The government has granted the Financial Markets Authority (FMA) a well-signaled massive boost to its coffers with a $14 million year-on-year increase to core Crown funding arrangements.
In budget figures released last week the FMA will receive a baseline $67 million to operate over the 2022/23 period compared to $53 million last year.
Most of the regulator’s pay increase will be used to cover “licensing and compliance monitoring functions”, which has seen costs soar to $32.7 million against just over $21 million in the 2021/22 year.
As well as moving to a full licensing regime for financial advisers in the year ahead, the FMA is gearing up to assume extra duties for climate-reporting and financial institution conduct oversight.
Regulations for the climate-reporting legislation should be in place by year-end while the Financial Markets (Conduct of Institutions) Amendment legislation – or COFI – is due to reach the house committee phase this week.
Separately, the Ministry of Business, Innovation and Employment (MBIE) released final levy increase figures for the financial services industry that will see the impost for large banks rise from $1 million plus this financial year to almost $3 million by the 2025/26 period to cover COFI and climate-reporting regulatory costs.
Licensed fund managers with at least $1 billion under management will also incur further annual FMA levies ranging from $15,000 to about $40,000 to cover the new climate-reporting regime. Unlike the institutional COFI levies, however, the fund manager climate-reporting fees stay flat, or slightly decrease over the following three years.
Cabinet papers published along with the FMA levy update show COFI is expected to pass into law by July 1 this year.
Overall, the FMA annual budget will swell to more than $76 million by the 2025/26 financial year with about 85 per cent to be funded by industry levies.
“The exact amount payable by levy payers is calculated using a model designed by MBIE. Financial markets participants make a contribution to the FMA levy for each financial service they provide and, where appropriate, levy amounts are also tiered within a levy class to recognise variations in participant’s size and nature,” the Cabinet paper says.
“This means that the amount of levy charged is typically proportionate to the size of the business. For example, a large KiwiSaver provider pays more than a smaller, boutique KiwiSaver provider, and a large bank pays more than a smaller bank.”
The government will likely “under-recover” COFI levies during the first year of operation, according to the Cabinet paper tabled by Commerce Minister David Clark.
“However, I note that the Crown has tended to historically over recover on the FMA levy (for example in 2017/2018 and 2018/2019 there was an over-recovery),” Clark says in the paper. “It is possible that at the end of FY22/23 or in outyears the Crown may be in a net-positive position in relation to FMA levy collection.”
Last week the FMA also published the findings of its fund manager ‘value-for-money’ pilot study as previewed here earlier in May.
The FMA report earmarks use of benchmarks and ‘embedded’ advice fees and commissions for special regulatory attention.
Paul Gregory, FMA director investments, said the pilot study identified significant scope for improvement in how managers disclose or justify in-fund advice fees while also questioning the use of cash-based and other non market-linked benchmarks.
“A related point made during the pilot is passive funds are not a useful performance reference point for active strategies. This is nonsense,” the report says.
The regulator will also take action against some of the 14 managers who participated in the pilot study in relation to “specific matters”, a FMA release says.
“… and, together with Supervisors, [we] will engage with industry on the market index and commission issues,” the statement says. “This will be first step in the FMA’s response to these issues. The FMA has other regulatory tools available if it finds persistent conduct issues arising.”