The Government has introduced Supplementary Order Paper No. 220 (SOP) which proposes a number of amendments to the Financial Markets Conduct Bill (FMC Bill). This SOP is likely to contain the last changes which will be made to the Bill, although there will be a further SOP which will split out Part 9 and Schedule 4 of the FMC Bill into a separate Financial Markets (Repeals and Amendments) Amendment Bill (or similar name) and a connected SOP that changes headings in Part 9.

The SOP has been prepared as a revision-track SOP, comprising a mark-up of the entire FMC Bill showing the proposed changes. All of the changes are also described in the explanatory note at the beginning of the SOP.

Whilst the majority of the amendments proposed by the SOP are minor and are mainly technical in nature or relate to consequential and consistency changes which you would expect to find in a bill that is over 650 pages long, there are also a number of significant changes, some of which required further Cabinet approval. The Cabinet paper approving those changes is available here. Briefly, those changes include:

  • Amendments to the purpose clauses of related legislation: To signal to the Financial Markets Authority, investors, market participants and the courts that all of the core financial markets legislation contribute to the same broad outcomes, the Financial Advisers Act 2008 (FAA) and the Financial Markets Supervisors Act 2011 are to be amended to identify that the overarching purposes of the FMC Bill are also purposes of those Acts.

  • Further Financial Advisers Act changes relating to custody and DIMS : The SOP introduces changes to clarify and enhance the FAA's custody regime, including those relating to discretionary investment management services (DIMS) provided under the FAA, custodians for wrap platforms and custodians for wholesale services. In addition, further amendments have been made to align regulation of DIMS provided under the FAA and the FMC Bill.

  • The removal of the general carve-out of the application of Fair Trading Act provisions to financial products and services: Following further discussions with the Commerce Commission, FMA and government officials, Cabinet has changed its position on including a general carve-out of the application of sections 9 to 11 (misleading and deceptive conduct) and 13 (false or misleading representations) of the Fair Trading Act in relation to financial products and services. Under the changes in the SOP:

    • Section 5A of the Fair Trading Act is repealed and the Act is to be amended to allow the Commerce Commission to take proceedings in relation to financial products and services under the Fair Trading Act provisions, but only with FMA's consent;

    • A double jeopardy provision will be added to the Fair Trading Act so that a person cannot be ordered to pay a pecuniary penalty, or be liable for a fine under the FMC Bill and be liable for a fine under the Fair Trading Act for the same conduct;

    • The provisions of Part 2 of the FMC Bill (which incorporate general prohibitions on misleading and deceptive conduct adapted from the Fair Trading Act to apply to financial markets) have been amended to ensure that they are as close as possible to the equivalent Fair Trading Act provisions in order to minimise the cost of complying with overlapping laws. This includes adding new unsubstantiated representation provisions (see clauses 19A to 19D) to create alignment with the Consumer Law Reform Bill, which will introduce comparable provisions into the Fair Trading Act. Under clause 19A it will be a contravention of Part 2 of the Bill to "make an unsubstantiated representation" in respect of financial products or financial services and in connection with any dealing in financial products or the supply of (or promotion by means of supply or use of) financial services. A representation is "unsubstantiated" if the person "did not have reasonable grounds for the representation, irrespective of whether the misrepresentation is false or misleading".

  • Provision for regulations to prescribe circumstances where directors are not deemed to be contraveners of the defective disclosure provisions under clause 509A: The explanatory note to the SOP suggests that this new regulatory provision has been introduced as a means to prevent unjustified compliance costs in some circumstances being incurred in relation to extensive due diligence processes that some directors may feel is necessary as a consequence of their potential liability under clause 509A. No specific details are given as to what these circumstances may be, but the Cabinet paper provides the example of the recent proposal in Australia to remove similar deemed civil liability provisions for directors in the case of simple corporate bonds. There, the deemed directors' liability provisions are viewed as being one of the legal impediments to the development of a retail corporate bond market in Australia. The paper also suggests that the deemed liability provision in clause 509A may not be appropriate for offers by local authorities, and possibly, other public bodies.

  • Amendments to the Schedule 1 disclosure exclusions for offers: In brief, these include:

    • Increasing the threshold for the wholesale investor exclusion from $500,000 to $750,000 and including this exclusion as part of the offers that may be subject to limited disclosure and other safeguards to be prescribed by regulations;

    • Removing the exclusion for offers by local authorities and for offers by lawyers of interests in contributory mortgages;

    • Widening the regulation-making powers that enable limited disclosure and other safeguards to be imposed where offers are made in reliance on Schedule 1 exclusions.

  • A new requirement to disclose equity derivative positions: In response to a Takeovers Panel recommendation, the Government has agreed to amend the "substantial product holder" disclosure requirements in Part 5 of the FMC Bill to also require disclosure of long equity derivative positions that are referenced to securities of listed issuers. For further details on the Panel's recommendation see our earlier client update: Regulators take aim at derivatives again.

Also of note for continuous issuers is the decision to extend the transitional arrangements for continuously issued debt securities or managed investment products from 12 months to a 2-year period.

Process from here

It is still possible to lobby for changes to the FMC Bill during of the Committee of the whole House stage, although the window for doing so is short. The Minister of Commerce's comments in the Cabinet paper also suggest that there is little appetite for any further substantive amendments being introduced prior to the Bill being passed. He notes that the Bill has reached a point where a line is to be drawn and "the FMC Bill should now proceed through its final stages, subject to the amendments in the SOP". Cabinet has however agreed that the Minister will be able to make further minor or technical changes to the Bill prior to its enactment.

The FMC Bill is expected to pass with these latest amendments by the end of June, but only a few provisions of the Bill will come into force at that time. Most of the Bill is not expected to come into effect until at least April 2014, and even then there will still be transitional arrangements in place between the old and new regimes.

In the meantime, there is a substantial body of regulations which need to be made under the FMC Bill before much of the Bill can be brought into force. The Ministry of Business, Innovation and Employment is currently considering submissions on its December 2012 discussion document on these regulations and the Minister is expected to seek Cabinet policy approval on the regulations this month. Under the Ministry's current timetable, an exposure draft of the regulations should be released in October 2013.