A practical approach to supervision under the Financial Markets Conduct Act 2013

Introduction

The introduction of the Financial Markets Conduct Act 2013 (FMCA) was hailed as a ‘once in a generation rewrite’ with the aim of restoring confidence in New Zealand’s financial markets.  Phase 1 of the FMCA came into effect on 1 April 2014.  This was later followed by the introduction of Phase 2 on 1 December 2014. 

We are currently in the ‘transition’ period between the full implementation of the FMCA (and associated legislation) and the full repeal of the Securities Act 1978 (and associated legislation) on 1 December 2016.

A key aspect of the FMCA was to consolidate and clarify the law relating to the governance of offers of securities under the Securities Act 1978 and its associated legislation, which tended to be a ‘mish-mash’ of governance rules that were scattered amongst several pieces of legislation.

Governance in general

Part 4 of the FMCA introduced stringent new governance requirements for regulated offers of financial products.  In general, these requirements impose overarching duties on issuers to maintain electronic registers and keep copies of documents for all such regulated offers, be they debt securities or managed investment products (MIP) under a managed investment scheme (MIS). 

Specific requirements imposed on issuers of regulated financial products include:

• A trust deed and supervisor for regulated offers of debt securities, in addition to general issuer and supervisor obligations.
• A governing document, manager and supervisor for regulated offers of MIP under a registered MIS, in addition to general issuer, manager and supervisor obligations.

These requirements ensure a better understanding on the part of issuers, managers and supervisors with regard to the management of their accountability and responsibility to both investors and the Financial Markets Authority (FMA) by ensuring that compliance with the FMCA is achieved and the requisite information is provided to the FMA. 

By giving supervisors less ability and opportunity to protect themselves from liability, the FMCA has promoted greater involvement on the part of supervisors in ensuring investor protection.

The role of the supervisor

The FMA regards the role of the manager of an MIS in a similar light to that of supervisors, namely being to ensure governing documents and governance arrangements are fit for purpose in placing investors’ interests above all else.

The FMA’s expectation is that those persons in a supervisory role must be able to demonstrate that they are empowered to carry out that role by:

• Working with the manager/issuer in the development of appropriate governing documents.
• Ensuring the governing documents allow them to act in the best interests of investors.
• Ensuring that there are a range of tools available for use where the interests of investors are not met.

In addition, supervisors will generally be responsible for ensuring that managers of an MIS are adequately discharging their duties.

A practical approach

In a recent speech, the FMA’s Director of Compliance, Elaine Campbell, has recommended a practical approach be taken to the supervision responsibilities under the FMCA.  Supervisors occupy a key role under the FMCA and Campbell indicated the FMA would begin to place increasing emphasis on supervision responsibilities.  The FMA has advised issuers to start their planning from the top in the anticipation that boards and senior management will best understand the processes their firms are running. 

The FMA’s focus is that an approach of preventative regulation will be most effective in identifying and anticipating potential causes of harm to market integrity and the interests of investors.  In a Media Release dated 9 March 2015 the FMA identified seven practices to overcome potential harm which are:

“ensuring quality sales and advice practices, addressing conflicted conduct in financial services, ensuring high standards of governance and culture among firms, ensuring integrity and growth in capital markets, ensuring effective frontline regulators, and improving information and resources for investors making decisions about products”.

The FMA has also intimated an approach that thinks beyond compliance.  It has advised that the effectiveness of the FMCA hinges on issuers going above and beyond the mere basic requirements prescribed by the FMCA, and it has indicated that it expects issuers to do just this.  The FMA anticipates that businesses will run systems to ensure that the highest standard of conduct is maintained.

The FMA has set out that supervisors will need to ensure they are sufficiently empowered to discharge their duties under Part 4 of the FMCA.  Supervisors must be assured of this before accepting any supervisory appointment.

Prior to accepting an appointment, supervisors should also review the relevant governing documents to ensure the minimum standards under the FMCA are met.  The FMA has emphasised the importance of ensuring that governing documents are well-structured from the outset in order to better allow supervisors to perform their obligations.

When to transition

The key decision for many businesses will be deciding when to adopt the new governance rules (and commit to FMCA compliance).

The expectation of the FMA is for supervisors to not take a ‘silent’ role but rather actively engage themselves with their subjects.  This includes consultation on the transition process from the Securities Act 1978 to the FMCA.

While some issuers may have already transitioned to the FMCA regime, others may be waiting for further clarification.  The decision on when to transition will ultimately depend on the individual circumstances with each situation being unique.  However, what the FMA has made clear is its willingness to act as a facilitator in encouraging and assisting businesses and other professionals in achieving compliance with the FMCA.  This facilitative approach indicates the FMA’s desire to ensure problems are identified and rectified and assist in a smooth transition for affected parties from the Securities Act 1978 to the FMCA. 

The new framework encourages supervisors to take a more central and active approach to their role.  Issuers and supervisors should therefore be more accommodating and open with one another in regard to information and what each party needs from the other.

If you would like further information please contact Laura Monahan on 07 958 7479.