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FINANCIAL ADVICE REFORMS INSIGHTS SERIES 4 - CHANGES TO THE FINANCIAL SERVICE PROVIDERS (REGISTRATION AND DISPUTE RESOLUTION) ACT ('FSP ACT')
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In this fourth in our Series of Financial Law Insights working through the detail of the Financial Services Legislation Amendment Bill we discuss some key changes to the FSP Act. Entities without a strong New Zealand connection will soon find it harder to register on the Financial Service Providers Register (‘FSPR’).

In brief:

The key changes to the FSP Act include:

  • Tightening of the territorial scope so that only those who are providing financial services to persons in New Zealand can be registered
  • New regulation-making powers that can prescribe circumstances and thresholds for when an entity must register on the FSPR, and required warning statements for certain advertisements
  • Provision for registration (and de-registration) of financial advisers (but not nominated representatives)
  • Increased obligations for dispute resolution scheme providers to report regulatory breaches.

 
The first in our Series of Financial Law Insights on the financial advice reforms providing an outline of the Bill can be found here.

Also in the Series so far are:

2 – key concepts
3 – the FAP conundrum

What’s the problem with the current registration regime?

The past few years have seen growing concerns that a number of overseas entities are registering on the FSPR to mislead investors into thinking they are regulated or supervised in New Zealand.

The key concern is that some may be involved in fraudulent activities offshore, or are unable to obtain registration in their home jurisdiction, with their registration in New Zealand negatively impacting on our international reputation.

In response to these concerns, amendments were made to the FSP Act in 2014 to give the FMA broader powers to deregister entities from the FSPR. As at June this year, the FMA had:

  • considered 198 FSP Act registrations and directed the Registrar to deregister 68 entities (with a further 21 entities ‘voluntarily’ deregistering)
  • won two of three de-registration proceedings heard in the High Court, and successfully appealed the third to the Court of Appeal.

Despite this regulatory activity, concerns about misuse still exist, with that misuse threatening the integrity and international reputation of New Zealand’s financial markets regulation.

So what are the key changes? 

The Bill aims to address the continued misuse of the FSPR by tightening the rules around who can register, and arming the FMA with broader powers to direct de-registration.

The FSP Act currently requires financial service providers to register on the FSPR (regardless of where the financial service is provided) if they:

  • are ordinarily resident or have a place of business in New Zealand, or
  • are required to be licensed or registered under New Zealand legislation.

Cabinet has previously agreed that entities registering on the FSPR should be required to have a stronger connection with New Zealand.

The initial proposal in the February exposure draft of the Bill was to require entities ‘promoting’ financial services in New Zealand to register. Submissions argued this standard was still too low, and that ‘promoting’ was too vague a term – and also could create opportunities for new forms of misuse.

As a result, the Bill proposes replacing the current territorial scope provision with a much stricter requirement. The new provision will only allow entities to register on the FSPR if they are in the business of providing a financial service, and:

  • either that financial service is provided to persons in New Zealand by or on behalf of the entity, or
  • the entity is required to be licenced or registered under New Zealand legislation.

The new provision also makes it clear that merely allowing services to be accessible by persons in New Zealand is insufficient in itself to result in the services being caught. This provides express comfort to offshore providers that they will not inadvertently trigger registration obligations by making services available through their websites.

However the FSP Act still seems to prevent new entrants from registering, even if they have a genuine intention to provide services to persons in New Zealand – given that you can only register if services are being provided, but you can only provide services if registered. Tricky…  

In addition to the tightening of FSP Act registration provisions, the Bill also creates new regulation-making powers, which may prescribe:

  • minimum thresholds for providing financial services in New Zealand before any entity can be registered
  • specific circumstances where registration is required
  • warnings that must be included when advertising financial services.

It will be interesting to see what, if any, threshold will be set (with a dollar-value threshold being an obvious option) and whether it will be set on a one-off basis or aggregate all the activities of an entity over a specified time period.

One key exception to make the new financial advice regime workable is that financial advisers are allowed to register, even if they are not technically in the business of providing financial advice services, with some consequential deeming provisions.

The Bill will also enhance information sharing and regulatory breach reporting by dispute resolution schemes, no longer requiring a series of material complaints to occur before regulators must be notified.

Transitional relief will be provided, to allow providers a few months to adjust to the new rules.  

Conclusion

The changes to the FSP Act include those necessary to support the proposed new financial advice regulatory regime. The changes are not extensive, but are particularly significant for offshore financial service providers having an exposure to or looking to utilise the New Zealand regime.
 

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If you would like a specific briefing on this or any other aspect of the Bill or what the proposed reforms may mean for your business, or would like advice on what you can do now to plan for the new regime, please contact Catriona Grover on +64 4 498 0816, David Ireland on +64 4 498 0840, Hayley Miller on +64 9 915 3366,  Nick Summerfield on +64 9 915 3357, Karen Mace on +64 4 496 5941, or Tom McLaughlin on +64 4 498 0886, or email the team at financialmarkets@kensingtonswan.com.

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