All NZ investors could waive their retail protection rights under plans floated in the recent Capital Markets review.
If adopted, the proposal – one of 42 in the EY-produced ‘Growing New Zealand’s Capital Markets 2029’ report – would allow anybody to claim wholesale investor status and step outside the Financial Markets Conduct Act (FMC) fence.
Under current rules, individual wholesale investors must meet either strict net asset requirements or be certified by a relevant professional as an ‘eligible investor’.
However, the EY report argues the ‘eligible’ avenue should be open to all without the existing “subjective” criteria through a self-certification process, albeit one signed off by a lawyer, accountant or financial adviser.
“Under the alternative, eligible investors should be able to certify that they do not require the usual information that would be available to them for a regulated offer, that they acknowledge there is a risk they may lose some or all of their money, that they understand that there may not be liquidity or regular disclosure, and that there are risks in concentrating their investment in any one investment or type of financial product,” the report says.
The EY report says self-certified eligible investors would have to recertify for each off-FMC product they bought while other caveats might apply including: a requirement that certifying professionals can not receive any inducement, other than a fee from the investor, to approve eligible status; and, a monetary limit.
According to the report, commissioned by the NZX and the Financial Markets Authority (FMA) last year, open-access to unregulated wholesale products through a “broader self-certification regime, as suggested, would give all New Zealand investors increased access to private investment opportunities”.
The proposal, like many others in the EY document, attempts to stretch the bounds of the existing rules rather than upend the whole system as the previous Capital Markets report recommended in 2010.
Following the 2010 report the government introduced the regime-changing FMC legislation, which, among other items, set the retail investment border controls the EY proposes to ease.
Similarly, the new report recommends extending the portfolio investment entity (PIE) tax rules to all direct listed share holdings.
Such a move, the report says, would remove the uncertainty “over the tax treatment of individuals who make gains and losses when trading their listed shares, and income derived from shares is taxed up to 33%”.
It’s not clear from the report, though, whether direct share portfolios would also incur the same reporting and disclosure obligations of PIE funds.
Hamish Macdonald, NZX general counsel, said the PIE-expanding proposal – like the others in the EY report – would require further detailed feasibility studies.
“But it’s a sensible suggestion to level the tax playing field between direct and managed fund investments,” Macdonald said.
He said regardless of the ultimate outcome of the latest capital markets review, the report serves as a conversation-starter on driving positive change across the industry.
“There’s huge value in the discussion process with different perspectives to explore a range of topics,” Macdonald said. “Within the industry, different organisations tend to be busy doing their own things so it’s worthwhile bringing them together around a consistent vision on how we can grow capital markets in NZ.”
As well as suggesting further tinkering with the KiwiSaver market, the 104-page EY report recommends changes across regulation, public sector assets, listing rules, financial education, tax and technology.
“Most of the proposals are apolitical, so they should be achievable whatever government is in power,” Macdonald said.
He said the NZX, FMA and other industry participants would consider responses to the report over the next year or so.
“It would be unrealistic to see recommendations adopted in the near term,” Macdonald said. “This is a 10-year vision for the markets.”