Financial Law Insight - Financial Markets Consultation Tsunami to Herald in the New Year



2020 has started off with a hiss and a roar on the regulatory reform consultation front, with a Review of the Financial Markets Authority Funding and Levy settings released at the end of January and the Financial Market Infrastructures Bill and the Financial Markets (Conduct of Institutions) Amendment Bill both having their first readings in Parliament on 12 February. In the background, we also have some targeted consultation under way for the proposed Financial Markets Conduct (Regulated Financial Advice Disclosure) Amendment Regulations.

There’s plenty of change about. But in these capacity-constrained times, is it really worth doing the mahi and making a submission? In our first Financial Law Insight of 2020, we offer our thoughts in response to that question by taking a high-level look at the three pieces of public consultation currently on the go. There’s also some interesting timing considerations with an election looming.

Review of Financial Markets Authority Funding and Levy—the costs of remaining in the game

The Financial Markets Authority (FMA) funding options review (Review) released on 28 January has left market participants just a month to consider what is proposed before submissions close on 28 February.

Jointly authored by MBIE and the FMA, the Review feeds off a fairly comprehensive report on the efficiency, effectiveness and baseline review of the FMA completed by PwC just before Christmas.

The timing is tight for market participants to digest the contents of the PwC report, consider the options put forward in the Review paper, and present an effective submission in response. However, the Review boils down to two key questions:

  • Should the FMA’s level of funding be increased to enable it to broaden and deepen its activity, as well as uplift its capability and capacity?
  • If so, should the burden of any increase in the FMA’s appropriation be fully funded through levy increases imposed on financial service providers, or increased by a combination of Crown and levy funding to maintain the current split of 25% Crown/75% levy funding?In addition to those fundamental questions, the Review also seeks feedback on some proposed changes to the current FMA levy model to introduce new levy classes, and change some of the tiers and the proportion of the total levy borne by each class.

The new levy classes proposed are benchmark administrators, growth market operators, small issuers, and self-select schemes—effectively modernising the levy regime to reflect market dynamics. This should overcome some of the need for levy waivers in relation to the new classes that don’t fairly fit within the existing classes.

Our thoughts

Of the three funding options proposed, the ‘current spend’ option (with $9m being added to the current $36m appropriation—effectively just enabling the current scope of the FMA’s operations to be maintained) seems dead in the water. The way the Review has been couched makes it very clear that this is not a viable option from the perspective of MBIE and the FMA. Virtually every paragraph of the Review Paper discussing this option identifies negative consequences, including lack of support for FMA’s strategic direction, poor value for money, and a risk of undermining market and consumer confidence. So good luck arguing for that one!

There may also be little traction in arguing the FMA should be more efficient with its existing funding, when the PwC report found the FMA to be a ‘high-performing organisation’. Nevertheless, there is a legitimate concern that the enhanced model, involving close to $25m of additional funding to increase FMA’s indicative appropriation to over $60m, may not encourage increased efficiency.

Determining the share of funding each class of market participants should bear is one area where submissions might be worth the effort. Whether any additional funding should be entirely borne by market participants, or whether the Crown should increase its share of the funding, is another. Increasing the Crown contribution would reflect the public and private good aspect of the FMA’s operations, but there will be political pressure to place all or most of the burden on the market participants whose conduct and activities are being regulated.

In our view, lumping an extra $20-$25m cost onto market participants, on top of all the additional resourcing costs generated by the current wave of regulatory reforms, is not palatable and could have a detrimental impact on the sector.

Financial Market Infrastructures Bill—widening the regulatory net

Financial Market Infrastructures (FMIs) are multilateral systems that provide trading, clearing, settlement, and reporting services in relation to payments, securities, derivatives, and other financial transactions. They include payment systems, security settlement systems, central securities depositories, central counterparties, and trade repositories.

The FMI Bill proposes to establish a new regulatory regime for FMIs. Instead of the current limited regime in the Reserve Bank of New Zealand Act, the new regime will provide certain FMIs with legal protections relating to settlement finality, netting, and the enforceability of their rules. The new regime would involve joint regulation by the Reserve Bank of New Zealand (RBNZ) and the FMA, except in relation to payment systems where the RBNZ would act as the sole regulator.

Our thoughts?

The FMI Bill has been referred to the Finance and Expenditure Committee, with submissions closing on 26 March. The select committee is due to report back by 12 August. With Parliament rising ahead of the election on 6 August and being dissolved on the date the select committee report back is due, we can’t see this one progressing before 2021.

Nevertheless, this is an important piece of regulatory reform, given the critical role FMIs play in the operation of a sound and efficient financial system. While legislative bills that have not been passed into law before the election will go back into the melting pot of post-election legislative reforms, the current select committee process represents the best opportunity for stakeholders in FMIs—including the financial markets participants that utilise FMIs—to have their say in the effective regulation of FMIs. Any practical issues that are flushed out through the current process will have the luxury of a significant lead time before the FMI Bill is resurrected in the next Government’s term. This will enable those issues to be well worked through behind the scenes, hopefully enhancing the quality of the final legislation.

Financial Markets (Conduct of Institutions) Amendment Bill—financial institution licensing

The CoFI Bill, as it is commonly known, was introduced to Parliament back on 11 December 2019. Like the FMI Bill, it also received its first reading on 12 February, with submissions to the Finance and Expenditure Committee due by 26 March 2020. Unlike the FMI Bill, the select committee’s report due date has been accelerated to 23 June, giving it an outside chance of being passed into law before Parliament rises.

We provided a helicopter view of the CoFI Bill and the key issues involved in our December 2019 Financial Law Insight, which you can find here.

Nothing has really changed since the CoFI Bill was first introduced. However we noted with interest the strong National Party opposition to the Bill in the course of its first reading. They labelled it as unworkable and unnecessary. That opposition was in stark contrast to the near unanimous support provided for the financial advice reforms ushered into law last year in the form of the Financial Services Legislation Amendment Act (FSLAA).

The CoFI Bill reflects the Government’s response to the joint RBNZ/FMA reviews into the conduct and culture of Banks and life insurers undertaken in the wake of the Australian Royal Commission into Misconduct in the Banking, Superannuation, and Financial Services Industry. In a nutshell, the Bill proposes a new conduct licensing regime for Banks, insurers and licensed non-bank deposit takers, requiring those within its scope to abide by a fair conduct principle, and to implement a fair conduct programme, with implications for the intermediaries that distribute their products and services.

Our thoughts?

We believe the introduction of a regulatory regime involving the imposition of some form of conduct licence on Banks and insurers is inevitable. It is simply a question of timing, scope, and the prescribed requirements of the new regime that are at issue.

The CoFI Bill was generated in the back half of 2019 behind closed doors and under extreme urgency (and resource constraints). The Cabinet decisions approving the proposed introduction of the new conduct regime were only released in late September 2019, with the CoFI Bill introduced to Parliament less than three months later. The only formal opportunity for providers to participate in the process was in responding to a conduct options paper released by MBIE in the 2nd quarter of 2019.

That is unseemly haste for a piece of regulatory reform that is so significant. The FSLAA regime is still in the course of being bedded down and will not come into effect until 29 June this year. That’s after the date the select committee is due to report back on the CoFI Bill. With the conduct regime being introduced under the CoFI Bill set to have a major impact on intermediaries distributing Bank and insurance products, and those intermediaries front and centre of the FSLAA regime, this is hardly a measured approach.

Contrast the development of the CoFI Bill with the development of the FSLAA regime. That regime spawned from a review of the current Financial Advisers Act that MBIE kicked off way back in 2015. That led to a set of Government policy decisions in mid-2016, with an exposure draft of the new legislation released in early 2017, and a Bill finally introduced in August 2017. Opportunity was taken throughout the four-year period leading to the passing of FSLAA into law to engage with market participants and finesse the proposed regime, with significant changes—most for the better—effected along the way.

FSLAA is a classic example of good things taking time. Even then, there are aspects of the FSLAA regime—like the provision of financial advice through interposed persons and the disclosure rules—where it might have been good to have had a bit more time to work through the practical implications of the reforms before they were set in stone.

With the CoFI Bill, it seems there will be very limited opportunity for market participants to challenge what is proposed to ensure the end product is workable and proportionate before the new regime is passed into law. The usual process for ensuring sound regulation has been sacrificed at the altar of being seen to have done something about the conduct and culture issues identified in the joint RBNZ/FMA reviews. This is not a good process.

Call to arms!

It might be a year or three before the new regime comes into full effect, but this may well be the last chance to influence the final shape and extent of prescription involved. That means it is absolutely critical for financial market participants to engage in the select committee process and ensure their submissions are heard.

That’s not just a task for the financial institutions falling within the immediate scope of the CoFI reforms. All intermediaries involved in the distribution of Bank and insurance products will have their businesses disrupted by the reforms:

  • Financial advice providers caught by FSLAA are excluded from much of what has been proposed, but not all of it, and aspects of what is proposed may bite hard.
  • For retailers offering finance and insurance to their customers, and for other distributors of Bank and insurance products exempt from the application of the FSLAA licensing regime, the impact will be even more profound and immediate.

Fund managers and DIMS providers should also assume that the time will come when they too will be swept into the new conduct licensing regime – any relief felt at falling outside the new regulatory net may well be short-lived.


The Financial Markets regulatory reform juggernaut just keeps on going. Only a month into the New Year and already we are hearing of consultation fatigue hitting parts of the sector, with many struggling to find the resource (or enthusiasm) to engage in the FMA funding review, in particular.

We are aware of the feeling in some corners of the sector that there is no point in submitting in these processes: it is all largely a foregone conclusion. That has not been our experience, as evidenced through the significant changes that were made to FSLAA in the course of its development. Submit now, and at least you can point to having tried to influence the outcome to make it workable. Fail to submit, and you can hardly complain if aspects of the reforms or the FMA’s funding structure don’t work out as you would have liked.

One aspect of the FSLAA reforms where further, widespread consultation would have been welcomed, is the Financial Advice Disclosure Regulations. The exposure draft of those released last year threw up some significant concerns with the practical application of what had been proposed. While there is a limited, targeted consultation going on at present, the timing imperative is such that the market will see these Regulations released in their final form at some stage in March, and will have to make the best of what they are presented with. We can only hope that those holding the pen on the Disclosure Regulations have listened to the concerns raised, and that the final outcome will offer some meaningful transitional relief for those needing to put them into effect. We shall see.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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