Financial Services Quarterly SUMMER 2017/18

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Welcome to the Summer 2017/18 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:

• High Court imposes maximum financial penalties under AML Act • A green light for robo-advice • Reserve Bank introduces revised outsourcing policy

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 High Court imposes maximum financial penalties under AML Act In the first determination under the Anti-Money Laundering and Countering Financing of Terrorism Act, the High Court has imposed NZ$5.29 million of pecuniary (financial) penalties.

Marketing Derivatives – High Court dismisses claims in latest case The High Court has handed down another decision in a case centred on the marketing of interest rate swaps to farmers. Cases such as this are highly fact-dependent and, in this case, all of the plaintiff’s claims were dismissed.

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LEGISLATION/IN PARLIAMENT Consultation on AML/CFT regulations The Ministry of Justice has sought submissions on the first tranche of proposed regulations under the Anti-Money Laundering and Countering Financing of Terrorism Act, following recent amendments to the Act to put in place Phase 2 of New Zealand’s AML/CFT laws.

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RECENT DEVELOPMENTS A green light for robo-advice The FMA has announced that it will start considering robo-advice applications early in 2018.

Reserve Bank introduces revised outsourcing policy The Reserve Bank has published a revised outsourcing policy for large banks, aimed at ensuring “that a bank can continue to operate in a situation where a key service provider fails”, according to Deputy Governor Grant Spencer.

Reserve Bank consults on new mortgage bond collateral standard Following a review of domestic and international mortgage bond collateral standards, the Reserve Bank has issued a consultation paper proposing an enhanced mortgage bond standard aimed at supporting confidence and liquidity in the financial system.

Update on the Financial Advice Code Working Group As part of the impending overhaul of the regulatory regime for providing financial advice, the Financial Advice Code Working Group is consulting with targeted focus groups on the basic design parameters for a first-cut draft of a code of conduct for the new regime.

Submissions released on foreign margin rules consultation The Reserve Bank of New Zealand and the Ministry of Business, Innovation and Employment has sought feedback on potential legislative changes to address the implications for New Zealand of foreign margin requirements for uncleared over-the-counter derivatives implemented as part of the Group of Twenty’s global derivatives reforms.

Reserve Bank responds to submissions on debt-to-income ratio restriction In June-August this year, the Reserve Bank sought submissions on the possibility of adding a debt-to-income ratio (DTI) restriction to its macroprudential toolbox that currently includes, for example, restrictions on high loan-to-value ratio (LVR) lending. The Reserve Bank has issued its response to the submissions received.

Latest from the Financial Markets Authority FMA releases Bank Bill Benchmark Rate and closing rates guidance The FMA has published guidance on conduct and expected controls in relation to trading that sets the Bank Bill Benchmark Rate and closing rates in the New Zealand market.

FMA issues guidance on initial coin offers and cryptocurrency services The FMA has published commentary on initial coin offers aimed at assisting firms to understand the regulatory framework they may be operating under, and to ensure they meet any obligations they may have when raising funds in New Zealand.

FMA reports on the misuse of the FSPR and its enforcement role The FMA has published a report describing the work it has undertaken to prevent misuse of the New Zealand Financial Service Providers Register.

New class designation for short duration forward foreign exchange contracts The FMA has reconsidered its interpretation of the definition of “derivative” in section 8 of the Financial Markets Conduct Act, and confirmed that businesses selling short duration derivative products should be licensed as derivatives issuers.

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New guidance on substantial product holder disclosures Following a consultation in June this year, the FMA has published new guidance on substantial product holder disclosures, updating the guidance issued in 2014.

FMA consults on draft of its updated Corporate Governance Handbook The FMA has sought submissions on a "refresh" of its Corporate Governance Handbook.

FMA and ASIC confirm collaborative approach to fintech The FMA and the Australian Securities and Investment Commission have reaffirmed their commitment to collaboration and co-operation on the expanding opportunities in fintech and innovation.

FMA extends exemption for AFAs providing DIMS The Financial Markets Conduct (Offers of Financial Products Through Authorised Financial Advisers Supplying Personalised DIMS) Exemption Notice 2015 exempts offerors of financial products from the disclosure requirements in Part 3 of the Financial Markets Conduct Act where offers are made through authorised financial advisers providing personalised discretionary investment management services under the Financial Advisers Act 2008.

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IN THE COURTS High Court imposes maximum financial penalties under AML Act

In the first determination under the Anti-Money Laundering and Countering Financing of Terrorism Act (the Act), the High Court has imposed NZ$5.29 million of pecuniary (financial) penalties.

The Act seeks to detect and deter money laundering and the financing of terrorism. Reporting entities, which currently comprise financial institutions and casinos, must conduct certain identity and verification checks on their customers (known as "customer due diligence" or "CDD"), report "suspicious transactions", and monitor customer accounts. The Department of Internal Affairs (the DIA) is one of the three supervisors responsible for monitoring and enforcing compliance.

In this case1, the DIA alleged that an Auckland money remittance and forex currency services company and its sole director “failed abysmally” to comply with obligations under Part 2 of the Act. The alleged failures related to 1,588 financial transactions totalling NZ$105.4 million.

Click here to read a full summary of the case and its implications for businesses.

1 Department of Internal Affairs v Ping An Finance (Group) New Zealand & Anor [2017] NZHC 2363

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Marketing Derivatives – High Court dismisses claims in latest case

The High Court has handed down another decision in a case2 centred on the marketing of interest rate swaps to farmers. Cases such as this are highly fact-dependent and, in this case, all of the plaintiff’s claims were dismissed.

The plaintiff had entered into interest rate swaps with the defendant bank, and was affected when interest rates fell post-GFC, leaving it to pay substantially more on servicing its debts than would have been the case without the swaps.

The plaintiff rejected the defendant bank’s offer of compensation made pursuant to the settlement the bank reached with the Commerce Commission in respect of the marketing of interest rate swaps to rural customers.

Instead, the plaintiff opted to sue the defendant bank for negligence, breach of contract, misrepresentation under the Contractual Remedies Act 1979, breach of the Fair Trading Act 1986 and oppression under the Credit Contracts and Consumer Finance Act 2003. The plaintiff also claimed that, if the defendant bank had not breached its legal duties, the plaintiff would not have entered into the swaps.

The Court found that there was not a proximate relationship between the plaintiff and the defendant bank sufficient to establish a duty of care, largely due to the effect of the disclaimer clauses contained in the agreements. These clauses stated that the plaintiff was not relying on the bank’s advice and had received its own professional advice. All other claims were also dismissed.

2 Bushline Trustees Limited v ANZ Bank New Zealand Limited [2017] NZHC 2520

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LEGISLATION/IN PARLIAMENT Consultation on AML/CFT regulations

The Ministry of Justice has sought submissions on the first tranche of proposed regulations under the Anti-Money Laundering and Countering Financing of Terrorism Act 2009 following recent amendments to the Act to put in place Phase 2 of New Zealand’s AML/CFT laws.

Consistent with the staged implementation of the Phase 2 sectors, new regulations will be made in different rounds or “tranches”. The first tranche covers matters that need to be addressed before the first Phase 2 reporting entities (lawyers, conveyancers and trust and company service providers) are required to comply on 1 July 2018.

Wider changes to the AML/CFT regime that are also due to come into effect on 1 July 2018, and which affect all (Phase 1 and Phase 2) reporting entities, are also being addressed.

Click here for more information.

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RECENT DEVELOPMENTS A green light for robo-advice

The Financial Markets Authority (FMA) has announced that it will start considering robo-advice applications in early 2018.

Innovators in the financial advice sector will welcome the FMA’s decision to accelerate the introduction of robo-advice by exercising its exemption power under the Financial Advisers Act 2008 (the Act). They would otherwise have faced a wait of more than 18 months before legislative changes to enable this form of advice take effect.

Reflecting the technology of its time (albeit less than a decade ago), the Act currently only accommodates the provision of personalised financial advice by a human. Consequently, it effectively prohibits the provision of “robo-advice” – that is, financial advice generated by an algorithm tailored to an individual’s personal financial circumstances and goals. This prohibition has frustrated those who see robo-advice as a solution to the “financial advice gap” which will give more New Zealanders access to affordable, quality financial guidance.

While this obsolete law is being addressed in the overhaul of the Act (detailed here), that law change will not take effect until May 2019.

The FMA has opened consultation, seeking industry views on:

• the Financial Advisers (Personalised Digital Advice) Exemption Notice 2018,

• the draft information sheet, and

• the draft application documents.

Click here for a copy of the consultation paper with the relevant documentation attached. Submissions are due on 15 December.

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Reserve Bank introduces revised outsourcing policy

The Reserve Bank has published a revised outsourcing policy for large banks, aimed at ensuring that “a bank can continue to operate in a situation where a key service provider fails”, according to Deputy Governor Grant Spencer.

“The revised policy sets requirements that banks need to meet when outsourcing particular functions and services, especially if the service provider is a related party of the bank. An on-going ability by banks to provide liquidity and basic services to customers, even in times of stress, is an important part of maintaining a sound and efficient financial system,” Mr Spencer said.

The policy applies to locally-incorporated registered banks with net liabilities of more than $10 billion. It came into force on 1 October, but affected banks have five years to ensure compliance.

Click here for more information.

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Reserve Bank consults on new mortgage bond collateral standard

Following a review of domestic and international mortgage bond collateral standards, the Reserve Bank has issued a consultation paper proposing an enhanced mortgage bond standard aimed at supporting confidence and liquidity in the financial system.

In an effort to improve the quality of mortgage bonds and to make them more marketable, the Reserve Bank is proposing a new format, called Residential Mortgage Obligations (RMO).

The Reserve Bank is seeking feedback on the terms for acceptance of mortgage bonds as collateral, and the proposed new RMO standard.

The consultation closes on 16 February 2018.

Click here for more information.

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Update on the Financial Advice Code Working Group

As part of the impending overhaul of the regulatory regime for providing financial advice, the Financial Advice Code Working Group is consulting with targeted focus groups on the basic design parameters for a first-cut draft of a code of conduct for the new regime.

According to the question sheet provided for the consultation, the Code Working Group is “approaching the consultation process with no preconceptions as to outcomes” and is seeking input from the “widest possible range of affected and interested parties”.

Following the targeted consultation, a draft code of conduct will be released for another round of consultation before the Code Working Group determines the final form and detail of a code to be recommended to the Minister of Commerce. The Government’s decisions around the new code will be reflected in the Financial Services Legislation Amendment Bill.

For details on the membership of the Code Working Group and current consultation, click here.

For more information, click here.

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Submissions released on foreign margin rules consultation

In July this year, the Reserve Bank of New Zealand (RBNZ) and the Ministry of Business, Innovation and Employment (the Agencies) sought feedback on potential legislative changes to address the implications for New Zealand of foreign margin requirements for uncleared over-the-counter derivatives implemented as part of the Group of Twenty’s global derivatives reforms.

Individual responses received as part of the consultation are now available on RBNZ’s website here.

RBNZ is currently analysing the responses. If a legislative response is chosen, RBNZ has indicated that an exposure draft of the proposed legislation may be released for further consultation prior to its introduction into Parliament.

Click here for details on the consultation, and to read Bell Gully’s views on the Agencies’ proposals.

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Reserve Bank responds to submissions on debt-to-income ratio restriction

In June-August this year, the Reserve Bank sought submissions on the possibility of adding a debt-to-income ratio (DTI) restriction to its macroprudential toolbox that currently includes, for example, restrictions on high loan-to-value ratio (LVR) lending. The Reserve Bank has issued its response to the submissions received.

DTI limits would restrict the portion of residential mortgage borrowers able to obtain large loans relative to their income.

Many submitters were critical of the inclusion of such a tool in the Reserve Bank’s toolbox. The Reserve Bank’s response to the submissions accepted that DTI is not a perfect indicator of risk and that, if such a restriction was included in its toolbox in the future, it would be written in a more general way to allow a range of formulations. With the slowdown in the housing market, the Reserve Bank has indicated that it will not implement a DTI restriction at this time, but it could be a useful option in the future.

Individual submissions received as part of the consultation, and the Reserve Bank’s response to those submissions, are now available on the Reserve Bank’s website here.

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LATEST FROM THE FINANCIAL MARKETS AUTHORITY FMA releases Bank Bill Benchmark Rate and closing rates guidance

The Financial Markets Authority (FMA) has published guidance on conduct and expected controls in relation to trading that sets the Bank Bill Benchmark Rate (BKBM) and closing rates in the New Zealand market.

These benchmarks are widely used as reference prices for financial instruments, contracts, and for measuring the performance of investment funds. The FMA’s guidance is part of wider efforts to encourage banks and other market participants to return to trading in the bank bill market, following concerns over the steady decline in the volumes of bank bills traded in the wholesale market overall and, in particular, within the BKBM rate set window.

When fewer banks participate in setting a benchmark there are increased risks the benchmark may not accurately represent the underlying market. One of the key reasons proffered by market participants for why bank bill volumes have trended lower in recent years is that there is a perceived increase in regulatory risk following the global and domestic regulatory reforms introduced in response to the LIBOR scandal in 2012, and the legal action in Australia last year relating to allegations of manipulation of the Australian short-term interest rate benchmark (the Bank Bill Swap Rate).

The FMA’s guidance note aims to reduce some of that regulatory uncertainty by setting out the FMA’s intended approach to enforcement under the Financial Markets Conduct Act 2013.

Click here for more information, and click here to read the guidance.

FMA issues guidance on initial coin offers and cryptocurrency services

The FMA has published commentary on initial coin offers (ICOs) aimed at assisting firms understand the regulatory framework they may be operating under and to ensure they meet any obligations they may have when raising funds in New Zealand.

In keeping with the views expressed by the Australian Securities and Investment Commission and other overseas regulators, the FMA has indicated that the regulation of an ICO will depend on the ICO’s structure and operation, and the rights attached to the tokens offered in the ICO.

Click here for more information.

FMA reports on the misuse of the FSPR and its enforcement role

The FMA has published a report describing the work it has undertaken since 2014 to prevent misuse of the New Zealand Financial Service Providers Register.

Click here for more information and click here to read the report.

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New class designation for short duration forward foreign exchange contracts

The FMA has reconsidered its interpretation of the definition of “derivative” in section 8 of the Financial Markets Conduct Act 2013, and confirmed that businesses selling short duration derivative products should, in fact, be licensed as derivatives issuers.

As a result of the FMA’s new approach, from 1 December 2017 any providers making regulated offers of short duration derivative products to New Zealanders that settle within three days, whether they are based in New Zealand or elsewhere, will require a derivatives issuer licence.

Click here for more information.

New guidance on substantial product holder disclosures

Following a consultation in June this year, the FMA has published new guidance on substantial product holder disclosures, updating the guidance issued in 2014.

Click here for more information.

To view a copy of the FMA’s response to the submissions it received on the June consultation, click here.

FMA consults on draft of its updated Corporate Governance Handbook

The FMA has sought submissions on a "refresh" of its Corporate Governance Handbook.

Click here for more information and a copy of the consultation paper.

FMA and ASIC confirm collaborative approach to fintech

The FMA and the Australian Securities and Investment Commission have reaffirmed their commitment (set out in their 2012 Memorandum of Understanding) to collaboration and cooperation on the expanding opportunities in fintech and innovation.

This includes sharing information and views on the regulatory issues arising from emerging technology and increasing innovation. Both regulators have indicated that they will provide assistance to businesses hoping to make ventures into each other’s markets by providing referrals for advice and support.

For further details see the FMA’s media release here.

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FMA extends exemption for AFAs providing DIMS

The Financial Markets Conduct (Offers of Financial Products Through Authorised Financial Advisers Supplying Personalised DIMS) Exemption Notice 2015 exempts offerors of financial products from the disclosure requirements in Part 3 of the Financial Markets Conduct Act 2013 (the Act) where offers are made through authorised financial advisers (AFAs) providing personalised discretionary investment management services (DIMS) under the Financial Advisers Act 2008.

This exemption was introduced as a temporary measure to put offers made through AFAs in the same position as offers made through DIMS licensees under the Act, and was originally set to expire in November 2017. However, the FMA has now extended the exemption until 5 November 2020 to allow the current position to continue until the legislative changes being introduced under the Financial Services Legislative Amendment Bill have been brought into effect.

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BELL GULLY NEWS

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

Update on the new Government’s foreign investment policy direction

Class action update

Details of new Tax Working Group announced

Businesses have less than one month to comply with new hazardous substances regulations

FMA consults on draft of its updated Corporate Governance Handbook

Does an arbitration clause prevent a tenant from seeking relief against cancellation from the Courts?

How should owners and occupiers manage asbestos?

“Transformational” changes to the employment landscape under new government?

A green light for robo-advice

High Court imposes maximum financial penalties under AML Act

Make unsubstantiated representations and face the consequences

Unlocking urban development

Court of Appeal allows James Hardie class action to proceed

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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 • World Bank

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