Fund managers and others caught under the impending climate-reporting regulations will have until 2026 before the Financial Markets Authority (FMA) moves into serious enforcement mode.
In a paper published last week outlining its approach to policing the Financial Sector (Climate-related Disclosures and Other Matters) Amendment Act, the FMA plots a four-phase ramp-up of regulatory actions.
“The FMA envisages taking a broadly educative and constructive approach, with a focus on issuing high-level guidance on compliance expectations in the early stages, moving to a proactive regulatory role as the CRD [climate-reporting disclosure] regime becomes established,” the note says.
Last month the External Reporting Board (XRB) released the first consultation on proposed climate disclosure standards under the new law (approved by the Queen on October 27).
Under the XRB schedule, all climate-reporting regulations should be in place by the end of next year with the 200 or so captured entities due to file first disclosures in the 2023/24 financial period.
According to the FMA paper, the regulator will release “high-level” industry guidance on the climate-reporting regime by the end of 2022 before setting more detailed expectations over the ensuing two years.
“Our initial regulatory stance will be focused on supporting CREs [climate-reporting entities] and encouraging development of good practice,” the FMA says. “Accordingly, we will likely only take enforcement action where there has been serious misconduct, such as failure to produce a climate statement, or where a climate statement is false or misleading.”
By 2026 the climate-reporting regulatory regime should be more-or-less mature, the paper says, with some scope for further development.
“The FMA will seek to settle into its ‘steady state’ level of monitoring (proactive sampling and assessment of climate statements),” the regulator says. “Good practice is likely to still be developing rather than settled; accordingly, the FMA will continue to research and develop guidance on compliance expectations.”
In addition to banks, non-bank deposit-takers, insurers and most NZX-listed companies, the climate-reporting duties will fall on all licensed fund managers with $1 billion or more under management.
Sarah Vrede, FMA capital markets director, said in a release: “While there is time to develop good practice and prepare for the first statements from 2024, we’re encouraging entities to start preparing for the new regime as soon as possible. This means finding the right people and business partners to help you understand the requirements and prepare your disclosures and getting your systems ready to ensure climate related records can be properly captured and maintained.”
Last week the regulator also offered more guidance to another of its newly acquired sector responsibilities, launching a suite of tools targeting Financial Advice Providers (FAPs).
In a statement, John Botica, FMA market engagement director, said the three self-reporting tools – covering record-keeping, cyber-security and outsourcing arrangements – followed industry requests for more guidance on the transition to full-FAP licensing
“We recognise that the requirements of full licensing can seem like a big step up, particularly for smaller advice businesses,” Botica said. “These tools are designed to help them identify the aspects of their business where they’re already compliant, as well as those areas where they might need to do a bit more work in order to apply for a Class 1 or Class 2 full licence.”
Last month the FMA set a September 30, 2022, deadline for all financial advisory firms to lodge their full-FAP licence applications. The Financial Services Legislation Amendment Act includes a two-year FAP transition licence period slated to expire in March 2023.
Transitional licensing was largely a tick-a-box affair but the full-licensing process promises to be more rigorous.
At the end of October the FMA reported just over 1,700 transitional licences still in force and more than 100 full-FAPs.
The regulator is on track for its budget – funded largely by industry levies – to more than double from its 2018/19 allocation of about $36 million. By 2023 the FMA has a $61 million budget locked-in but it will go higher still.
In October the Ministry of Business, Innovation and Employment (MBIE) released now-closed consultation on further industry levies of up to $18.8 million to cover the climate-reporting duties and other work coming via the imminent Conduct of Financial Institutions (COFI) and new insurance laws.
COFI has bounced up and down the government business priorities since an interrupted second reading in June, landing last Thursday at ninth on the parliamentary order paper.
Parliament has nine sitting days left before wrapping up 2021 on December 16.