The Ministry of Business, Innovation and Employment (MBIE) has released a third exposure draft of the FMC regulations for the second phase of the implementation of the Financial Markets Conduct Act 2013 (FMCA), with accompanying commentary. Submissions on this exposure draft close on 20 June 2014.
Copies of both documents and details of how to make online submissions on the exposure draft are on MBIE’s website here.
Background to the third exposure draft
This latest exposure draft covers the draft regulations setting the core content of disclosure for financial products and the mutual recognition of security offerings with Australia. This includes the content of the Product Disclosure Statement (PDS), offer register and ongoing disclosure requirements for the five types of financial products:
- equity securities;
- debt securities;
- managed funds;
- other managed investment schemes; and
Much of the content of this third exposure draft was previously consulted on in October 2013, when the draft “disclosure requirements” were publicly released along with the first exposure draft of regulations. (Details of this consultation and copies of the submissions received on this consultation are available here.) This third exposure draft reflects submissions on the October exposure draft requirements and further thinking by the Ministry and FMA (some of which is set out in the commentary paper).
The draft regulations set content only. The regulations relating to the disclosure process were consulted on in the first exposure draft of regulations (click here for a copy of those regulations).
Additional disclosure matters are still being worked on, including variations for particular products and issuers, and the service disclosure statements for discretionary investment management services (DIMS). MBIE have indicated that they will consult further on these matters over the next few months.
MBIE acknowledges that this exposure draft will not be completely right and notes that the Ministry is continuing to work on addressing inconsistencies and gaps. The focus of this consultation is to obtain feedback on some particular issues outlined in the commentary paper and to determine whether there are any technical issues with the regulations which will result in the regulations not achieving the desired effect or having unintended consequences.
Overview of the disclosure regulations
The disclosure-related regulations in the exposure draft are set out as follows:
- Part 1 – which contains a number of general disclosure-related regulations;
- Part 2 – which sets out the regulations for the mutual recognition of offerings with Australia;
- five schedules covering the disclosure requirements for each type of financial product; and
- a schedule of warning statements for Australian offers using the mutual recognition regime.
The general disclosure-related regulations in Part 1 of the exposure draft apply across all of the disclosure requirements for each type of financial product set out in the five schedules. They cover key general rules for content and presentation of the PDS, register entry and other disclosure documents. These include:
- Covering information and KIS: requirements for standardised covering information and a key information summary (KIS) at the start of each PDS; and
- PDS length limits: a hard length limit for PDSs of 60 pages (for equity and complex managed investment schemes), 30 pages (for debt and derivatives) and 12 pages for simple offers of managed investment products in a managed fund. Alternative equivalent word limits are included to ensure that a page limit doesn't have the inadvertent consequence of reducing white space, use of pictures and diagrams, and other techniques to improve document readability and help investor understanding.
The regulations do not set a “template” for each PDS. Instead they take the approach of setting headings, heading order, and some format elements (e.g. the use of prescribed tables, diagrams and charts) with specified content requirements. The regulations also set out various prescribed statements which must be contained in a PDS, for example those used to explain the nature and effect of financial information.
Trans-Tasman mutual recognition scheme
The existing regulations required for the trans-Tasman mutual recognition scheme have been carried over, with appropriate modifications, into this exposure draft. The mutual recognition scheme, which has been in place since 2008, allows an offeror to offer securities or interests in managed investment schemes in Australia and New Zealand using one disclosure document prepared under the requirements of its home country.
MBIE and FMA are engaging with the Australian Treasury and ASIC on the required changes to regulations in both countries.
MBIE expect a full set of FMC regulations will be made in mid-2014 in the lead up to the second implementation phase of the FMCA on 1 December 2014. These will incorporate all three exposure drafts of the FMC regulations and replace the Financial Markets Conduct (Phase 1) Regulations 2014 which came into force on 1 April 2014.