ISSN 1174-4758
ISSN 1177-7184 (online)
The Quarterly Newsletter of the New Zealand Securities Commission
No.45 October 2008
This issue
Financial advisers will be supervised by the Securities Commission under new law passed on 27 September.
"The new rules will make financial advisers more accountable and boost investor confidence in the professionalism and integrity of financial advisers," Commission chairman Jane Diplock says. "It is an important piece of legislation and will significantly increase the Commission's role."
The new law will require financial advisers to meet standards for competence, professional conduct, and disclosure and make them accountable for the quality of advice they give to clients.
It addresses a significant shortcoming identified in New Zealand's regulatory framework by the IMF in its 2003 Financial Sector Assessment Programme. The regime introduced by the Financial Advisers Act meets international standards for the regulation of financial intermediaries while distinguishing between higher and lower risk activities and avoiding unnecessary compliance costs.
The Financial Advisers Act complements the Financial Service Providers (Registration and Dispute Resolution) Act, which will require financial services providers (including advisers) to register and join an approved dispute resolution scheme.
The law regulates individuals who are financial advisers and some businesses that employ financial advisers.
The main terms used to determine the scope of the Act are financial adviser, financial adviser service, and financial product.
A financial adviser is any individual who, in the course of business, provides a financial adviser service.
This covers:
A person gives financial advice if that person makes a recommendation or gives an opinion or guidance in relation to acquiring or disposing of (or not acquiring or disposing of) a financial product.
An investment transaction is the receipt, handling, payment, or investment of money or property by one person on behalf of another in relation to acquiring or disposing of a financial product.
A financial planning service is a service that analyses an individual's current financial situation, identifies their financial goals, and develops financial options for realising those goals.
The requirements of the law for advisers will depend on the nature of the service provided, and the relevant financial products.
The Act divides financial products into two categories:
In general, advisers who give advice or undertake investment transactions on category 1 products such as securities, and all people who provide financial planning services, will need to be authorised by the Securities Commission.
Individuals who give advice or undertake transactions on category 2 products will need to be registered and belong to a dispute resolution scheme, but will not need to be authorised.
Some financial advisers will not have to register or become authorised in order to provide certain types of financial adviser services. This will be the case for financial advisers who are employees or agents of financial institutions that have been granted Qualifying Financial Entity (QFE) status by the Commission.
An entity can be given QFE status if the Commission is satisfied that it has the capacity to take responsibility for compliance of its employees and agents with their financial adviser obligations. An employee or agent of a QFE can give financial advice and carry out investment transactions for category 2 products, and (for employees only) for category 1 products of which the QFE is the issuer.
The Financial Advisers Act sets out a number of exceptions to the general rules for coverage. These include:
The Act introduces certain statutory obligations on all financial advisers, namely:
For authorised financial advisers these duties will be supplemented by obligations under a code of conduct, and there is a statutory duty to comply with that code. Authorised advisers and QFEs will also be subject to terms and conditions attached to their authorisation.
Authorised advisers will also be under a duty not to recommend illegal investments, or to accept money for illegal investments. Client money received by authorised advisers will need to be held in a trust account.
Individuals who want to provide financial planning services, or give advice on securities and other category 1 products, will need to be authorised by the Securities Commission. In order to obtain authorisation, a person must satisfy the Commission that they:
Authorisation can be granted for any class or classes of services and products, and can be granted subject to terms and conditions. The Commission will be able to suspend or revoke authorisations if an adviser fails to comply with his or her obligations as an authorised adviser.
A Commissioner for Financial Advisers is to be appointed as an additional Member of the Securities Commission. This Commissioner has particular responsibilities under the Financial Advisers Act:
The Code of Professional Conduct, developed by the Code Committee in consultation with industry bodies and participants, will apply to all authorised financial advisers. It must be approved by both the Commissioner for Financial Advisers and the Minister of Commerce before it comes into force, and must set minimum standards for:
The Securities Commission will be responsible for enforcement of the law and for this purpose can give directions to any financial adviser or QFE to require them to take steps to comply with their obligations, the Code, or terms and conditions of authorisation. The Commission can set a time limit for the adviser to remedy any breach and can require the adviser or QFE to report back to it on implementation of the direction.
Criminal offences are set out in the legislation for breaches of most statutory duties, with fines up to $100,000 able to be imposed. The Commission can use its investigative powers under the Securities Act for the purposes of the Financial Advisers Act and can share information with other regulators and the Police.
The Act will be brought into force by Order in Council.
Implementation is already underway, involving industry players, officials, and the Commission. More information on progress with the various tasks needed to implement the legislation will be posted on our website and in future editions of The Bulletin.
The Reserve Bank of New Zealand Amendment Act 2008, passed by the Parliament in early September made the Reserve Bank the prudential regulator of non-bank deposit takers.
Deposit takers (including finance companies) will continue to be subject to the trust deed, prospectus and investment statement requirements of the Securities Act. Under this new regulatory arrangement, the Reserve Bank, trustees and the Commission will each have responsibilities relating to deposit takers.
The Commission will continue to be responsible for formulating, administering and enforcing deposit takers' disclosure requirements and authorising some trustees who will in turn continue to be the supervisors of deposit takers.
The Reserve Bank will be able to require information from trustees of deposit takers, to develop and enforce minimum prudential and governance requirements and to administer credit rating requirements.
The Reserve Bank will be working to develop and introduce new regulations for the industry over the next two years. These regulations will introduce consistent standards for key risk areas such as financial strength (capital), access to cash (liquidity) and lending to associated parties. It is expected that these new rules will be introduced in 2010. The Commission will be developing disclosure rules to complement these new requirements.
The first round of compensation of approximately $17.3 million has now been paid to 30 counterparties from the settlement received from the Tranz Rail case. These are investment firms or individuals who bought shares from the defendants and suffered a loss.
All counterparties had to sign a declaration that the compensated amount was not going to benefit the defendants. This followed directions from the Court to the Commission to pay the counterparties and the Commission the legal costs that it has incurred.
The next step includes the distribution of approximately $10 million to Tranz Rail shareholders as at 8 February 2002. Computershare, the share registry acting for Tranz Rail, has identified some 3100 qualifying shareholders.
They are acting on instructions from the Commission and will be contacting shareholders for confirmation. This process is likely to take another two to three months.
We have seen unprecedented turmoil across the global financial markets over recent weeks. While the immediate bail outs and stability issues may be a primary concern of prudential regulators, the lessons regarding market conduct will be sought from securities regulators.
The world will look to the development of appropriate standards to ward off such a turbulent period happening again. Such standards are to be found within the framework of securities markets regulation at the international level which is the remit of IOSCO. IOSCO's Task Force on the sub-prime crisis published its initial report in May this year and following that has been further prioritizing work in areas of immediate concern to address the global financial turmoil.
Volatility of futures markets - A taskforce on commodities markets, comprising regulators from both developed and emerging market economies is examining whether supervisory approaches are keeping pace with market developments and whether regulators are cooperating sufficiently to deal with the increasing globalization of markets.
Emerging markets - A new taskforce will assess the implications of the crisis for emerging markets, with a particular focus on structured financial products. The initial priority is to assess the impact of the market turmoil on members' markets and their regulatory responses.
Short selling - In light of the ongoing credit crisis, the members of the IOSCO Technical Committee have taken steps, during recent weeks, to address concerns regarding short sales in their markets. Their efforts have focused particularly on the securities of financial institutions whose health may have an impact on financial stability. Technical Committee members, representing major developed securities markets around the world, have coordinated with each other regarding their actions and monitoring market reactions.
Credit rating agencies - IOSCO is also urging greater international co-ordination in the oversight of credit rating agencies (CRAs). The Technical Committee is working towards improving international monitoring of credit rating agencies and helping address issues that have contributed to failures in the structured finance product markets. It is developing ways for national regulators to coordinate their monitoring of CRAs in line with IOSCO's revised Code of Conduct Fundamentals for CRAs. The Code focuses on transparency and disclosure of the methods used by agencies, conflicts of interest, use of information, performance and duties to issuers and the public.
Standards for hedge funds - The Technical Committee also issued proposed regulatory standards for funds of hedge funds for comment by 5 January 2009. These aim at addressing regulatory issues of investor protection in light of the increased involvement of retail investors in hedge funds through funds of hedge funds.
Report on credit risk transfer - The Joint Forum comprising IOSCO, the Basel Committee on Banking Supervision and the International Association of Insurance Supervisors, has released a report on credit risk transfer. Focusing on two financial instruments that have been used widely to transfer credit risk - collateralized debt obligations referencing asset backed securities (ABS CDOs) and collateralized loan obligations (CLOs) - the report contributes to the understanding of the causes of the credit market turmoil. The Joint Forum will survey significant market participants in 2009 to assess the extent to which they have followed on the report's recommendations.
Further details can be found at
www.iosco.org.
Chairman and Members have on 12 occasions, this year, in New Zealand and abroad addressed various audiences about securities regulation, corporate governance and the effects of the US subprime crisis in New Zealand and around the world.
These speeches are available from the Commission's website www.seccom.govt.nz.
Some of the more recent speeches include:
The Securities Commission has played a significant role in recent charges being laid against directors of two failed finance companies. New, more serious Securities Act charges were laid against Bridgecorp executive directors Rodney Petricevic and Robert Roest early in September. The charges were laid by the Companies Office at the request of the Commission, following further investigations into statements in the prospectus.
The prosecutions relate to claims in Bridgecorp's prospectus that it had never missed an interest or principal payment. The charges allege that the company missed many payments from February 2007 until it was placed in receivership in July 2007, but continued to claim to the contrary in its prospectus. Those claims are also the subject of other Securities Act charges laid in June this year relating to the allotment of securities.
The Commission assisted the Companies Office in gathering evidence for criminal charges laid earlier this month against the directors of National Finance 2000 Limited, Trevor Ludlow, Anthony Banbrook and Carol Braithwaite.
They are charged under the Financial Reporting Act for failure to disclose material transactions between National Finance and related parties. The directors are further charged under the Securities Act for falsely stating that they had made proper and adequate provisioning for bad debts and that loans were secured by general security agreements.
The Securities Act charges carry maximum penalty of five years imprisonment or fines of up to $300,000. Under the Financial Reporting Act the directors are liable to a fine not exceeding $100,000.
Trevor Ludlow faces additional charges under the Financial Reporting Act for making false or misleading statements in relation to bad debt provisioning, related party lending and general security agreements. For these additional charges he is liable for a penalty up to five years imprisonment or a fine not exceeding $200,000.
The Commission is looking at all finance companies that have run into difficulties, including those in moratorium. Chairman Jane Diplock says, "We have been extremely energetic in pursuing those who appear to have breached the law in relation to these companies and has cooperated with other regulators in an unprecedented way. The Commission is determined to ensure that those whose actions have led to investor losses and to the ensuing loss of confidence in the market are brought to account."
Where companies had registered a prospectus or distributed advertisements after October 2006 the Commission has power also apply to the court for pecuniary penalty orders and in some circumstances orders to compensate investors. The Commission and the Companies Office can also prosecute alleged breaches of the Securities Act.
The Commission has granted exemptions to facilitate disclosure by issuers about the New Zealand deposit guarantee scheme. These exemptions came into force on 20 October 2008. "These exemptions encourage simple and consistent disclosure so that investors can easily see which institutions are included in the scheme," Commission General Counsel Liam Mason says.
"They require statements about the Crown guarantee under the scheme to be in a standard form. Financial institutions will be able to refer investors to the Treasury website to obtain further information about the deposit guarantee scheme".
The exemptions prohibit issuers from making any statements about the scheme that are inconsistent with information provided by Treasury. This aims to prevent misleading or confusing information about the scheme being published by issuers.
In relation to the investment statement the exemption allows issuers to include information about the deposit guarantee scheme in an insert to accompany investment statements distributed after an institution has been accepted into the scheme.
The exemption covering prospectus and advertising content are conditional on issuers delivering to the Registrar a memorandum of amendments to update their prospectus within five working days of acceptance into the scheme. Issuers will be able to alert investors about the application of the scheme as soon as notice of an issuer's acceptance is made public by the Government, so long as they use the standard wording to describe the guarantee scheme.
The exemption also makes consequential amendments to the Commission's exemptions for TV and radio advertising and an exemption for banks so that those exemptions can still be used by issuers, but requiring statements about the deposit guarantee scheme to comply with the new exemption.
The exemption notice is available on the Commission's website at www.legislation.govt.nz and on the Commission's website at www.seccom.govt.nz (PDF 401KB).
In her review of the 2007-08 year, Chairman Jane Diplock says, "Finance company collapses are being investigated by the Commission, the Serious Fraud Office and the National Enforcement Unit of the Registrar of Companies".
"Each agency brings its special skills and regulatory responsibilities and we work closely together. Investigations are revealing misleading disclosures and poor behaviour by directors. We are also concerned about reports of investors being given very dubious investment advice."
The Commission's annual report was tabled in the House on 18 August 2008 and is available on its website www.seccom.govt.nz or in hard copy from the Commission by emailing seccom@seccom.govt.nz or calling 04 472 9830.
The Commission is reviewing how well issuers respond to significant reporting challenges in the current market as part of its surveillance programme.
It has begun reviewing financial reports with 30 June 2008 balance date as part of Cycle 8 of its Financial Reporting Surveillance Programme.
"All participants involved with the financial reporting process need to understand the potential impact of current market turbulence on the issuer, particularly the liquidity squeeze and a degree of softening in the property sector," Commission Chief Accountant Alastair Boult says. "It is essential that issuers understand the risks, adequately assess and measure them, and have appropriate responses in place."
Current market conditions highlight the importance of understanding relevant accounting standards aiming to be transparent to investors.
"Good disclosure will assist in keeping the market well informed. The key here is not mere compliance with the standards, but issuers telling investors the full story about their financial situation," Alastair Boult says.
"We believe it is important that NZ IFRS is rigorously applied by issuers because this is integral to New Zealand having a fair, efficient and transparent securities market." The Commission urges issuers to further improve the quality of their financial reporting. This includes making transparent disclosures, ensuring that the 'basics' of NZ IFRS are complied with, avoiding 'boiler plate' accounting policies and notes and ensuring that any 'common industry practice' also complies with New Zealand Generally Accepted Accounting Practice (NZ GAAP). If disclosures beg a further question, the Commission considers that transparency has not been achieved.
Further information on areas that the Commission has an interest in is outlined in the Review of Financial Reporting by Issuers Cycle 7 available on www.seccom.govt.nz