NZ regulators have targeted licensed financial firms governance practices for closer scrutiny, slating funds management as one of four sectors to be probed in a ‘thematic review’.
In a double-team effort, the Reserve Bank of NZ (RBNZ) and the Financial Markets Authority (FMA) will select 32 firms across the four regulated areas of banking, non-bank deposit-takers, insurance and investment management to face in-depth grilling on their respective governance operations.
According to a RBNZ release: “The review will focus on boards of regulated entities and their ability to effectively govern and provide oversight. The RBNZ and FMA expect their regulated entities to have effective boards that make sound judgements in the best interest of the entity and in the interest of key stakeholders.”
“This will be an exploratory review into the structure and operational practices of boards to determine their effectiveness. The review will also help us develop and maintain a good working knowledge of board practices and their adherence to our governance expectations. This, in turn, will let us share good practices and recommend improvements within and across sectors.”
Lucky entities selected for the thematic review will have five weeks to complete a comprehensive questionnaire and supply requested information before a follow-up “onsite phase” that will include “interviews with board and committee members and senior executives of each entity”.
“Once the thematic review is completed, we will provide specific feedback to each entity that participated in the review and publish a joint thematic report,” the RBNZ release says.
Due to begin last month, the governance review should take a year to complete.
Such thematic reviews have previously set the stage for further regulatory action – often in the form of ‘guidance’ – or even legislative change. For example, the 2018/19 banking and insurance reviews, again a joint RBNZ/FMA project, triggered the law reform process culminating in the Financial Markets (Conduct of Institutions) Amendment Bill, or COFI.
COFI, which imposes a new ‘conduct’ licensing regime on many financial institutions, has been held up in parliament since its second reading was interrupted in June. According to the most recent parliamentary order paper, COFI is now second on the government’s to-do list after a debate on appropriation estimates (expected to consume some seven hours and 36 minutes of democratic time).
In its most-recent corporate plan the FMA flagged a few sectors for thematic reviews in the year ahead including the wholesale investor and discretionary investment management service (DIMS) regimes.
Meanwhile, the regulator recently extended the close-off date for submissions on proposed plans to waive certain financial reporting duties for regulated entities in liquidation, receivership or administration.
The FMA has pushed out the deadline for feedback to October 6 from the original September 8.
Under the proposed changes, Financial Market Conduct Act (FMC) regulated entities in distress would be able to access class relief from supply some financial reports.
As well as recognising technical issues for insolvent firms in filing certain reports, the proposals would also limit wind-up or restructure costs for struggling FMC-regulated businesses.
For example, the FMA says a sample of audit costs for financial statements ranged from between $2 million for a “major reporting entity” to $500,000 and $40,000 for medium-, and small-sized firms, respectively.
“In 2020, out of approximately 570 FMC reporting entities, there were 28 entities (all companies) which were in liquidation and did not file annual audited financial statements as required by the FMC Act. Out of these 28 entities, 18 of the entities were related companies. There were no financial reporting entities in liquidation that did file annual audited financial statements in 2020. The numbers are similar for 2019,” the FMA paper says.
“… While the numbers are small, we believe there is a problem which needs to be addressed.”