Financial markets conduct regulatory system

System description and objectives

The financial markets conduct regulatory system is a foundational system providing the legal framework for New Zealand’s capital markets and financial services. That legal framework:

• provides for fair dealing in financial markets
• regulates offers of financial products and the governance of certain types of financial products
• regulates financial product markets
• regulates certain financial market services (including financial advisers and registration and dispute resolution requirements) and
• establishes and funds the Financial Markets Authority as the system enforcement agency.

The system excludes prudential regulation of banks, non-bank deposit takers and insurers (the Reserve Bank of New Zealand leads this) and financial reporting matters (this sits within the corporate governance regulatory system). Prudential regulation is focused on institutional soundness, and promoting the maintenance of a sound and efficient financial system. 

The system also excludes the consumer credit protections in the Credit Contracts and Consumer Finance Act (this forms part of the consumer and commercial regulatory system).

The objective of the financial markets conduct regulatory system is to promote the confident and informed participation of businesses, investors and consumers in financial markets, and to promote and facilitate fair, efficient and transparent financial markets.

Ministerial portfolio and key statutes

Regulatory agencies and their roles

Collaboration and information-sharing between regulatory agencies 

The Council of Financial Regulators (CoFR) is a forum for sharing information and considering and addressing financial markets regulatory issues more broadly, and risks or gaps that arise or are being monitored. It comprises MBIE, the Treasury, the Reserve Bank, the FMA and the Commerce Comission, which are the key central government agencies responsible for the financial markets regulatory systems – both conduct and prudential.

Council of Financial Regulators (CoFR) website(external link)

The FMA also co-ordinates, and shares intelligence, with government agencies to ensure the FMA’s work is informed, proportionate and effective. Those agencies include: the Reserve Bank, Companies Office, Department of Internal Affairs, Commerce Commission, Serious Fraud Office and the Inland Revenue Department.

Te Ara Ahunga Ora Retirement Commission leads the National Strategy for Financial Capability, which is a practical framework for raising the financial capability of New Zealanders. It relies on government, community and the private sector working together to have the biggest impact.

Te Ara Ahunga Ora Retirement Commission leads a quarterly cross-government group to share information and learnings and contribute to the design and delivery of locally led communities of practice.

Regulated parties and main stakeholders

Regulated parties and key stakeholders include:

• Fund managers and managed investment schemes
• Financial advisers
• Entities involved in the creation of financial instruments (e.g. investment banks)
• Frontline supervisors (such as trustees and supervisors) and custodians
• Capital markets (debt and equity)
• Foreign exchange markets
• Money markets
• Derivative markets
• Banks and non-bank deposit takers (from a conduct perspective, not a prudential perspective)
• Insurers (from a conduct perspective, not a prudential perspective) and
• Investors and consumers.

Processes for engagement with regulated parties and stakeholders

We actively engage with the financial markets industry to ensure that the regulation in this area is fit for purpose.

When we create new policy, or change current requirements, we follow good regulatory practice, including where possible by:

• engaging with interested stakeholders
• consulting on any changes through discussion documents and options documents
• releasing exposure drafts of new legislation or regulation.  

Forward plans for the system 

Reviews and other planned regulatory amendments or operational changes are outlined here:

CoFR’s Regulatory Initiatives Calendar (RIC)(external link) — Council of Financial Regulators (CoFR)

Note: this calendar also covers changes in the prudential regulatory system (RBNZ, Treasury) and the consumer and commercial system (Commerce Commission, MBIE).

System’s fitness for purpose

• Learn more about the fitness-for-purpose assessment and ratings
• Date of assessment: Mid 2017

Effectiveness

System performing well against criteria

New Zealand’s financial market regulation is well regarded internationally following the significant policy and operational changes made in the wake of the global financial crisis. Compared to many other jurisdictions, New Zealand has adopted a flexible and innovative approach while still putting in place protections to support fair, efficient and transparent financial markets.

The relative infancy of the new regulatory system makes it difficult to draw definitive conclusions about its effectiveness, with the Financial Markets Conduct Act only coming fully into force on 1 December 2016. The initial round of evaluation activity has found good take-up of innovations like crowdfunding and peer to peer lending, and same class offers disclosure exemptions by debt issuers. However, the impacts on wider capital raising activities are unclear and some market participants hold the view that investors are not making full use of the information available to them. Recent volatility in global financial markets has made the evaluation task more difficult. New Zealanders' confidence in financial markets is quite volatile, having reduced from 60% of investors in 2014 to 2015 to 56% in 2015 to 2016 and then increasing to 65% in 2016 to 2017. While market conditions appear to play a large role in investor confidence, it is possible the recent reforms are also playing a role.

The International Monetary Fund (IMF) completed a Financial System Stability Assessment in April 2017 and found New Zealand’s financial markets reforms had significantly improved the regulatory framework, and recommended further consideration be given to: (i) including wholesale asset managers and custodians in the regulatory system; and (ii) the resourcing of the FMA. Recommendations were also made to improve the regulation of some insurance intermediaries. These recommendations are being progressed through the ongoing comprehensive reform of financial advice regulation.

Significant additional funding has been provided to the Financial Markets Authority (FMA) from 1 July 2017 to ensure it can fulfil its mandate as a pro-active intelligence led regulator.

Efficiency

System performing well against criteria

Feedback from most market participants suggests the design and implementation of the system is efficient. A regulatory charter for the wider financial sector has been put in place under the auspices of the Council of Financial Regulators involving MBIE, FMA, RBNZ, and Treasury.

The Financial Markets Authority (FMA) is well regarded by key system stakeholders as a pragmatic, efficient, and risk-based regulator. An efficiency and effectiveness review of the FMA was completed in 2016.

Resilience

System performing well against criteria

The principle-based approach employed by the system provides considerable flexibility to adjust to the impacts of market and technological changes. Many key aspects of the regime are contained in regulations, which can be changed more easily than primary legislation. In addition, FMA has considerable scope to make adjustments to the system via exemptions. Nonetheless, careful regulatory stewardship will be required to ensure implementation is efficient and effective, and to ensure any emerging issues are appropriately diagnosed and addressed. This is likely to require significant ongoing regulatory maintenance efforts.

New Zealanders’ underlying levels of financial capability do not appear to have significantly changed since the finance company collapses of 2006-2012. This issue represents a source of ongoing potential instability to the regulatory system in the event a substantial group of investors suffer material wealth losses due to a lack of understanding about the underlying characteristics of their investments.

Fairness and accountability

System performing well against criteria

Information about the regulatory system is widely distributed by the FMA. However, there is room to raise awareness levels amongst some system participants.

Enforcement action for serious breaches of system legal frameworks is generally via the High Court which provides an independent and transparent process with appeal rights. While the FMA takes the majority of enforcement actions, private enforcement is also available. The FMA has published an enforcement policy setting out how they intend to approach their broad regulatory powers and functions.

Enforcement policy(external link) — FMA

The Financial Markets Authority (FMA) is the Crown entity with the mandate to promote and facilitate the development of fair, efficient and transparent financial markets. It plays a critical role in regulating capital markets and financial services in New Zealand. For more detail read its Statement of Intent.

Statement of Intent(external link) — FMA