FMA’s areas of future focus
The Financial Markets Authority (FMA) has released its Annual Report for the year ended 30 June 2016. The report covers the FMA’s work over the last year. It also identifies areas of focus for the coming year in which the FMA will have its full remit upon it under the Financial Markets Conduct Act 2013 (FMCA). Points of interest include:
- The FMA will be stepping up engagement within the sales and advice sector (including advisors who work for large organisations such as banks and fund managers, and other advisors who are either authorised or registered by the FMA).
- Not all licensed market participants, at the time they applied for licences, met the measures for:
- their boards receiving information on customer outcomes;
- having risk and compliance frameworks in place that are relevant to their business activities; and/or
- having conflict management procedures to address conflicts relevant to their business.
- To the extent that the FMA then granted licenses with specific conditions relating to those
measures, the FMA will be reviewing those licence conditions through future monitoring. The report sets out an explanation of what the FMA will be looking for in this regard.
- During the 2015-16 year, the FMA completed a new Enforcement Governance Framework. The FMA intends to publish that framework to give greater transparency of how and when it chooses to take enforcement action.
The monitoring of specific licence conditions described above will sit alongside the FMA’s general monitoring and supervision of licensed market participants. As to which, the FMA’s press release of 1 December flagged again the intended evaluation of licensed market participants against good conduct indicators. Meanwhile, an FMA Update released this week announced that the FMA’s final Conduct Guide will be released early in the New Year.
Feltex decision comments on disclosure obligations
The Court of Appeal has upheld the High Court’s decision clearing the former directors of Feltex Carpets Limited (Feltex), two Credit Suisse entities, and two joint lead managers (JLMs), of any liability for alleged disclosure failings in the prospectus for Feltex’s 2004 initial public offering. The background to the case is discussed in further detail in our September 2014 Corporate Advisory Legal Update.
While the case focused on the (now repealed) Securities Act 1978, a number of the points arising out of the Court of Appeal’s decision could have ongoing relevance to the way that disclosure documents are prepared, and liability is assessed, now that the transitional period under the FMCA has come to an end.
- Focus on disclosure: The purpose of the Securities Act is not to limit the extent of risk to which investors are exposed, but to ensure that investors receive adequate and accurate information so that they are able fully to understand and evaluate that risk for themselves. The FMCA also names as one of its specific purposes the provision of timely, accurate and understandable information to assist decision-making in relation to financial products and services.
- How disclosure will be assessed: The Securities Act creates a comprehensive regime for disclosure, and there is no support for the proposition that “full” disclosure above and beyond that which is required by the Securities Act is required. Further, the content of a prospectus must be assessed with reference to specific statements – there is no liability if a disclosure document simply portrays a falsely upbeat tone in a general sense. The language of the FMCA also focuses on statements.
- Due diligence: A due diligence or other verification process should not be viewed as a simple “box-ticking” exercise. It must be rigorously applied to the content of the prospectus, with a proper understanding and focus upon the purpose of the process. The Court observed that the Feltex due diligence process appeared to be thorough in both conception and execution. The Court also held that under the Securities Act, a defendant cannot escape liability if he or she knows a statement to be untrue, even if they reasonably believed the matter to be immaterial. If that remains the legal position, a defendant under the FMCA might avoid liability if he or she believes there are no false or misleading statements in the requisite disclosure documents, but is unlikely to be able to do so if he or she is aware of such a matter and (erroneously) makes the call that the matter is not material. That said, immateriality will still be relevant to assessments of whether the matter is reasonably capable of misleading an investor or of causing loss.
Phase 2 AML/CFT Reforms
The Government is progressing the implementation of Phase 2 of the Anti-Money Laundering and Countering Financing of Terrorism (AML/CFT) regime with the release of an exposure draft of the Anti-Money Laundering and Countering Financing of Terrorism Amendment Bill (Exposure Draft). Public consultation on the Exposure Draft will run until 27 January 2017, with a final version of the amendment Bill then expected to be introduced to Parliament in early 2017.
In addition to extending AML/CFT laws to cover new industries, existing reporting entities will welcome proposed changes in the Exposure Draft aimed at reducing compliance costs, such as by simplifying certain customer due diligence requirements. It is also proposed that the process for obtaining a Ministerial exemption will be streamlined by delegating the decision-making power to the Secretary of Justice and placing a greater emphasis on the actual risk that a business poses of money laundering and terrorist financing.
The Exposure Draft also contains the following proposals:
- A staggered roll out across the new industries, including lawyers (six months after the amendment Act is passed), accountants (12 months), real estate agents and the New Zealand Racing Board (18 months), and businesses that trade in high-value goods (24 months).
- The retention of the current multi-supervisor model comprised of the Department of Internal Affairs (DIA), the Reserve Bank of New Zealand and the FMA with DIA nominated as the supervisor for Phase 2 entities.
- Revising the definition of ‘privileged communication’ so that it more closely follows the privilege concepts in the Evidence Act 2006 and carves out communications made or brought into existence for a dishonest purpose or to enable or aid the commission of an offence.
FMA AML monitoring report released
The FMA has released a report summarising its monitoring activity over the past year pursuant to the AML/CFT regime. The report notes that, as legal obligations under the AML/CFT Act have now been in place for three years, the FMA will be adopting a stronger position where it sees failures by reporting entities. The report identifies that future monitoring will focus on (i) the programme of work to update and maintain AML/CFT documentation, and (ii) management and board oversight. Other areas highlighted by the FMA in the report include:
- concern around the continued low level of filing of suspicious transaction reports by reporting entities;
- lack of staff training by some reporting entities, including a failure to train staff on a continuing basis and/or to train new staff;
- the need for senior management and boards to have oversight of AML/CFT matters, which will require documented processes for escalating material matters to senior management or governance committees; and
- varying levels of compliance in respect of due diligence on high-risk customers.
FMA Audit Quality monitoring report released
The FMA has also released an annual report on the reviews it has undertaken under the Auditor Regulation Act 2011. The report includes content concerning (i) the FMA’s expectations of directors and auditors of financial statements; and (ii) the FMA's key future focus areas. Notably, at page 5 there is a chart that sets out “key takeaways” for directors concerning the instruction of and working with auditors.
Commerce Commission CCCFA clamp down continues
The Commission’s campaign against mobile traders continues, with Bestdeals 4 You Limited (Bestdeals) pleading guilty to charges relating to breaches of the Fair Trading Act 1986 (FTA) and the Credit Contracts and Consumer Finance Act 2003 (CCCFA). Bestdeals is the ninth mobile trader to be prosecuted by the Commission for breaches of consumer credit laws.
In addition, the Commission has secured the highest penalties yet against mobile traders Ace Marketing Limited and Smart Shop Limited (trading as SmartStore). The sentencing judges in both cases recognised the recent increases in the penalties available under the FTA and the need to give effect to the protective and deterrent effects of the CCCFA and FTA. The Commission's media release is here.
Further, Adelphi Finance Ltd and Shaw Personal Finance Ltd have refunded customers or reduced customer account balances following warnings from the Commission that they were likely to have breached information disclosure requirements. The Commission reported that both lenders promptly voluntarily refunded interest and credit fees to customers and ceased pursuing fees not yet paid to them. To date, Adelphi Finance has refunded customers over $1.4 million in fees, while Shaw Personal Finance has refunded or credited over $100,000.
The Commission also reports that payday lender Twenty Fifty Club Limited and its sole director Gavin Marsich have been fined a total of $76,000 after being found guilty of breaches of the CCCFA, FTA and Commerce Act 1986. Mr Marsich was banned indefinitely from carrying out any further consumer lending.
Fine for misleading pre-approval letters
Peer-to-peer lender Harmoney has been fined $292,500 for breaches of the Fair Trading Act 1986. The Commerce Commission reports that letters sent to consumers were misleading because they gave the impression the consumer had been pre-approved for a loan, when in reality they still had to go through the normal application and approval process.
This publication is intended only to provide a summary of the subject covered. It does not purport to be comprehensive or to provide legal advice. No person should act in reliance on any statement contained in this publication without first obtaining specific professional advice.