA has released its first monitoring report on practices in sales and advice within New Zealand’s financial services sector. The report covers the period 1 July 2014 to 30 June 2015. The report covers sales and advice practices, governance and culture, conflicted conduct, and investor decision-making within the main financial services providers, including the three types of professional advisers. 

The report identifies four key themes arising from the FMA’s supervision of the sector over the past year, specifically:

  • Putting customers’ interests first: many businesses were unable to demonstrate to the FMA how they explicitly balance conflicts of interest, or how they ensure customers can make informed decisions based on a product’s risk profile.
  • Governance and culture: while many businesses have good policies in place, these policies were not reflected in good processes – ie policies were not understood by staff and / or supervisors adopted a “set and forget” attitude.
  • Compliance: businesses lacked comprehensive compliance systems, including under-resourced compliance and risk teams and a lack of frontline staff oversight over decision-making. 
  • Supervision and reporting: recording of information and reporting for management was inconsistent. The FMA was concerned that few KiwiSaver providers collected useful data on sales, with reports to management mostly focussed only on volume.

The report is part of the FMA’s focus on improving sales and advice practices and monitoring KiwiSaver switching and retention tactics. In early 2016 the FMA intends to issue a series of guidance on conduct, governance, and disclosure of certain fees and returns for managed funds (including KiwiSaver), and also expects to review its October 2012 guidance on the sale and distribution of KiwiSaver.

A copy of the full report is available here.

FMA releases report on audit quality

The FMA has released its annual audit quality review for the year to 30 June 2015. From a sample of 38 complex and risky files the FMA concluded that 18 per cent were good (up from 5 per cent last year), 37 per cent required improvement and 45 per cent required significant improvement. The full report is available here.

Review of financial advisors legislation – Options Paper released

MBIE has released an Options Paper seeking feedback on potential options for changes to the financial adviser regulatory regime. The Options Paper forms part of MBIE’s review of the Financial Advisers Act 2008 and the Financial Service Providers (Registration and Dispute Resolution) Act 2008 (discussed in more detail in the March 2015 and June 2015 editions of this newsletter).

Feedback is sought in relation to three broad categories of options:

  • Options to improve the function of the existing regime including: removing the distinction between personalised advice and class advice; narrowing the number of complex services that only certain advisers can provide; requiring all advisers to disclose the same information; and greater consistency of dispute resolution scheme rules.
  • Three options for a new regime, ranging from minor to major proposed changes:
    • PACKAGE ONE (improved consumer focus through minor changes): retaining current boundaries about who can provide what type of advice; all advisers must comply with the same ethical obligation to put consumer’s interests first; all advisers must provide simple and common form of disclosure; licensed entities could provide “robo-advice” online.
    • PACKAGE TWO (all Package One improvements plus increased competency and ethical obligations for all advisers): removing distinction between class and personalised advice; all financial adviser businesses must be licensed (must ensure employees comply with competency and ethical obligations).
    • PACKAGE THREE (all Package One improvements, some Package Two improvements and further distinctions between sales and advice): “salespeople” not subject to obligation to put the consumer first but must notify consumers of this; and salespeople can only sell their own financial products.
  • Options to address misuse of the Financial Service Providers Register. Proposed changes include: stronger registration requirements (eg proof of licence in home jurisdictions); and converting the register into a non-public list.

A copy of the full Options Paper and submission template is available here. Submissions on Parts 1 and 2 of the Options Paper are due by Friday 26 February 2016, and submissions on Part 3 are due by Friday 29 January 2016. MBIE’s final report to the Minister, which will include its final recommendations for reform (incorporating the feedback it receives on the Options Paper), is expected in July 2016.

FMA releases consultation paper on annual declarations of compliance

The FMA released a proposal to add a new standard condition that will require all FMC Act market service licensees to declare, on an annual basis, their compliance with each condition of their licence. The FMA says that such a new condition will ensure that compliance is on the agenda of licensees' governing bodies each year. The proposal notes that a director who knowingly makes a false or misleading declaration will commit a criminal offence under the FMC Act and also that a market licensee providing an inaccurate declaration could contravene their licensee obligations in a material way. 

Submissions close on 21 December 2015 at 5pm. The proposal is available here.

NZX releases discussion documents on Participant Rules and governance reporting

NZX has released a discussion document as part of its review of the corporate governance reporting requirements within the NZX Main Board Listing Rules. NZX is also reviewing the NZX Participant Rules and has released a discussion document on the proposed changes. 

The two discussion documents can be viewed here.

Commerce Commission issues repossession guidelines

The Commerce Commission has released guidelines on the approach it intends to take to enforcing the repossession provisions in Part 3A of the CCCFA. 

A copy of the guidelines is available here.

No AML exemption for iPredict

Prediction website iPredict has announced it will close after the Associate Minister of Justice refused to grant it an exemption from the AML regime. More details are available here.

Sportzone Chapter 4 – waiting for the judgment begins

The Commerce Commission v Sportzone Motorcycles Ltd appeal in relation to the interpretation of the unreasonable fee provisions of the CCCFA was heard in the Supreme Court. The hearing was held on 10 and 11 November 2015 before Elias CJ and William Young, Glazebrook, Arnold and O’Regan JJ.

In oral argument, the Court focused chiefly on the factors relevant to an assessment of whether fees are unreasonable for the purposes of ss 41, 42 and 44 of the CCCFA. Contested readings of the legislative history, policy arguments and consequences of adopting varying standards were canvassed thoroughly by both counsel and the Court.

International developments and insights

Privilege in regulatory investigations

A recent English High Court judgment considering legal advice privilege in the context of regulatory investigations has been handed down. The judgment was issued in the course of the same proceeding, Property Alliance Group Ltd v Royal Bank of Scotland PLC, discussed in the September 2015 edition of this newsletter. The judgment confirms that communications between solicitors and their clients can attract privilege even when the content of a communication is not solely legal advice, for example, when a solicitor is assisting a client to manage its approach to regulatory investigations.

The Court held:

  • Even though the documents did not expressly refer to legal advice, they were privileged because:
    • they were part of the necessary exchange of information of which the object was the giving of legal advice as and when appropriate; and
    • did not contain extraneous material.
  • The Court recognised the public interest in allowing experienced lawyers to accurately advise their clients how to respond and co-operate with regulatory investigations. The Court said: “such lawyers must be able to give their client candid factual briefings as well as legal advice, secure in the knowledge that any such communications and any record of their discussions and the decisions taken will not subsequently be disclosed without the client’s consent”.

A copy of the judgment is available here.

UK FCA and PRA release report on failure of HBOS plc

In the UK, the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA) have released a report into the failure of HBOS plc (a large banking and insurance company) in 2008. HBOS was created in 2001 through the merger of the Halifax and the Bank of Scotland. The report says that the failure of HBOS can be attributed to a number of factors, including the Board’s failure to instil a culture within the firm that balanced risk and return appropriately, the Board’s lack of sufficient experience and knowledge of banking and a failure by control functions to challenge effectively executive management. The culture of HBOS and its resulting business strategy permitted the firm’s executive management to place inappropriate reliance on continuous growth without regard to the risks involved. While the report places ultimate responsibility for the failure on the Board, the report also criticises HBOS's then regulator, the Financial Services Authority, for flaws in its supervision of HBOS.

A copy of the report is available from the PRA here and the FCA here.

FCA Director of Enforcement and Market Oversight grapples with how to measure good culture

The FCA’s new Director of Enforcement and Market Oversight, Mark Steward, has given a speech focussing on governance and culture. Mr Steward expressed concern that “culture” is in danger of becoming a “buzz term” and “merely regulatory”. After recognising that a key challenge in making culture a pragmatic reality is the difficulty in knowing whether the culture that exists is good or even working, he suggested some ways of potentially measuring whether the right culture exists. These measures include asking how long it takes for problems to escalate to the right person or group of persons for effective decision making or action, how many problems linger in the inbox before their easily fixable date, and how difficult it is to fix things once they are detected? 

A full copy of the speech is available here

Mark Steward's comments on measuring culture align with recent speeches given by Greg Medcraft, Chairman of ASIC. Medcraft has said that the “culture indicators” ASIC will be looking for include “policies not lining up with what people say and do, or a lack of action when things go wrong.” See, for example, a speech Medcraft gave on 20 November 2015 available here.


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