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Financial Services Quarterly
WINTER 2016
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Welcome to the Winter 2016 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:
Hidden priorities - statutory charges and the PPSA
FMA wins appeal to de-register Financial Service Provider
New health and safety laws now in force
Mandatory credit rating requirement removed for some NBDTs
Latest from the Financial Markets Authority
Need more information?
For more information on any of the cases, articles and features in Financial Services Quarterly,
please email [email protected] 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
Hidden priorities - statutory charges and the PPSA Creditors with first-ranking perfected security interests may rank behind Customs when there is a statutory charge on goods imported into New Zealand in respect of unpaid duty.
Supreme Court allows Mark Hotchin to seek contribution from trustee
The Supreme Court has reversed the High Court and Court of Appeal’s decisions striking out Mark Hotchin’s claim
seeking a contribution from New Zealand Guardian Trust towards Mr Hotchin’s alleged liability to members of the
public who invested in debenture securities issued by Hanover Finance Limited. However, strongly worded comments
from the majority judges suggest it will be difficult for Mr Hotchin to succeed in his claim.
FMA wins appeal to de-register Financial Service Provider The Financial Markets Authority has won its appeal against a High Court ruling that it breached rights to natural justice by failing to provide sufficient basis for its decision to deregister.
Interest not recoverable on assigned debt An assignee of a loan failed to recover interest on the debt because interest was not specified in the assignment.
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LEGISLATION/IN PARLIAMENT
New health and safety laws now in force After much anticipation, the Health and Safety at Work Act 2015 and regulations relating to worker engagement, participation and representation came into force on 4 April 2016.
Panama Papers - “Phase 2” of anti-money laundering reforms to be fast-tracked
New Zealand’s Prime Minister John Key has indicated that debate around the Panama Papers is likely to result in
a push to finalise legislation to complete New Zealand’s anti-money laundering obligations.
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RECENT DEVELOPMENTS
Mandatory credit rating requirement removed for some NBDTs The Reserve Bank has granted a new class exemption for certain Non-bank Deposit Takers from the requirement to have a mandatory credit rating under the Non-bank Deposit Takers Act 2013.
RBNZ consults on a crisis management regime for systemically important financial market infrastructures In March 2016, the Reserve Bank of New Zealand issued a consultation paper on proposed crisis management powers for systemically important financial market infrastructures.
RBNZ consults on review of the default option for publication of submissions The Reserve Bank has received feedback proposing that it fundamentally change its current policy of not publishing individual submissions it receives from regulated entities to publishing all submissions by default.
Lenders risk loss of interest and fees if they don’t comply with disclosure rules The Commerce Commission has reminded lenders that failing to disclose key information to borrowers in consumer credit contracts could result in loss of all fees and interest until proper disclosure is made.
IMF to assess how NZ’s financial institutions are prudentially regulated and supervised The International Monetary Fund’s Financial Sector Assessment Programme for New Zealand is expected to start later this year.
Disclose Register – new guide released for providing managed fund data The Companies Office has released a guide for managers of managed funds clarifying how fund data should be prepared and uploaded to the Disclose Register.
NZX has released submissions on its review of corporate governance reporting requirements The NZX is reviewing the 45 submissions it received in response to its consultation on proposed changes to corporate governance reporting requirements within the NZX Main Board Listing Rules.
Asia Region Funds Passport – now signed The Asia Region Funds Passport Memorandum of Co-operation has been signed by New Zealand, Australia, Japan and Korea.
Animation campaign aims to empower borrowers The Commerce Commission has launched an original animated series to raise awareness of consumer rights.
Latest from the Financial Markets Authority
Regulatory relief required for offshore futures dealers
New exemptions for the NZ$750,000 minimum investment wholesale investor exclusion
Proposed FMA exemptions for overseas businesses and restricted schemes
New standard conditions for market services licences
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IN THE COURTS
Hidden priorities - statutory charges and the PPSA
Creditors with first-ranking perfected security interests may rank behind Customs when there is a statutory charge on goods imported into New Zealand in respect of unpaid duty.
The High Court recently held1 that, under the Customs and Excise Act 1996, Customs can rank ahead of security
interests perfected pursuant to the Personal Property Securities Act if there is a statutory charge in respect of unpaid duty on imported goods.
Neither the existence, nor the extent, of Customs’ charge will be visible on the Personal Property Securities Register.
For more information, read our previous briefing here.
1 in Fisk & McCloy v Attorney-General [2016] NZHC 479
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Supreme Court allows Mark Hotchin to seek contribution from trustee
The Supreme Court has reversed the High Court and the Court of Appeal’s decisions striking out Mark Hotchin’s claim
seeking a contribution from New Zealand Guardian Trust (Guardian Trust) towards Mr Hotchin’s alleged liability to
members of the public who invested in debenture securities issued by Hanover Finance Limited (Hanover Finance).
However, strongly worded comments from the majority judges suggest it will be difficult for Mr Hotchin to succeed in his
claim.
As a result of the decision2, Mr Hotchin will be allowed to file a fresh claim contending that:
he was liable to investors for untrue statements in Hanover Finance’s prospectus,
Guardian Trust (as the trustee for Hanover Finance) is also allegedly liable for not taking enforcement action to prevent Mr Hotchin from causing damage to investors, and
it is just and equitable that Mr Hotchin should receive a contribution towards the settlement sum that he paid to the Financial Markets Authority.
The majority judges were plainly unimpressed by Mr Hotchin’s inconsistent stances:
The Chief Justice said that Mr Hotchin’s position had an “artificial appearance” which meant that the claim for contribution “may be viewed with some scepticism”.
Justice Glazebrook said, “At best, this is hypocritical. But the suspicion must be that this may be a cynical attempt to force a settlement with Guardian Trust. If this is the case, the courts should not be party to what would be a misuse of the court processes”. Her Honour went on to contemplate that Guardian Trust could potentially bring a
new application to prevent such an abuse of process.
Justice William Young said that “His litigation stance as against the trustee is thus diametrically opposite to the position he has, in every other respect, maintained in relation to this litigation”.
It therefore remains to be seen how the High Court will deal with Mr Hotchin’s shifting stances and whether it is possible for him to establish that it is just and equitable that he should receive a contribution to his settlement.
Click here to read a full summary of the case and its implications.
2 Mark Stephen Hotchin v The New Zealand Guardian Trust Company [2016] NZSC 24
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FMA wins appeal to de-register Financial Service Provider
The Financial Markets Authority (FMA) has won its appeal against a High Court ruling that it breached rights to natural justice by failing to provide sufficient basis for its decision to deregister.
The case3 centred around a company (Vivier) incorporated in New Zealand and registered as a financial services
provider under the Financial Services Providers (Registration and Dispute Resolution) Act 2008. However, the financial services provided by Vivier were entirely provided to clients outside New Zealand. The key reasons given by the FMA for de-registration were that “registration was likely to have the effect of:
creating a false or misleading impression with respect to the extent to which Vivier provides financial services from a place of business in New Zealand and to which it is regulated by New Zealand law in relation to those services, and/or
otherwise damaging the integrity and reputation of New Zealand’s financial markets and New Zealand’s law regulatory arrangements for regulating those markets”.
The High Court found that the FMA’s decision to deregister Vivier was incorrect because it did not have particular evidence that Vivier’s registration was misleading or harmful. The High Court also found that the FMA failed to observe the principles of natural justice when it did not disclose to Vivier a specific complaint it had received. The Court of Appeal overturned the High Court’s decision:
noting that complaints about process cannot alter the essential conclusions as to the appropriateness of deregistration,
stating that the High Court applied an incorrect evidential threshold for deregistration, and
agreeing with the decision in Excelsior4 that the FMA was entitled to draw on its expert knowledge of financial
markets in New Zealand and overseas. It was in the best position to assess matters such as damage to the reputation of financial markets and whether registration would create a misleading appearance.
The Court of Appeal restored the FMA’s direction that Vivier be deregistered.
3 Financial Markets Authority v Vivier and Company Limited [2016] NZCA 197
4 Excelsior Markets Limited v Financial Markets Authority [2015] NZHC 3334
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Interest not recoverable on assigned debt
An assignee of a loan failed to recover interest on the debt because interest was not specified in the assignment.
The High Court has limited an award to the amount of the assigned debt because the assignment document did not include the right to recover interest and default interest accruing on the debt.
The case5 concerned a loan that was assigned once prior to, and twice after default, and includes discussion on
evidence of assignment to prove who the owner of the debt was.
Once the third assignee was determined to be the owner of the debt, the Court considered whether accrued interest could be claimed.
The Court decided that the third assignee was only entitled to the amount of the debt, and not the accrued interest, because the assignment did not expressly include a right to claim that interest.
The lesson for assignees is to ensure that the terms of an assignment of a debt expressly include an assignment of the right to claim interest, fees, costs and any ancillary rights.
5 Debt Buyers Limited v Adamson [2016] NZHC 932
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LEGISLATION/IN PARLIAMENT
New health and safety laws now in force
After much anticipation, the Health and Safety at Work Act 2015 and regulations relating to worker engagement, participation and representation came into force on 4 April 2016.
For more information, please see our previous briefings on the new health and safety legislation:
New health and safety laws passed by Parliament;
Australian Court determines project manager is not an “officer”;
Health and Safety at Work Regulations 2016 now available; and
Worker participation duties for PCBUs with voluntary workers.
Also, view Bell Gully partner Tim Clarke's video on what the new health and safety legislation means for your business here.
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Panama Papers - “Phase 2” of anti-money laundering reforms to be fast-tracked
New Zealand’s Prime Minister John Key has indicated that debate around the Panama Papers is likely to result in a push to finalise legislation to complete New Zealand’s anti-money laundering obligations.
According to Mr Key, "There's no question that's as a result of the debate around the Panama Papers and wider global debate".
Justice Minister Amy Adams told last year's Asia/Pacific Group on Money Laundering that a second tranche of legislative reform (broadly known as “phase 2” of New Zealand’s anti-money laundering reforms) would extend anti-money laundering requirements to professions and businesses dealing in high-value goods, such as lawyers, accountants, conveyancing practitioners and real estate agents. Ms Adams stated that “these are currently covered under the Financial Transactions Reporting Act, but a next stage would see them subject to the more robust anti-money laundering obligations under the AML/CFT”.
This recent statement by Mr Key demonstrates a renewed interest and emphasis on phase 2 of the reforms - which,
until now, have not been subject to a publicised timeline for completion.
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RECENT DEVELOPMENTS
Mandatory credit rating requirement removed for some NBDTs
The Reserve Bank of New Zealand has granted a new class exemption for certain Non-bank Deposit Takers (NBDTs) from the requirement to have a mandatory credit rating under the Non-bank Deposit Takers Act 2013.
The 2016 version has replaced the Non-bank Deposit Takers (Credit Ratings Minimum Threshold) Exemption Notice 2009, with effect from 15 February 2016.
The 2016 exemption widens the number of NBDTs to whom the exemption is available to include:
NBDTs that have just commenced business, and
NBDTs with consolidated liabilities of the borrowing group of less than NZ$20 million measured as an average over a specified 12-month period.
The exemption notice outlines certain conditions, including specified capital ratio requirements that a NBDT must comply with in order to benefit from this class exemption.
Click here for a copy of the notice.
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RBNZ consults on a crisis management regime for systemically important financial market
infrastructures
In March, the Reserve Bank of New Zealand (RBNZ) issued a consultation paper on proposed crisis management powers for systemically important financial market infrastructures (SIFMIs).
The proposed crisis management powers form the final part of proposals that the RBNZ announced in December for a new oversight regime for designated SIFMIs.
The proposed crisis management regime has two parts.
First, SIFMIs would be required to maintain business continuity plans, and recovery and orderly wind-down plans.
Second, the joint regulators (the RBNZ and the Financial Markets Authority) could call on proposed new statutory powers when these plans are inadequate to manage a crisis.
A copy of the consultation paper is available here. Submissions closed on 20 May 2016.
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RBNZ consults on review of the default option for publication of submissions
The Reserve Bank has received feedback proposing that it fundamentally change its current policy of not publishing individual submissions it receives from regulated entities to publishing all submissions by default.
Click here to read the Reserve Bank’s consultation paper.
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Lenders risk loss of interest and fees if they don’t comply with disclosure rules
The Commerce Commission has reminded lenders that failing to disclose key information to borrowers in consumer credit contracts could result in loss of all fees and interest until proper disclosure is made.
Changes to New Zealand’s consumer credit laws took effect in June 2015. The key changes include:
lender responsibility principles, supported by guidance set out in the Responsible Lending Code,
new rules about the repossession of consumer goods,
amendments to some of the disclosure rules,
higher penalties for breaking the laws, and
a broader range of enforcement tools for the Commerce Commission.
In a recent media release Commissioner Anna Rawlings noted that “the law applies to lenders of all sizes and types, from small payday lenders through to our major banks. The responsibility to ensure contracts comply with the law rests squarely on those lenders and it is essential that they ensure their disclosure documents have been reviewed and they are satisfied that the documents contain all of the relevant key information required by the Credit Contracts and Consumer Finance Act”.
Model disclosure forms are available here.
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IMF to assess how NZ’s financial institutions are prudentially regulated and supervised
The International Monetary Fund’s (IMF) Financial Sector Assessment Programme for New Zealand is expected to start later this year.
A team from the IMF will visit New Zealand twice this year, in August and November, to meet with and question New Zealand authorities, and hold discussions with industry groups and financial sector entities that are subject to regulations.
Click here for more information.
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Disclose Register – new guide released for providing managed fund data
The Companies Office has released a guide for managers of managed funds clarifying how fund data should be
prepared and uploaded to the Disclose Register.
The Guide for providing managed fund data on the Disclose Register outlines the options for delivery of data, file
formats and data requirements.
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NZX has released submissions on its review of corporate governance reporting requirements
The NZX is reviewing the 45 submissions it received in response to its consultation on proposed changes to corporate governance reporting requirements within the NZX Main Board Listing Rules.
Click here for more information.
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Asia Region Funds Passport – now signed
The Asia Region Funds Passport (ARFP) Memorandum of Co-operation has been signed by New Zealand, Australia, Japan and Korea.
Following implementation, the ARFP will provide a multilaterally agreed framework to facilitate the cross border offering of high quality managed funds across participating economies in the Asia region.
The ARFP is expected to offer an increased range of investment options in high quality managed investment products that New Zealanders may not have previously had access to, resulting in increased competition in New Zealand managed funds markets.
Click here for more information.
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Animation campaign aims to empower borrowers
The Commerce Commission has launched an original animated series to raise awareness of consumer rights.
It’s All Good features “New Zealand’s sharpest legal advisor” Aunty and her nephew Herman, with the first episode targeted at raising awareness of borrowers’ rights following the introduction of new credit laws last year.
According to Commissioner Anna Rawlings “It is important that borrowers understand the new processes that lenders
must follow when providing credit and are familiar with their rights and obligations if they decide to get a loan. It’s All
Good communicates serious messages in an entertaining format, providing another tool to reach consumers.”
All episodes are available to watch here.
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LATEST FROM THE FINANCIAL MARKETS AUTHORITY
Regulatory relief required for offshore futures dealers
The client money rules in Part 6 of the Financial Markets Conduct Regulations 2014 (the Regulations) and their application to wholesale exchange-traded derivatives is causing concern for derivative issuers.
Last year, in response to that concern, the Financial Markets Authority (the FMA) issued an exemption for US futures commission merchants in the Financial Markets Conduct (US Futures Commission Merchants) Exemption Notice 2015. That exemption exempts US FCMs from compliance with the Part 6 client money rules, but only in respect of products traded on the NZX derivatives market.
The FCM must still comply with the New Zealand client money rules in respect of products traded on offshore markets.
The FMA has said that it will be approaching the Ministry for Business, Innovation and Employment (which administers the Regulations) to seek clarification that the client money rules do not apply to exchange-traded products traded on an offshore market for wholesale investors.
However, in Bell Gully’s view this would not be a clarification; it would be a law change. That is, there is no doubt that the Regulations, as currently drafted, apply to derivatives traded on offshore markets for wholesale investors.
For more information, please see our previous briefing: Is relief in sight for offshore futures dealers from NZ client money rules?
New exemptions for the NZ$750,000 minimum investment wholesale investor exclusion
The FMA has granted exemptions for offerors of certain debt securities that rely on the NZ$750,000 minimum investment wholesale investor exclusion in clause 3 of Schedule 1 to the Financial Markets Conduct Act 2013.
Click here for details of the exemptions.
Proposed FMA exemptions for overseas businesses and restricted schemes
The FMA has consulted on four proposed exemptions for overseas businesses and trustees of restricted schemes to further support the implementation of the Financial Markets Conduct Act 2013 (FMCA) regime.
Generally, offerors relying on this exclusion must include a warning statement in every offer document and obtain an
acknowledgement of the warning from investors under the requirements of Schedule 8 of the Financial Markets
Conduct Regulations 2014. The Financial Markets Conduct (Wholesale Investor Exclusion - NZ$750,000 Minimum
Investment) Exemption Notice 2016 changes these requirements for:
offerors of Kauri bonds who are now exempted from the warning and investor acknowledgement requirements (without conditions), and
offerors on the issue of other unsubordinated debt securities, who must include a warning statement only in the principal terms sheet (which must be given to the investor) and are exempted from the investor acknowledgement requirement.
The exemption notice also allows warnings for secondary sales of unsubordinated debt securities to be given in any principal terms sheet provided to the investor.
However, it is only mandatory to give the principal terms sheet to the investor if the Bloomberg page does not contain a link to the principal terms sheet (which includes a warning statement).
Offerors on the secondary sale of unsubordinated debt securities are exempted from the investor acknowledgement requirement.
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The exemptions deal with specific transactional issues that were raised with the FMA as being particularly unworkable, and have only been granted on a 12-months basis (that is, until 4 February 2017), to enable the FMA to monitor the use of the exemptions.
New standard conditions for market services licences
On 31 March 2015, variations to some standard conditions for Financial Markets Conduct Act 2013 (FMCA) market services licences came into effect.
This followed on from the FMA’s consultation in December 2015 seeking market participants’ views on proposed variations to the standard conditions.
The key changes relate to the auditor’s procedures and the financial resources condition.
Click here for more information.
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BELL GULLY NEWS
For further details and more news visit the publications section of our website
Regime to address earthquake-prone buildings now law
Proposed overhaul of tax rules for employee share schemes
Keeping the global spotlight on corruption
The final word on fee “reasonableness”
Government announces changes to overseas investment regime
Not on the label. Online wine and sales and promotions - seller beware!
Hidden priorities - Statutory charges and the PPSA
Breach of Overseas Investment Act places “associate” rules in the spotlight
Worker participation duties for PCBUs with voluntary workers
Significant changes to employment standards imminent
Is relief in sight for offshore futures dealers from NZ client money rules?
RMA reform back on the agenda
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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
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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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