The International Capital Markets Review: New Zealand
New Zealand's capital markets are primarily regulated under the Financial Markets Conduct Act 2013 (the FMC Act). All offers of financial products must be made under the FMC Act. The Financial Markets Authority (FMA) is the principal regulator in respect of financial products and financial services and is responsible for enforcing the FMC Act and other financial markets legislation.
i Structure and regulation
New Zealand has a legal system based on English common law. New Zealand's laws include legislation made by Parliament, rules made by local authorities and the common law, which is developed by judges. Legislation made by Parliament overrides common law. The court system is a hierarchy that includes two appeal courts (the highest of which is the Supreme Court) whose decisions are binding on courts below them in the hierarchy.
Offers of financial products are regulated by the FMC Act and regulations made under the FMC Act (the Regulations). The FMC Act and the Regulations:
- impose fair-dealing obligations on conduct in both the retail and wholesale financial markets;
- set out the disclosure requirements for offers of financial products;
- set out a regime of exclusions and wholesale investor categories in connection with the disclosure requirements;
- set out the governance rules that apply to financial products; and
- impose a licensing regime.
A summary of the FMC Act provisions applicable to offers of financial products in New Zealand is provided in this chapter.
The FMC Act
Under the FMC Act, an offer of financial products for issue requires disclosure to investors unless an exclusion applies to all persons to whom the offer is made. Certain specified offers of financial products for sale will also require disclosure to investors.
There are four categories of financial products: debt securities, equity securities, managed investment products and derivatives, each of which is separately defined. A managed investment product refers to an interest in a managed investment scheme, which is broadly defined to include any scheme:
- the purpose or effect of which is to enable participating investors to contribute money to the scheme to acquire an interest in the scheme;
- where the interests are rights to participate in or receive financial benefits produced principally by the efforts of others; and
- where participating investors do not have day-to-day control over the operation of the scheme.
The definition of derivatives is wide and explicitly includes transactions that are commonly referred to in New Zealand or overseas financial markets as futures contracts, forwards, options (other than options to acquire by way of issue equity securities, debt securities or managed investment products), swap agreements, contracts for difference, margin contracts, rolling spot contracts, caps, collars, floors and spreads.
The FMA has the power to declare that a security that would not otherwise be a financial product is a financial product of a particular kind.
An offer of financial products that requires disclosure is a regulated offer. An offer that is not a regulated offer will still be subject to the general fair dealing provisions in the FMC Act.
The disclosure required in relation to each financial product is set out in the Regulations and is tailored according to the characteristics of the particular product being offered.
Other legislation and legislative bodies
Other key statutes regulating New Zealand's financial sector include the Financial Reporting Act 2013, the Companies Act 1993 (the Companies Act), the Financial Service Providers (Registration and Dispute Resolution) Act 2008 (FSPA), the Financial Markets Authority Act 2011, the Financial Advisers Act 2008 (FAA), the Reserve Bank of New Zealand Act 1989 (the RBNZ Act), the Insurance (Prudential Supervision) Act 2010 (the IPS Act), the Non-bank Deposit Takers Act 2013 (the NBDT Act), the Financial Markets Supervisors Act 2011 and the Anti-Money Laundering and Countering Financing of Terrorism Act 2009 (AMLA). The Financial Services Legislation Amendment Act 2019 (the FSLA Act) will repeal the FAA and introduce a new financial adviser regime in New Zealand, with full effect by 15 March 2021.
The principal regulatory bodies for New Zealand's financial sector are:
- the FMA, whose principal objective is to promote and facilitate the development of fair, efficient and transparent financial markets. The FMA's functions include monitoring compliance with, and investigating conduct that constitutes or may constitute breaches of, financial markets legislation, and licensing and supervising authorised financial advisers, qualifying financial entities, licensed independent trustees and licensed supervisors; and
- the Reserve Bank of New Zealand, which is responsible for the prudential regulation of banks, non-bank deposit takers and insurance providers.
Under the FMC Act, a person making a regulated offer of debt securities is required to appoint a licensed supervisor and enter into a trust deed with that supervisor, and issuers of regulated managed investment products under the FMC Act are required to register the managed investment scheme, appoint a licensed supervisor and licensed manager, and enter into a governing document. The licensing regime in respect of supervisors is set out in the Financial Markets Supervisors Act 2011, which includes compliance and reporting obligations for licensed supervisors and permits the FMA to remove a supervisor in certain circumstances.
ii Authorisation and licensing
There are no direct government controls on the issuing of financial products in New Zealand, either by domestic or foreign companies. However, market participants may need to obtain registrations or authorisations when participating in New Zealand's capital markets, depending on the type of activity an entity is proposing to conduct in New Zealand.
Overseas company registration
The Companies Act requires any company incorporated outside New Zealand that is carrying on business in New Zealand to register as an overseas company. Whether a particular activity or activities constitute carrying on business will be a question of fact and degree. Registration as an overseas company is a relatively simple process, although there are continuing compliance obligations for overseas companies, including the requirement to lodge annual returns with the Registrar of Companies and (for entities of a certain size) to prepare and file financial statements.
Financial service provider registration
Subject to certain limited exceptions, the FSPA requires any person who carries on the business of providing a financial service and is ordinarily resident in New Zealand, has a place of business in New Zealand or is required to be a licensed provider under a licensing enactment (which includes registered banks, authorised financial advisers, certain licensed supervisors and others) to be registered for that service on the publicly available Financial Service Providers Register (the FSP Register). Financial service providers that provide financial services to retail clients must also join an approved dispute resolution scheme, subject to certain limited exceptions.
The definition of financial services is broad and includes, inter alia:
- a financial adviser, broker, licensed non-bank deposit taker or registered bank;
- any person participating in a regulated offer as the issuer or offeror of financial products;
- any person acting in the capacity of an issuer, supervisor or investment manager in respect of a regulated product;
- any person acting as a custodian or offering a licensed market service;
- an operator of a financial products market; and
- any person that trades financial products or foreign exchange on behalf of another person.
Most participants in the financial services industry in New Zealand will be required to register under the FSPA. Registration is a simple process, and registered entities are required to pay annual fees depending on the nature of the financial services being provided. Pursuant to incoming amendments to be made by the FSLA Act, businesses will be required to have a stronger connection to New Zealand to register on the FSP Register. For example, the FSPA will not apply merely because a business' financial services are accessible by persons in New Zealand; and the FSPA will not apply if the financial services provider does not have a place of business in New Zealand and is not providing its services to any retail client in New Zealand. However, the FSPA will apply to a reporting entity under New Zealand's anti-money laundering legislation.
A person who provides financial adviser services (or broking services) in the ordinary course of his or her business to clients in New Zealand is currently required to comply with certain disclosure, conduct and registration requirements under the FAA. The requirements apply regardless of where the person providing the financial adviser service is resident, is incorporated or carries on business.
A person is deemed to provide a financial adviser service if he or she gives financial advice, provides an investment planning service or provides a discretionary investment management service. Financial advice is given when a person makes a recommendation or gives an opinion in relation to acquiring or disposing of a financial product (which would include equity securities and debt securities).
Financial adviser services exclude, inter alia:
- any form of communication made by or on behalf of an issuer of financial products that is not a regulated offer because of a relevant exclusion (which includes offers to wholesale investors);
- providing or making available a product disclosure statement, other limited disclosure document or information from a register entry or advertisement under the FMC Act; and
- financial adviser services covered by a market services licence for discretionary investment management services.
The FAA imposes different requirements depending on the types of products being advised on, the intended audience (whether wholesale or retail) and the type of advice (personalised or generic class advice). For example, the requirements for a financial adviser providing personalised financial advice to a retail client will be more onerous than the requirements for a provider of class advice to wholesale clients.
Once the relevant provisions of the FSLA Act come into force, the FAA will be repealed and a new regulatory regime for the provision of financial advice established through amendments to the FMC Act. The key elements of the new regulatory regime are that:
- all persons who provide financial advice services (known as financial advice providers) must be licensed by the FMA. The licensing requirement does not apply if the service is not provided to any retail client. Financial advice providers may be entities or individuals that give regulated financial advice to their clients on their own account or engage other persons to give regulated financial advice to their clients on their behalf;
- persons who may be engaged by a financial advice provider to give regulated financial advice are financial advisers, nominated representatives or other persons engaged through interposed persons;
- a Code of Conduct will apply to all persons who give regulated financial advice to retail clients. The Code of Conduct was approved in May 2019, and sets standards of ethical behaviour, conduct, client care and competence, knowledge and skill; and
- in addition to the Code of Conduct, duties also apply to all persons who give regulated financial advice, whether to retail or wholesale clients, including the duty to give priority to clients' interests and disclose certain information to clients (although the required information is likely to vary for wholesale and retail clients).
The new regime (including the Code of Conduct) will come into force by 15 March 2021, followed by a two-year transition period. During the transition period, financial advice providers will need to hold, and all persons giving regulated financial advice will need to be covered by, a transitional licence. The FMA began accepting transitional licence applications in November 2019 and will be accepting full applications once the new regime commences fully.
Bank or insurance company registration
Registration as a New Zealand registered bank is not required to provide banking or financial services, or to offer or sell financial products in New Zealand. However, pursuant to the RBNZ Act, no person can carry on any activity (directly or indirectly) in New Zealand using a name or title that includes the restricted words 'bank', 'banker' or 'banking', or any derivatives thereof (including any translation of those words into another language). The IPS Act contains a similar prohibition in relation to the use of 'insurance', 'assurance', 'underwriter' and 'reinsurance' (and terms with the same or a similar meaning). The prohibitions do not apply under the RBNZ Act if an entity is a registered bank, or under the IPS Act if an entity carries on insurance business in New Zealand (which would require the entity to hold an insurance business licence). If a potential issuer wishes to use a restricted word in its name but not register as a bank or obtain an insurance business licence, an application can be made to the Reserve Bank for an authorisation or exemption.
The Reserve Bank has released guidance on the interpretation of the relevant legislative provisions and a class authorisation for overseas banks (that are not registered in New Zealand) to carry on limited wholesale activities in New Zealand without the need for registration, subject to certain requirements. The class authorisation came into force on 23 September 2019.
A non-bank deposit taker (NBDT) is a person who makes a regulated offer of debt securities in New Zealand and carries on the business of borrowing and lending money, providing financial services, or both. The definition is broad and captures entities beyond the traditional finance companies at which the regime was originally targeted. The NBDT Act currently requires NBDTs to be licensed by the Reserve Bank. NBDTs are subject to prudential supervision by the Reserve Bank with the relevant supervisor (trustee) tasked with monitoring an NBDT's compliance with the relevant prudential requirements. The prudential supervision of NBDTs is part of a wider review of the RBNZ Act and in December 2019, the Treasury announced the in-principle decision that there will be a single deposit-taker regime that will apply to both banks and NBDTs.
iii Offers of financial products
New Zealand has a disclosure-based approach to the offer of financial products to the public. An offer of financial products for issue will require full disclosure to investors under Part 3 of the FMC Act, unless an exclusion applies (and limited disclosure is required for offers made in reliance on some FMC Act exclusions).
In addition, certain offers of financial products for sale (secondary sales) also require disclosure. For example, if financial products are issued (but not, inter alia, under a regulated offer) with a view to the original holder selling the products, and the offer for sale is made within 12 months of the original issue date, that secondary offer will require disclosure.
The FMC Act applies to any offer of financial products in New Zealand regardless of where the resulting issue or transfer occurs, or where the issuer is resident, incorporated or carries on business.
For a regulated offer of financial products, a product disclosure statement (PDS) must be prepared, and certain information relating to the offer must be contained in a publicly available register entry for the offer. The PDS must be lodged with the Registrar of Financial Service Providers, and the register entry must contain all material information not contained in the PDS. Material information means information that a reasonable person would expect to, or that would be likely to, influence persons who commonly invest in financial products in deciding whether to acquire the financial products on offer and that is specific to the particular issuer or the particular financial product. Investors to whom disclosure is required must (subject to certain exceptions) be given a PDS before an application to acquire the relevant financial products under a regulated offer is accepted.
The Regulations set out detailed requirements for the timing, form and content of initial and continuing disclosure for financial products, including limited disclosure for products offered under certain FMC Act exclusions. The content requirements for a PDS are prescriptive and include prescribed statements and page or word limits. The Regulations impose different disclosure requirements for different types of financial products.
Under the FMC Act, there is an exclusion for offers to wholesale investors, which includes:
- investment businesses;
- people who meet specified investment activity criteria;
- large entities (those with net assets of at least NZ$5 million or consolidated turnover over NZ$5 million in each of the two most recently completed financial years);
- government agencies;
- eligible investors;
- persons paying a minimum of NZ$750,000 for the financial products on offer;
- persons acquiring derivatives with a minimum notional value of NZ$5 million; and
- bona fide underwriters or sub-underwriters.
Even where an exclusion applies, certain disclosure requirements may still apply.
The FMC Act also contains an exclusion for quoted financial products (QFP). This exclusion allows issuers to offer equity securities, debt securities and managed investment products of the same class as financial products that are quoted on an appropriate licensed market without a PDS. The QFP exclusion can also be used for offers of options to acquire financial products where the underlying financial products are of the same class as QFPs. The issuer must issue a 'cleansing notice' to the market (which includes a confirmation that the issuer is complying with its continuous disclosure and financial reporting obligations), as well as a document setting out the terms and conditions applicable to the financial product (commonly a short-term sheet). The QFP exclusion is popular among issuers, and has quickly become the norm in the debt and equity markets.
If a PDS, any application form that accompanies that PDS or the register entry relating to a financial product omits information required by the FMC Act or the Regulations, or contains a statement that is false or misleading or is likely to mislead, and that matter is materially adverse from the point of view of an investor, there is potential civil liability under the FMC Act. If a person acquires a financial product that declines in value after defective disclosure is made, that person is treated as having suffered loss or damage because of that defective disclosure unless it is proved that the decline in value was caused by a matter other than the relevant statement. This reverses the usual onus of proof and means that investors do not need to show the link between the defective disclosure and the loss they have suffered to obtain an order for compensation.
Every director of the offeror at the time of the contravention will be treated as also having contravened that provision of the FMC Act, and can be ordered to pay a pecuniary penalty or compensation. A number of defences are available to that director, including if he or she can prove that he or she took all reasonable and proper steps to ensure that the entity complied with the relevant provision.
Criminal liability can also attach if the offeror knows that, or is reckless as to whether, a statement is false or misleading or is likely to mislead. In these circumstances, a director of an offeror may also commit an offence if the director knows or is reckless as to whether the statement is false or misleading or likely to mislead.
iv Some other features of New Zealand's capital markets
Regulation of derivatives
Offers of derivatives are regulated by the FMC Act, and issuers are required to prepare and lodge a PDS in respect of a regulated offer of derivative products.
A derivatives issuer (meaning a person in the business of entering into derivatives) who makes regulated offers of derivatives is required to hold a market services licence (unless an exemption applies). In addition to the exclusions discussed above, there are exclusions under the FMC Act that apply specifically to offers of derivatives, including:
- offers of derivatives made by a person who is not a derivatives issuer;
- offers of quoted derivatives on a licensed market;
- offers of derivatives approved for trading on a prescribed overseas market; and
- offers of currency forwards by registered banks (or their subsidiaries) where settlement is, broadly, within 12 months of issue.
If a derivatives issuer makes a regulated offer of derivatives, it will also be required to ensure that a client agreement is in place with the counterparty prior to the issue of the derivative and provide confirmations to the counterparty.
Exchanges and markets
The FMC Act
A person who wishes to operate a financial product market in New Zealand will be required to obtain a licence to operate that market from the FMA or the responsible minister under the FMC Act. NZX Limited (NZX) is currently a licensed market operator in New Zealand and is licensed to operate, inter alia, the NZX Main Board (NZSX, NZX's original equities market) and the NZX Debt Market (NZDX). With effect from 1 July 2019, the NXT Market and NZX Alternative Market (for small to medium-sized businesses) were consolidated with the NZSX into a single equity board, the NZX Main Board, and the NZX Listing Rules (the Listing Rules) were revised to provide for the listing of funds and wholesale debt.
Listed issuers whose securities are quoted on one of NZX's licensed markets will be subject to the Listing Rules applicable to that market and the FMC Act. The Listing Rules set out a number of obligations for issuers, including obligations to prepare and deliver annual reports to NZX that contain certain prescribed information, and to make a preliminary announcement to the market after the end of each financial year or half year. Listed entities must also describe their corporate governance practices in detail in their annual reports (to the extent that these are not described on its website).
In addition, listed entities must comply with the continuous disclosure requirements of the Listing Rules and disclose price-sensitive information to the market (by means of an announcement to NZX) immediately once they become aware of the information. There are limited exceptions to this disclosure obligation.
In certain circumstances, listed entities must also release material information to the market to prevent the development or subsistence of a market for its securities based on false or misleading information.
There are two principal settlement and clearing systems operating in the New Zealand financial markets: the NZClear system operated by the Reserve Bank (formerly known as Austraclear) and the clearing and settlement system operated by New Zealand Clearing and Depository Corporation Limited (a wholly owned subsidiary of NZX) (NZCDC). NZCDC clears and settles all trades conducted on NZX's markets.
NZClear and the NZCDC have each been declared to be a designated settlement system for the purposes of the RBNZ Act. As a result, those systems are subject to statutory protections in relation to, inter alia, the enforceability of the rules, the finality of settlements and the validity of netting in respect of those systems.
New Zealand is not a member of the G20 and has not introduced legislation to require standardised over-the-counter (OTC) derivatives contracts to be cleared through central counterparties. However, in August 2019 the Financial Markets (Derivatives Margin and Benchmarking) Reform Amendment Act 2019 (the FMRA Act) was enacted to amend aspects of New Zealand law to allow compliance with the G20 margin requirements for OTC derivatives.
Directors' duties in New Zealand are prescribed by legislation, in particular the Companies Act, and common law. As fiduciaries, directors owe a duty:
- to act honestly;
- to exercise care and diligence;
- to act in good faith in the best interests of the company and for a proper purpose;
- not to improperly use their position or company information; and
- to disclose their material personal interests and avoid conflicts of interest.
Directors have duties regarding financial and other reporting and disclosure, solvency matters and reckless trading.
The Companies Act permits directors to rely on information or advice supplied by employees, professional advisers or experts, and other directors or directors' committees, provided that a director acts in good faith, makes proper enquiries where warranted by the circumstances, has no knowledge that this reliance is unwarranted, and has reasonable grounds to believe that his or her reliance on another person was warranted. Breaches of certain directors' duties under the Companies Act attract criminal liability.
At least one director of a company incorporated in New Zealand must live in New Zealand, or in an 'enforcement country' where that director is also a director of a company registered (not as an overseas company) in that enforcement country. Similar requirements apply to limited partnerships under the Limited Partnerships Act 2008. At present, Australia is the only country prescribed as an enforcement country.
New Zealand's anti-money laundering regime is set out in the AMLA.
The AMLA applies to reporting entities, which include, inter alia:
- a financial institution (a wide definition that includes a person who participates in securities issues and provides financial services related to those issues in the ordinary course of business);
- a designated non-financial business or profession; and
- any other person or class of persons deemed to be a reporting entity under the regulations or any other enactment.
The AMLA includes customer due diligence, reporting and record-keeping requirements, and in addition requires reporting entities to develop and maintain a risk assessment and a risk-based anti-money laundering and countering financing of terrorism programme. The AMLA provides for external supervision of entities subject to the AMLA to monitor the level of risk of money laundering and the financing of terrorism involved in an entity's activities, and to ensure programmes are appropriately tailored to address those risks.
In addition to the OTC reforms discussed above, the FMRA Act will introduce a voluntary licensing regime for administrators of financial benchmarks to be supervised and enforced by the FMA. The regime will be brought into force by order in council no later than 30 August 2021. Implementation of this regime is intended to ensure that a New Zealand financial benchmark can continue to be referenced within the EU when Regulation (EU) No. 2016/1011, commonly referred to as the Benchmarks Regulation, fully comes into force.
The year in review
i Green bonds guidance from the FMA
Since the inaugural retail (regulated offer) of green bonds in New Zealand in June 2018, New Zealand issuers have continued to successfully raise financing through such offers. In December 2019, the FMA provided guidance on disclosure requirements for green bonds under the FMC Act, clarifying that issuers may only rely on the QFP exclusion if they have quoted green bonds with identical green features (rights, privileges, limitations and conditions). In reinforcing the distinction between green and non-green 'vanilla' bonds, the FMA highlighted the importance of maintaining investor confidence in green products by minimising the risk of greenwashing.
ii Financial market infrastructure reforms
In December 2019, the Financial Market Infrastructures Bill (the FMI Bill) was introduced to Parliament. Once enacted, the FMI Bill will establish a new framework for regulation and supervision of financial market infrastructures, namely systems used for clearing, settling or recording payments, personal property and other transactions within the financial system. Under the proposed regime, the regulators will have a range of information-gathering and investigative powers, with enhanced regulation and settlement and netting certainty in certain circumstances. The Bill is currently awaiting its second reading and the Reserve Bank has indicated that the precise transaction timeline will also depend on covid-19 developments.
iii Response to covid-19
Following the emergence of covid-19, the New Zealand government and other regulators responded with a variety of measures.
These included the delayed implementation of the FSLA Act and temporary changes to a number of key pieces of legislation, such as the COVID-19 Response (Further Management Measures) Legislation Act 2020. This Act included a temporary business debt hibernation regime and a temporary 'safe harbour' for New Zealand directors from personal liability for insolvency or reckless trading under the Companies Act for the period from 3 April to 30 September 2020.
In April 2020, NZX Regulation released guidance on issuers' compliance with their continuous disclosure obligations under the Listing Rules in light of the challenges posed by covid-19. In addition to detailed comments on potential issues such as assessing materiality, NZX Regulation emphasised that, while a pragmatic approach would be taken, the obligation to disclose material information promptly and without delay remains a fundamental obligation on issuers under the Listing Rules.
In August 2020, the Reserve Bank announced that its Large Scale Asset Purchase (LSAP) programme, which aims to inject money into the economy, would be expanded. By June 2022, under the LSAP programme the Reserve Bank will purchase in the secondary market up to NZ$100 billion of New Zealand government bonds, bonds issued by the New Zealand Local Government Funding Agency and New Zealand government inflation-indexed bonds.
Outlook and conclusions
Like the rest of the world, the impact of covid-19 on New Zealand's capital markets remains to be seen. Since the initial full nationwide lockdown in the first half of 2020, issuers have re-entered both the retail and wholesale markets, including Mercury NZ Limited's debut green bond issuance in September 2020. However, continued worldwide volatility and the delay of anticipated law reform because of covid-19, including the implementation of the FSLA Act and review of the RBNZ Act, mean New Zealand's capital markets are likely to remain in a state of change for the next 12 to 18 months. Participants will also be keeping a close watch on the results of the general election in October 2020, which may lead to further changes or additional initiatives as a result of covid-19 or otherwise.
1 Deemple Budhia is a partner and Ling Yan Pang is a senior associate at Russell McVeagh. The authors would like to thank and gratefully acknowledge the assistance of Victoria Jones.