The on-site work supporting the findings and conclusions of this Technical Note was conducted during November 2016. The information in this note is current as of December 2016.
The relevant IOSCO documents used are: Methodology for Assessing Implementation of the IOSCO Objectives and Principles of Securities Regulation, August 2011, Principles of Suspensions of Redemptions in Collective Investment Schemes (CIS), January 2012, Policy Recommendations for Money Market Funds, October 2012, Principles of Liquidity Risk Management for CIS, March 2013, Principles for the Valuation of CIS Assets, May 2013 and Standards for the Custody of CIS Assets, November 2015.
Known as CIS at the time of the last FSAP, they were later renamed Managed Investment Schemes under the new regime, as explained in more detail below.
In many instances, KiwiSaver schemes take the form of umbrella schemes, with several different investment fund options within one scheme.
Early withdrawals are permitted in limited circumstances, such as experiencing significant financial hardship, having moved overseas permanently or to assist with the purchase of a first home.
All references to dollar amounts ($) in this note will be to New Zealand dollars.
The FMA’s responsible Minister announced on November 3, 2016 the government’s approval to a funding increase for the FMA of approximately 20 percent of its budget, to come from changes in levies of financial services providers. The funding increase was considered necessary to account for the growth in the FMA’s responsibilities created by the implementation of the FMC Act and the progressive implementation of the Financial Advisers Act and the AML/CFT Act.
The exclusion regime in Schedule 1 covers buy-side exclusions like offers made to wholesale investors and sell-side exclusions that relate to the characteristics of the issuer (e.g., offers by the Crown or offers of debt and related products by registered banks). It also covers exclusions based on the relationship between the issuer or the investor (e.g., close business associates and relatives).
The FMC Act provides for fair dealing in relation to financial products and services by prohibiting misleading or deceptive conduct, false or misleading representations, unsubstantiated representations and offers of financial products in the course of unsolicited meetings. The fair dealing provisions of the FMC Act apply to all recipients of financial products or services regardless of whether they are a retail or a wholesale client (Fair Dealing Obligations).
A reform of the FSPR is currently under discussion to re-design its features in a manner that the registration of an entity does not create a misleading appearance as to the entity providing financial services in New Zealand or being regulated by New Zealand law.
As explained in further detail below, offers of funds to wholesale investors are not covered by the FMC Act regime and therefore, wholesale funds and wholesale fund managers are not supervised by the FMA, which means no official data is available on the size of this sector.
While data for the number of licensed managers and registered MIS is as of December 1, 2016 (post transition into the new regime), the data on AUM are as at September 30, since MIS managers are only required to report AUM data quarterly.
For MIS this includes being registered as an Australian scheme and preparing an Australian offer document. In addition to compliance with Australian law, the regime requires that suitable warning statements are provided to investors to put them on notice to the effect that the offer is an Australian offer and may be subject to additional risks. In addition to the FMA’s bilateral MoU with ASIC for investigation and enforcement issues, the Companies Office and the FMA have established protocols for cooperation between the authorities administering the mutual recognition regime.
Wholesale MIS may also choose to voluntarily register.
Further to the FMC Act, the MIS Manager is required to: act honestly in its role as MIS Manager, act in the best interest of the scheme participants and treat such participants equitably when exercising any of its powers or duties as MIS Managers, and not make use of information acquired through its role as MIS Manager to gain an improper advantage for itself or any other person, or cause detriment to scheme participants (Overarching Duties of Managers).
Restricted MIS are required to report to the FMA in a manner similar to the way in which Registered MIS must report to the Supervisor.
LITs must satisfy the eligibility criteria in the FMC Act and the minimum standards defined by the FMA in its licensing guidelines for LITs that cover the following categories: general legal requirements, fit and proper, capability, operational infrastructure, financial resources and governance.
Forward pricing is understood to be the practice of effecting purchases and redemptions of CIS interests at the next computed NAV after the receipt of the order. Therefore, investors will not know the NAV per unit at the time of placing the order within the relevant cut-off time and all investor orders will be treated the same. IOSCO Principles for the Valuation of Collective Investment Schemes provide that the purchase and redemption of CIS interests should not be made at historic NAV.
IOSCO defines MMFs as investment funds that seek to preserve capital and provide daily liquidity, while offering returns in line with money market rates. Policy Recommendations for Money Market Funds, IOSCO, October 2012.
There are other cash MIS that invest fully in New Zealand bank deposits. These typically offer a variable rate of return that is allocated to investors in the form of units and are offered as an alternative to bank deposits due to the MIS having better tax treatment. They would be subject to the same credit risk as a deposit with a credit institution.
Before appointing or reappointing an auditor for a Registered MIS, the MIS Manager must consult with the Supervisor, ensure that the comments of the Supervisor on the appointment are taken into account and enable the Supervisor to be a party to an engagement for the Supervisor to obtain assurance of matters relevant to the exercise or performance of the powers or duties of the Supervisor.
In the context of this mission it has not been possible to conduct a detailed comparison of the accounting requirements.
Recommendation 10: “MMFs that offer a stable NAV should be subject to measures designed to reduce the specific risks associated with their stable NAV feature and to internalize the costs arising from these risks. Regulators should require, where workable, a conversion to floating/variable NAV. Alternatively, safeguards should be introduced to reinforce stable NAV MMFs resilience and ability to face significant redemptions.”
Recommendation 1: “MMFs should be explicitly defined in CIS regulation.”
While review of MIS managers’ liquidity risk management systems is done on a systematic basis at the time of licensing, the FMA has so far only done sample reviews of some of the governing documents and SIPOs for the MIS they manage (i.e., no exhaustive review of all Registered MIS’ SIPOs and governing documents has been carried out).
Note that entities performing delegated investment management functions in New Zealand for MIS are not required to be licensed by the FMA. The provision of portfolio investment management services to retail clients (where entities make buy-sell decisions for retail clients without needing to consult them), is called Discretionary Investment Management Services (DIMS) in New Zealand, and is licensed by the FMA.
Since 2011, the FMA brought proceedings in relation to 19 finance companies, resulting in more than $82 million returned to investors, $18 million imposed as fines, 37 directors being convicted and banned and 11 people agreeing to be subject to certain restrictions on their ability to be involved in the management of entities.
Enforcement action has been taken in a number of areas and using a variety of enforcement tools. Notable enforcement activities have related to governance and culture.
Due to the novelty of the MIS regime, it was not possible for this mission to evaluate any meaningful information on sanctions or enforcement actions affecting MIS managers.