The Financial Markets Authority (FMA) has put wholesale investment managers on notice, slating a review this quarter that may close access to one disclosure exemption avenue.
In its end-of-year wrap-up, the FMA says it plans to investigate the current let-out for product offerors from issuing “warning and investor acknowledgement requirements” to wholesale clients with at least $750,000 to invest.
“We’ll be seeking information about how the current exemptions are being used in order to be satisfied that they remain relevant and appropriate and that investors aren’t being negatively affected by the lack of warning and acknowledgement requirements,” the regulator says.
NZ legislation provides many routes for investors wishing to achieve the ‘wholesale’ designation, which excludes them from most of the protections afforded to retail investors while easing compliance burdens for product issuers. The wholesale exemption can apply to both businesses, and individuals who meet certain asset or investment minimum standards. Individuals can also achieve wholesale status by asking a lawyer, accountant or financial adviser to certify them as an ‘eligible investor’.
In 2017 the International Monetary Fund (IMF) recommended NZ should bring wholesale investment products under tighter regulations.
At the time, the IMF Financial Sector Assessment Program (FSAP) report noted: “This [wholesale funds] sector may not be significantly larger than the retail sector, but there is insufficient data to assess its risks.”
Aside from the wholesale exemption review, the FMA further plans to consult with industry on possible relief from disclosure requirements for restricted schemes before the end of March this year.
“… we will determine whether a class exemption is required,” the update says.
In December the FMA also provided industry guidance on the use of research reports prepared by offshore entities. The FMA guide confirms that for the most part overseas companies won’t be captured under NZ financial advice licensing laws for any of their research distributed here to wholesale investors or advisory firms.
“This remains the position even if the NZ firm or wholesale client passes on that research report to its retail clients in New Zealand (with or without the overseas firm’s permission),” the FMA note says.
However, offshore entities that carry out business in NZ or supply research direct to retail clients could be caught under Financial Market Conduct Act provisions.
The FMA is gearing up for a major expansion of its regulatory duties this year with Financial Services Legislation Amendment Act (FSLAA) going live on March 15. Under FSLAA, the FMA will be responsible for policing a larger chunk of the NZ financial advisory market than previously.
“As at 14 December, the FMA had licensed or authorised 1289 financial advice providers and 461 authorised bodies, representing an estimated 8423 financial advisers and 11921 nominated representatives,” the regulatory update says.
The regulator will likely be lumped with further duties once the Financial Markets (Conduct of Institutions) Amendment Bill passes into law. Known colloquially as COFI, the legislation – which establishes a ‘culture and conduct’ licensing regime for banks, non banks and insurers – is due for its final parliamentary journey after emerging out of select committee last August. COFI was 11th on the order paper as at the close of parliament on December 9.
Over the next few years the FMA, headed by Rob Everett, will see its budget about double compared to its 2019/20 government allocation with industry levies set to rise in tune.