The Financial Markets Authority (FMA) recently issued its Annual Corporate Plan for 2017-2018 (ACP). This sets out the FMA's priorities and intended activities for the year ahead and is one of their core strategic documents. The ACP touches on a wide range of priorities and activities for the FMA, including a focus on standards of governance and culture within licensed financial services firms, and on investor capability and decision-making. The ACP also reiterates the FMA's approach to FinTech regulation.
As discussed in our update on 15 May 2017, the International Monetary Fund (IMF) has recommended a few enhancements to New Zealand's regulatory framework in relation to supervisors, custodians, and wholesale asset management, and has recommended that the FMA puts those enhancements in place over the coming one to three years.
The ACP is the first indication we have as to the FMA's approach to the implementation of the IMF's recommendations and it includes some key points of interest for supervisors, custodians and wholesale managers.
Wholesale asset management
In accordance with the IMF's recommendations, the FMA intends to commence thematic reviews of the governing documents of managed investment schemes (MIS), statements of investment policy and objectives, outsourcing arrangements and the use of wholesale asset management. The FMA wants to understand more about areas of unlicenced activity on its regulatory perimeter and to increase its understanding of the risks in wholesale markets and their impact on retail investors.
We suspect this will be an information gathering exercise to allow FMA to gain better insight into market practice and, in particular, the extent of use of wholesale MIS. As pointed out in the IMF report, the FMA currently has little knowledge of the use of wholesale MIS.
Limited partnerships are a key structure in the wholesale private equity fund sector and, since the Financial Markets Conduct Act 2013 (FMCA) came into force at the end of 2014, limited partnerships have been required to include information in their annual return as to whether the limited partnership has offered financial products under an FMCA regulated offer or under an FMCA disclosure exclusion. We expect this information-gathering behaviour to continue while the FMA increases its understanding of the role played by wholesale asset management in New Zealand markets.
Supervisors and Custodians
Of particular relevance to supervisors and custodians is the FMA's intention to ensure supervisors are being held to high standards and being given clear expectations.
The FMA intends to undertake a thematic review on custody arrangements for retail managed funds. This review is expected to improve the FMA's understanding of how frontline supervisors are discharging their responsibilities, both where the function is carried out by the supervisors themselves and where it is delegated to a custodian.
Financial Markets Authority v Prince and Partners is evidence of the FMA's high expectations of supervisors. The FMA has said that one of the regulatory objectives in bringing the claim against Prince and Partners was to demonstrate that it will take action where supervisors fail to meet their obligations.
For custodians, the FMA has clearly flagged in the ACP that a future focus will be to consider the case for licensing and supervision of custodians.
While FMA has expressly refuted the idea of a 'regulatory sandbox' in New Zealand, it has outlined a number of ways that it intends to facilitate innovation over the next year. While wanting to bring benefits to investors and customers of financial services, the FMA has expressed its wish to be flexible where it can. This flexibility is intended to be balanced with an overarching duty to protect investors and the integrity of New Zealand's capital markets. The FMA has suggested that it will be issuing tailored guidance material to financial markets newcomers and designing regulation to clearly articulate its expectations.
The FMA intends to increase engagement with public and private groups looking to promote innovation and FinTech in New Zealand and overseas, keeping abreast of ever changing trends, risks and challenges. To assist businesses wishing to bring new ideas and offerings to the market, the FMA has outlined its intention to issue tailored website material for FinTechs.
They want to see innovative financial products and services coming to market that deliver customer benefits and support market integrity. To support this, the FMA will look to finalise the parameters of the proposed class exemption to allow the provision of robo-advice ahead of the financial adviser reforms. No doubt the FMA's findings from the robo-advice consultation will feed into the policy decisions when building the new licensing framework for financial advice.
The FMA has also signalled a future focus on deepening its understanding of the application of technology to regulatory compliance issues. This is an exciting prospect for innovative firms looking to use RegTech to streamline regulatory compliance systems in the financial services world.
In relation to crowd-funding and peer-to-peer platforms, the FMA has signalled that it will work to assess compliance with conduct expectations of those licensees through risk based monitoring. We can expect FMA to issue a summary/report on the results of the regulatory returns from these platform providers.
The ACP also includes a small reference to the FMA's intention to monitor the use of innovative and non-traditional offer structures for potential harms to investors over the next year. We suspect that the reference to 'innovative and non-traditional offer structures' will include Initial Coin Offerings which have been a recent focus for regulators around the world (see our recent update).
The FMA has promised an update as to its progress on the work outlined in the ACP in its annual report for 2018. Stakeholders are also welcome to engage with FMA on the content of the ACP throughout the year and the FMA has said that it welcomes feedback.