Just a handful of managed investment scheme (MIS) applications are still in the queue as the licensing regime prepares for launch this week.
Liam Mason, Financial Markets Authority (FMA) director of regulation, said the paperwork is pending on only three MIS licences for already-established entities.
“We also have some applications for a few new entrants that we’ll be processing in December but everyone currently in the market will be through by December 1,” Mason said. “It’s not what I feared might be happening at this stage.”
He said the regulator was also working with a number of schemes – principally superannuation funds – that were in wind-up phase. The FMA has also issued MIS exemptions for several forestry and property schemes that face “long tail” wind-up procedures.
Excluding the three pending applications (which should be approved before the Thursday start date), the FMA has licensed 66 MIS managers, of which 21 operate KiwiSaver schemes.
The MIS list includes about 20 New Zealand-owned funds management firms (excepting property and forestry schemes). Roughly half of the 66 MIS entities could be described as traditional funds managers – either as direct investors in equities/bonds etc or fund-of-funds – with the remainder featuring property, forestry and UK pension schemes.
While the MIS list defines the known NZ retail funds management universe, Mason admitted there could be some yet-to-be-discovered outliers.
“It’s almost certain that there are some schemes that should’ve applied for licensing but haven’t,” he said.
Mason said the FMA would begin surveillance post December 1, liaising with the Companies Office as well as “scanning beyond that” to identify any non-compliant managers.
“We don’t expect to find a significant number,” he said. However, the FMA has a range of tools to either bring errant schemes under the MIS umbrella or close them down.
“We will freeze assets if we have to,” Mason said.
The 70 or so licensed schemes falls about 30 shy of the FMA’s initial estimate of MIS numbers with the shortfall due to some industry consolidation, several super schemes choosing to wind-up or amalgamate and “a small number have decided to go wholesale”.
He said while wholesale managers (as well as wholesale products managed by MIS managers) fall outside the Financial Markets Conduct (FMC) licensing ambit, the sector is caught under “fair dealing provisions”.
“We’ve also highlighted the risks in the wholesale sector,” Mason said. “But it’s fair to say we need to improve our data on wholesale managers… and we plan to do that partly by using our relationships built up during the licensing process.”
The FMA should also know some time in the new year the approximate value of the funds under management (FUM) represented by the MIS sector: an important figure considering the regulator will collect levies based on retail FUM, according to a sliding scale.
“We don’t know that figure yet as we don’t have complete data,” he said. “Once everyone has registered their documents and made their first quarterly reports we will have a go at doing that.”
As at last Friday, 167 schemes had uploaded documents to the Disclose website, covering all MIS schemes (including some multiple offerings from the same provider) as well as dozens of super funds, which don’t require an MIS licence.
According to Mason, the FMA was reasonably happy with the quality of documents supplied by scheme managers.
“It’s been a good start but the industry is still on a learning curve,” he said. For example, Mason said the maximum word-counts for some disclosure documents should be seen as upper limits “not targets”. Some managers were also struggling with defining their particular scheme risks.
“We haven’t seen the ‘gold standard’ [of disclosure documents] yet,” he said.
From December 1, the FMA would switch its focus to policing the MIS market along with the other licensed sectors.
According to FMA figures, as at last week licensees included: 66 MIS managers; 53 discretionary investment management service (DIMS) providers; 31 independent trustees (as well as three corporate independent trustees); 22 derivatives issuers; eight crowd-funding firms; and, seven peer-to-peer lending platforms.
The FMA also polices about 1,800 authorised financial advisers (AFAs) – although only about 1,500 are real ones.
Mason said the 25-strong supervision team was responsible for the entire range of FMC-licensed entities.
“[The size of the supervision team] underpins why we have adopted a risk-based approach to supervising the industry,” he said.
Mason said the licensing process has already lifted industry standards with about 40 people (across all licence types) either withdrawing applications or formally declined by the FMA over the last couple of years.
Of those who withdrew voluntarily, he said about 20 per cent subsequently were granted licences after improving processes.
“A small number were formally declined for reasons that were idiosyncratic to each case,” he said. “But common all of them were poor governance and systems that failed to meet the standards required to deal in the retail market.”