Dentons Kensington Swan has warned impending changes to the Financial Markets Conduct Act (FMC) will hand the regulator “unfettered statutory power” to storm business premises.
Under the FMC Amendment Bill currently before parliament, the Financial Markets Authority (FMA), would be granted the ability to “without notice, enter and remain at a place of business of a financial markets participant for compliance monitoring purposes”.
In a draft submission on the proposed legislation, Dentons says that while the new powers would have to meet some ‘reasonable’ conditions “these restrictions do not do enough to protect financial market participants and effectively give the FMA an unfettered statutory power” to enter and search business premises without notice.
The submission notes that under current law the regulator can apply for a court-ordered warrant to carry out searches in line with broader civil protections.
“Such a requirement is an important constitutional constraint on the powers of a regulatory body, and should be retained,” Dentons says. “We are also concerned that giving the FMA the additional power proposed in the Bill may undermine market participants’ willingness to freely engage with the regulator, and negatively impact on market culture.”
The draft law would also require businesses captured under the FMC to obtain explicit permission from the FMA for any ‘change in control’, defined as “where another person obtains significant influence, defined as obtaining 25% of voting rights or the ability to appoint 50% of directors”.
“It also covers significant transactions (asset sales) of a material part of the business and amalgamations,” the draft bill says.
David Ireland, Dentons partner, said the clause would have a chilling effect on corporate actions in the sector if the legislation proceeds as drafted.
Ireland said many merger or acquisition deals are necessarily conducted in confidence and often under time-sensitive deadlines.
He said the proposed law could see the FMA dragging an approval process over weeks or even months beyond the initial 20 working-days limit after the regulator receives all requested information.
“Many businesses might choose to walk away from any deal than have to wait for an unknown time period for FMA approval,” Ireland said.
The existing law only requires businesses to notify the FMA of any substantial changes-of-control.
According to Ireland, the draft legislation appears to confuse the “prudential” powers available to the Reserve Bank of NZ (RBNZ) with the “conduct” focus of the FMA.
Dentons says in the submission that the RBNZ ambit covers “systemically important institutions” such as banks and insurers.
“The same cannot be said for all entities licensed by the FMA, particularly financial advice providers,” the submission says.
“… There is no need for the FMA’s powers to mimic those given to RBNZ, and no identified burning platform necessitating this expansion to its powers.”
Aside from noting significant concerns about potential regulatory over-reach through the search and change-of-control veto conditions, Dentons says the proposal to introduce single-licensing is also problematic.
The draft legislation includes reforms to the Conduct of Financial Institution (COFI) regime as flagged by former Commerce Minister Andrew Bayly last year.
But while allowing institutions with multiple FMA licences to operate under a single authority was touted as a key COFI upgrade by Bayly, Dentons suggests any small efficiency gains could be outweighed by new risks.
For example, the current multi-license system means any possible regulatory breach is “not readily conflated to be a concern about the licensee at the entity level”
“This current ‘siloed’ approach means such concerns can be ring-fenced to the particular market service licence type. The same goes for supervisory engagements – they are limited to a licence type rather than the entity as a whole.”
The submission backs some of the technical changes included in the bill such as incorporating long-term FMA exemptions into legislation.
Despite backing the intent of the legislation to “reduce the regulatory burden”, though, Dentons says “some of the proposed changes may complicate rather than simplify processes and result in unnecessary costs and delays for participants and increase the workload of the FMA”.
The draft legislation passed its first reading parliament on May 20 with submissions due by June 23 ahead of a select committee report set down for October 20 (this year).