An industry body representing licensed NZ fund managers has called for a radical regulatory rethink as the new government assumes power.
In a ‘briefing to income ministers’, the Boutique Investment Group (BIG) says the medium-sized managers that represent the bulk of its membership are overloaded with rules while risks are piling up outside the current regulatory perimeter.
Simon Haines, Nikko Asset Management legal counsel and BIG chair, said small- and mid-sized licensed investment firms can’t properly accommodate the slew of formal regulations, ‘guidance’ and ‘expectations’ that the Financial Markets Authority (FMA) has loaded on the industry over the last couple of years.
Haines said as well as resource-heavy legal requirements such as anti-money laundering (AML) and new climate-change reporting, the industry has been weighed down by a series of FMA standard-setting exercises including the ‘value-for-money’ push, liquidity requirements and the just-released ‘outcomes-focused’ approach.
However, he said other equally important, if lightly or unregulated, parts of the NZ investment market tend to escape attention despite the emergent risks.
“What is extremely frustrating is that while our sector is subject to laws of diminishing returns, as the ‘expectations’ for us are continually added to, more significant issues in adjacent and competing markets do not appear to receive the same focus,” the BIG briefing says.
For example, Haines said while KiwiSaver managers are tightly policed, fund administrators and custodians – key cogs in the NZ investment machinery – mostly fall outside the regulatory purview.
The briefing also flags the “three entity supervisor market” as “problematic given the level and nature of change at one of the supervisors”.
BIG suggests the FMA could make better efforts to promote the benefits of investing in regulated funds instead of the growing number of mass-marketed “get rich quick” products such as “crypto currencies, forex training courses, unregulated schemes, and do it yourself trading”.
Similarly, the briefing notes that the ‘wholesale’ investing rules still leave much room for abuse, regardless of recent FMA actions against several players in the market.
Policing wholesale investments is “a fringe area for the FMA, when it should be a core area”, the BIG note says.
And one side-effect of loose wholesale investment regulations is making it more difficult for NZ fund managers to compete in the Australian institutional market, Haines said.
He said NZ fund managers looking for institutional mandates in Australia must hold an Australian financial services licence because of the lack of a wholesale fund licensing regime on this side of the Tasman: NZ-based managers are the only ones not to receive an exemption from the Australian wholesale licensing requirements,
While the trans-Tasman Mutual Recognition (TTMR) agreement does allow regulated retail funds to be offered in both Australia and NZ dual disclosure documents, to date the flow of money has been a “one-way street”, Haines said.
Australia-domiciled funds continue to be a popular, if unquantified, option for NZ investors, albeit with some regulatory inconsistencies between the two countries.
Overall, BIG urges the government and FMA to “right size” regulations while collaborating with the licensed fund manager sector to “address emergent challenges that we both have an interest in solving”.
Haines said Andrew Bayly, the new National Party Commerce Minister, told BIG the issues raised in the briefing were “on his radar” while the FMA has pencilled in talks.
Founded as a loose collective of licensed manager compliance experts in 2015, the industry body formalised as BIG in 2020 with about 25 members from non institution-owned firms and service providers.