Financial Services Quarterly AUTUMN 2017

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Welcome to the Autumn 2017 issue of Financial Services Quarterly, a review of current legal issues in the financial sector.

Each quarter, we summarise recent issues and preview upcoming developments in these areas:

In the courts

Legislation/In Parliament

Recent developments

Bell Gully news

Useful Web links

In this issue:

• Changes to financial services legislation proposed • Marketing derivatives – sellers beware • Common Reporting Standard requirements imminent • Final policy decisions on proposals for review of outsourcing policy for registered

banks • New FMA conduct guide for financial service providers

Need more information?

For more information on any of the cases, articles and features in Financial Services Quarterly, please email rachel.gowing@bellgully.com or call on 64 9 916 8825.

Disclaimer: this publication is necessarily brief and general in nature. You should seek professional advice before taking any action in relation to the matters dealt with in this publication.

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IN THE COURTS

Marketing derivatives – sellers beware The High Court has handed down a decision in a case centred on the marketing of interest rate swaps to farmers.

Paid out creditors not entitled to vote at creditors’ meeting The High Court confirmed that only creditors with an on-going claim were entitled to vote on variation of a deed of company arrangement.

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LEGISLATION/IN PARLIAMENT

Common Reporting Standard requirements imminent The Taxation (Business Tax, Exchange of Information and Remedial Matters) Bill, which will require an automatic exchange of information to implement a Common Reporting Standard for New Zealand, has passed its third reading.

Changes to financial services legislation proposed A draft Financial Services Legislation Amendment Bill has been released for public consultation.

Exposure draft of the AML/CFT Phase 2 Amendment Bill released for consultation The Ministry of Justice is considering submissions on an exposure draft of the proposed Anti-Money Laundering and Countering Financing of Terrorism Amendment Bill, which was released for comment (together with a related information paper) at the end of last year.

Consultation on the consequences of non-disclosure for lenders under the CCCFA The Ministry of Commerce and Consumer Affairs is considering submissions on whether reform of section 99(1A) of the Credit Contracts and Consumer Finance Act (which forfeits a creditor’s right to interest or fees for the period during which noncompliant disclosure was made) is appropriate.

Improvements to KiwiSaver annual statements Cabinet has agreed to change the requirements for information that must be given to investors in KiwiSaver annual statements.

Transition period for the FMC Act ends – triggering notification requirement for some issuers The Financial Markets Conduct Act regime provided for a two-year transition period from 1 December 2014, during which some of New Zealand’s previous capital markets and financial services legislation continued to apply. This transition period ended on 30 November 2016.

Proposed amendments to close-out netting provisions to specify trustees The Commerce Select Committee has heard submissions on the Regulatory Systems (Commercial Matters) Amendment Bill, an omnibus bill proposing amendments to various statutes administered by the Ministry of Business, Innovation and Employment to improve regulatory systems. This Bill includes provisions dealing with the application of New Zealand’s netting rules to trusts.

Proposal to exclude third-party lenders from provisions of Consumer Guarantees Act A Member’s Bill proposing to exclude third-party lenders from the definition of “supplier” in the Consumer Guarantees Act has reached select committee stage.

Co-regulatory licensing regime for insolvency practitioners The Government has announced that it will introduce a co-regulatory licensing regime for insolvency practitioners.

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RECENT DEVELOPMENTS

Final policy decisions on proposals for review of outsourcing policy for registered banks The Reserve Bank has published its final policy decisions on a revised outsourcing policy for locally incorporated banks.

RBNZ seeks to place limits on DTI ratios for residential mortgage borrowers The Reserve Bank has asked the Government to add to its macro-prudential toolkit to allow it to place limits on debt to income ratios for residential mortgage borrowers.

Dual registration policy for small foreign banks updated The Reserve Bank has updated the Banking Supervision Handbook document “Statement of Principles - bank registration and supervision” to reflect a revised approach to the dual registration of foreign-owned banks that have a small, non-systemic, locally incorporated presence in New Zealand.

Latest from the Financial Markets Authority

New FMA conduct guide for financial service providers The Financial Markets Authority has released A guide to the FMA’s view of conduct, aimed at directors and senior managers of financial service providers licensed or authorised by the FMA under the Financial Markets Conduct Act or any other financial markets legislation (including the Financial Advisers Act).

2016 FMA AML/CFT monitoring report The FMA has published its third annual Anti-Money Laundering and Countering Financing of Terrorism Act monitoring report.

FMA has issued formal warnings to 12 reporting entities under the AML/CFT Act In a recent media release, the FMA advised it has issued 12 formal warnings under section 80 of the Anti-Money Laundering and Countering Financing of Terrorism Act.

Revised guidance note: Offering financial products in New Zealand and Australia under mutual recognition An updated guide has been published jointly by the FMA and the Australian Securities and Investments Commission. The guide is for New Zealand and Australian issuers offering financial products, including interests in managed or collective investment schemes, in both countries.

FMA consults on requirement for managers of multiple participant schemes to register participation agreements The FMA is seeking views on a proposal for a possible class exemption from the Financial Markets Conduct Act for managers of multiple participant schemes.

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IN THE COURTS

Marketing derivatives – sellers beware

The High Court has handed down a decision in a case centred on the marketing of interest rate swaps to farmers.

The decision offered a mixed bag for the parties. The plaintiff’s win, while awarding it the moral high ground, was a hollow one financially. And the defendant’s loss, while leaving it financially unscathed, still leaves plenty for it to ponder.

Click here to read a full summary of the litigation, together with Bell Gully’s comments on the outcome.

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Paid out creditors not entitled to vote at creditors’ meeting

The High Court confirmed that only creditors with an on-going claim were entitled to vote on a variation of a deed of company arrangement.

This case1 concerned a variation to a deed of company arrangement (DOCA), which required a vote of creditors. The administrators sought the Court’s direction on whether all creditors were entitled to vote, or only those with an on-going claim.

The Court decided that “it would make no commercial sense for creditors who have had their debts paid in full to be entitled to attend and vote on a DOCA that no longer affects them, potentially to the prejudice of creditors who are deeply affected by the proposed amendments”.

1 Gibson v Solid Energy New Zealand Limited & Ors [2016] NZHC 2939.

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LEGISLATION/IN PARLIAMENT

Common Reporting Standard requirements imminent

The Taxation (Business Tax, Exchange of Information and Remedial Matters) Bill, which will require automatic exchange of information (AEOI) to implement a Common Reporting Standard (CRS) for New Zealand, has passed its third reading.

The CRS is a framework allowing the exchange of tax-payer information between countries that have signed up to the Convention on Mutual Administrative Assistance in Tax Matters (which took effect for New Zealand in March 2014). It largely mirrors the requirements for New Zealand institutions under the Foreign Account Tax Compliance Act (FATCA), which aims to reduce tax evasion by US entities.

Implementing the CRS will ensure that Inland Revenue is provided with the information to be exchanged. In return, other jurisdictions will exchange information with Inland Revenue for use in detecting tax evasion by New Zealand entities.

Under the CRA, reporting financial institutions will be obliged to:

• conduct due diligence of their account holders to identify reportable accounts, and collect defined information for those reportable accounts, and

• report the collected information to the Inland Revenue, and the Inland Revenue must exchange that information with its tax treaty partners.

Once the Bill has received Royal Assent, New Zealand’s lists of Participating Jurisdictions and Reportable Jurisdictions will be made available, and reporting financial institutions will commence due diligence procedures from 1 July 2017.

Click here for more information.

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Changes to financial services legislation proposed

A draft Financial Services Legislation Amendment Bill has been released for public consultation.

The Bill contemplates repealing the Financial Advisers Act 2008, and includes changes to both the Financial Service Providers (Registration and Dispute Resolution) Act 2008 and the Financial Markets Conduct Act 2013 (FMC Act). The majority of the regulation of financial advice will sit within the FMC Act (rather than in standalone legislation as is currently the case).

See Part 2 of the Ministry of Business Innovation and Employment’s Consultation Paper – New Financial Advice Regime for commentary on the draft Bill.

Submissions are due on Friday 31 March 2017.

Click here for more information.

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Exposure draft of the AML/CFT Phase 2 Amendment Bill released for consultation

The Ministry of Justice is considering submissions on an exposure draft of the proposed Anti-Money Laundering and Countering Financing of Terrorism Amendment Bill, which was released for comment (together with a related information paper) at the end of last year.

The Government intends to have the Bill introduced in March, and passed by the middle of this year. After that, the extended Act will come into force in stages, sector by sector, beginning early next year.

The principal proposals are to:

• expand the current suspicious transaction reporting requirement to include “suspicious activities”2, and

• reduce compliance obligations relating to:

• Designated Business Groups,

• reliance on another business,

• existing customer due diligence, and

• the Ministerial exemptions process, and

• make legislative changes to the information sharing, supervision and statutory review provisions in the Act, as well as bringing some existing regulations into the Act.

Click here for more information.

2 As recommended in the John Shewan report Government Inquiry into Foreign Trust Disclosure Rules, New Zealand Government, June 2016.

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Consultation on the consequences of non-disclosure for lenders under the CCCFA

The Ministry of Commerce and Consumer Affairs is considering submissions on whether reform of section 99(1A) of the Credit Contracts and Consumer Finance Act (which forfeits a creditor’s right to interest or fees for the period during which noncompliant disclosure was made) is appropriate.

Background to the consultation was referenced in our Summer 2016/17 issue of Financial Services Quarterly. Essentially, concerns had been raised that section 99(1A) might lead to unfair outcomes, particularly where the information the lender fails to disclose is very minor, or where the borrower suffers no harm.

Click here to read the discussion paper, and here to read the submissions made.

Ministry officials are considering the submissions and will advise the Minister of Commerce and Consumer Affairs on whether they think reform of section 99(1A) is appropriate.

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Improvements to KiwiSaver annual statements

Cabinet has agreed to change the requirements for information that must be given to investors in KiwiSaver annual statements.

The changes are designed to improve the minimum content requirements for annual statements, and to give KiwiSaver investors more relevant information to assist them in making decisions about their retirement savings.

KiwiSaver providers are now obliged to provide the following information to investors (in addition to the existing requirements) for each year:

• total fees paid,

• the total amount that the investor’s account grew by, and

• summary transaction figures detailing the money that has gone in and out of the investor’s account.

A transitional arrangement allowing providers to comply with the new requirements will be introduced this year. Full compliance will commence in 2018.

Click here for more information.

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Transition period for the FMC Act ends – triggering notification requirement for some issuers

The Financial Markets Conduct Act (FMC Act) regime provided for a two-year transition period from 1 December 2014, during which some of New Zealand’s previous capital markets and financial services legislation continued to apply. This transition period ended on 30 November 2016.

Issuers whose securities were automatically transitioned to the FMC Act are now subject to all of the on-going requirements of the FMC Act (unless the securities fall within a new exemption notice granted by the Financial Markets Authority under the FMC Act regime).

This includes any governance and on-going disclosure obligations, as well as financial reporting requirements.

Those issuers must also have sent a notice to their security holders by 28 February 2017 notifying them that the requirements of the FMC Act now apply to them in compliance with the provisions in clause 30 of Schedule 4 of the FMC Act.

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Proposed amendments to close-out netting provisions to specify trustees

The Commerce Select Committee has heard submissions on the Regulatory Systems (Commercial Matters) Amendment Bill, an omnibus bill proposing amendments to various statutes administered by the Ministry of Business, Innovation and Employment to improve regulatory systems.

Of particular interest to the finance industry is the proposal to amend the Companies Act to broaden the ability of counterparties to net amounts under bilateral netting arrangements where a counterparty to the transaction is a trustee.

One of the concerns raised in a submission made by Bell Gully is that the proposed amendments are of limited value in the context of providing robust enforceability opinions for derivative arrangements with trustees, because the proposed amendments don’t clarify that netting is enforceable on the insolvency of the underlying trust fund (only trustees).

Click here to read the Bill and the submissions made on it.

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Proposal to exclude third-party lenders from provisions of Consumer Guarantees Act

A Member’s Bill proposing to exclude third-party lenders from the definition of “supplier” in the Consumer Guarantees Act has reached select committee stage.

The background to the proposals is explained in the Bill:

“The Consumer Guarantees Act (the Act) is intended to provide protection for consumers against traders. The Act currently gives consumers broad recourse to both traders and lenders (creditors) equally. This is appropriate when the trader and lender are effectively the same, that is, when they are related parties in terms of NZ IAS 24: the accounting standard concerning related parties. However, when the trader and lender are separate and at arm’s length from each other (unrelated parties), recourse should be to the trader who made the sale and not the lender, because the lender has little or no influence on the sale and so should have no direct responsibilities under the Act”.

Click here for more information.

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Co-regulatory licensing regime for insolvency practitioners

The Government has announced that it will introduce a co-regulatory licensing regime for insolvency practitioners.

This was one of the primary recommendations of the Insolvency Working Group’s first report, and is aimed at ensuring the professional administration of insolvencies.

The Insolvency Practitioners Bill will be amended to introduce the licensing regime, alongside a number of additional amendments aimed at further raising the practice standards of insolvency practitioners, and ensuring they act in accordance with their statutory duties.

The Government will also amend the Companies Act 1993 and the Receiverships Act 1993 to:

• improve the list of automatic practitioner disqualifications,

• provide the High Court with an effective means to disqualify practitioners,

• make it more difficult for debtor friendly liquidators to be appointed, and

• void the transfer of a company’s assets once a liquidation application has been filed.

Regulation will bring New Zealand into step with other countries and similar professions.

Click here for more information.

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RECENT DEVELOPMENTS

Final policy decisions on proposals for review of outsourcing policy for registered banks

The Reserve Bank of New Zealand has published its final policy decisions on a revised outsourcing policy for locally incorporated banks.

The policy review was commissioned following a review of the current outsourcing policy, set out in the Banking Supervision Handbook Document 11 (BS11). That review found that the policy was being inconsistently applied, which could impact on the stability of the banking system in stress situations, and potentially undermine the viability of the Open Bank Resolution.

Key features of the final revised policy include:

• a formal definition of outsourcing, • a formal engagement process with the Reserve Bank on new proposed outsourcing arrangements with related

parties, • robust back-up arrangements for key functions outsourced to a parent or another related party, • strengthened contractual provisions for outsourcing arrangements, • foreign-owned, locally incorporated banks to produce separation plans, • clarity on the level of service a bank must be able to continue providing in the event of a failure or possible

separation from its parent, and • a five-year transitional path, during which affected banks have to become compliant with the outsourcing policy.

The Reserve Bank plans to consult on an exposure draft of a new BS11 in March 2017, and anticipates publishing the final policy in the second quarter of this year.

Click here to read the Reserve Bank’s final policy decisions in full. Click here for more background information.

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RBNZ seeks to place limits on DTI ratios for residential mortgage borrowers

The Reserve Bank of New Zealand (RBNZ) has asked the Government to add to its macro-prudential toolkit to allow it to place limits on debt to income ratios (DTIs) for residential mortgage borrowers.

This would be a potential complement to the new loan to value ratio restrictions described in RBNZ’s consultation paper.

The Minister of Finance has requested a cost-benefit analysis on DTIs and RBNZ public consultation before a decision is reached. RBNZ has indicated that it intends to commence public consultation in March.

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Dual registration policy for small foreign banks updated

The Reserve Bank of New Zealand has updated the Banking Supervision Handbook Document 1 “Statement of Principles - bank registration and supervision” (BS1) to reflect a revised approach to the dual registration of foreign-owned banks that have a small, non-systemic, locally incorporated presence in New Zealand.

Click here for a summary of submissions to the June 2016 consultation on the proposed policy, and the final policy decision.

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LATEST FROM THE FINANCIAL MARKETS AUTHORITY

New FMA conduct guide for financial service providers The Financial Markets Authority (FMA) has released A guide to the FMA’s view of conduct, aimed at directors and senior managers of financial service providers licensed or authorised by the FMA under the Financial Markets Conduct Act or any other financial markets legislation (including the Financial Advisers Act). Click here for more information.

2016 FMA AML/CFT monitoring report

The FMA has published its third annual Anti-Money Laundering and Countering Financing of Terrorism Act monitoring report.

The 2016 report highlights the FMA’s concerns around the continued low level of filing of suspicious transaction reports, and how it intends to monitor reporting entities under the AML/CFT regime in 2017.

Some of the areas the FMA intends to focus on include monitoring:

• what measures reporting entities have in place to update and maintain AML/CFT documentation, as well as management and board oversight, and

• how reporting entities ensure their staff are trained to a satisfactory standard, and what on-going training programmes are in place.

Click here to read the report.

FMA has issued formal warnings to 12 reporting entities under the AML/CFT Act

In a recent media release, the FMA advised it has issued 12 formal warnings under section 80 of the Anti-Money Laundering and Countering Financing of Terrorism Act (the AML/CFT Act).

Under section 59(2) of the AML/CFT Act, the FMA required 77 reporting entities to submit their audit of their Anti-Money Laundering and Countering Financing of Terrorism assessment and programme by 25 November 2016.

Twelve of the reporting entities were found to be non-compliant with the law.

Click here for more information.

Revised guidance note: Offering financial products in New Zealand and Australia under mutual recognition

An updated guide has been published jointly by the FMA and the Australian Securities and Investments Commission. The guide is for New Zealand and Australian issuers offering financial products, including interests in managed or collective investment schemes, in both countries.

The guide explains what issuers have to do under the trans-Tasman mutual recognition scheme for ‘recognised offers’ of financial products.

A copy of the guide is available here. Click here for more information.

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FMA consults on requirement for managers of multiple participant schemes to register participation agreements

The FMA is seeking views on a proposal for a possible class exemption from the Financial Markets Conduct Act for managers of multiple participant schemes.

A multiple participant scheme is an umbrella superannuation scheme for multiple employers to provide superannuation plans under the same scheme (managed by a scheme manager) while allowing tailored rules for each employer and its employees.

The proposal is to exempt managers of these schemes from the requirement to register participation agreements entered into with the various employers they service, which form part of the scheme’s governing document.

A copy of the consultation paper is available here. Click here for more information.

Submissions close on 17 March 2017.

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BELL GULLY NEWS

For further details and more news visit the publications section of our website.

Privacy Commissioner recommends six key changes to the Privacy Act

New Zealand public sector on top - but fight against corruption real

Brexit: Statute required to trigger Article 50, says Supreme Court

Cabinet reshuffle changes the OIO ministerial decision makers

Australian High Court rules against Flight Centre in price-fixing case

A fresh look at the Search and Surveillance Act

Are "full and final" settlements really final?

Happy holidays? Ensuring Holidays Act compliance over Christmas and New Year

Marketing derivatives - seller beware

Sensible alcohol promotions in the silly season - avoiding the legal traps

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USEFUL WEB LINKS

New Zealand Government

• Consumer Affairs • Inland Revenue Department • Ministry of Business, Innovation & Employment • Ministry of Foreign Affairs and Trade • New Zealand Government • NZ Treasury • Office of the Clerk of the House of Representatives [New Zealand Parliament] • Parliamentary Counsel Office

New Zealand financial agencies and organisations

• Commerce Commission • The Companies Office • Export Credit Office • NZ Law Commission • Office of the Banking Ombudsman – password required • Insurance and Savings Ombudsman • Privacy Commissioner • Personal Property Securities Register • Reserve Bank of New Zealand • Takeovers Panel • Financial Markets Authority

New Zealand commercial sites

• NZFMA • ILANZ • Financial Services Federation • Chartered Accountants Australia and New Zealand • NZ Bankers’ Association • NZ Institute of Economic Research • NZX • The New Zealand Initiative

Australian Government sites

• Banking Ombudsman

Australian commercial sites

• Australian Financial Markets Association • Australian Securities and Investment Commission • Australian Stock Exchange

International sites

• Bank for International Settlements • International Monetary Fund • International Swaps and Derivatives Association • NASDAQ • New York Stock Exchange • United States Securities and Exchange Commission

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• World Bank

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