By Gareth Vaughan
The Government is seeking submissions on six options proposed to tackle the open sore that is New Zealand's Financial Service Providers Register (FSPR) and wants submissions in a month before those on other changes to the financial adviser regime, suggesting it's serious about making meaningful change.
The options come in a Ministry of Business Innovation & Employment (MBIE) options paper. In it MBIE acknowledges misuse of the FSPR, by companies registering in New Zealand but operating overseas, remains an ongoing challenge and the Financial Markets Authority's deregistration powers haven't proven to be "fully effective." The FMA's recent attempt to deregister Vivier and Company was overturned in the High Court.
"Given the risk of damage to New Zealand's reputation as a well-regulated jurisdiction and the reputation of legitimate New Zealand-based financial service providers, we will explore making changes ahead of any other changes to the financial adviser regime," MBIE says.
The options canvassed include making applicants confirm and prove they're licensed and/or supervised in their home jurisdiction and in any country where they're proposing to provide financial services. Another option touted, which is favoured by FMA CEO Rob Everett, is having the FSPR only apply to entities with "a stronger connection" to NZ than is currently the case, meaning they may have to provide financial services within NZ. Company agents are also targeted, with MBIE suggesting regulations to "prescribe trust and company service providers subject to anti-money laundering legislation as financial service providers required to register on the FSPR."
Anti-money laundering loophole also in sights
MBIE also says it's working with the Ministry of Justice looking at how the preferred option would work alongside anti-money laundering and countering financing of terrorism legislation, and whether any changes to the Anti-Money Laundering and Countering the Financing of Terrorism Act (AML/CFT Act) would help resolve misuse issues. Changes here have been pushed for by interest.co.nz and Minter Ellison Rudd Watts partner Lloyd Kavanagh.
In what's a significant loophole, the existing territorial guidance for the AML/CFT Act means NZ registered financial services providers that operate overseas but not within NZ, aren't supervised by our regulators for compliance with the AML/CFT Act. The guidance says, "An entity incorporated or formed in New Zealand, which carries on financial activities wholly outside New Zealand, will not be a 'reporting entity' under the AML/CFT Act."
Ironically one of the purposes of the Financial Service Providers Act is to help NZ meet its Financial Action Task Force (FATF) obligations. FATF is an inter-governmental body established by the Group of Seven that sets policies and standards on anti-money laundering and combating terrorist financing.
Although the likes of NZ registered banks, non-bank deposit takers, authorised financial advisers, qualified financial entities and peer-to-peer lenders are registered on the FSPR, overseas entities with little or no presence in NZ are also able to register in what is effectively something akin to a telephone directory. They're then able to operate overseas calling themselves registered NZ financial service providers, thus gaining credibility and trading off NZ's good international reputation. Many, such as Euro Forex, have deliberately misled customers into believing they're fully fledged licensed and regulated NZ financial service providers when this isn't the case. These issues have been covered extensively by interest.co.nz with our stories here.
The six options outlined by MBIE are detailed below. It's seeking submissions by 5pm, January 29, a month earlier than submissions are being sought elsewhere in the options paper that reviews the Financial Advisers Act 2008 and the Financial Service Providers (Registration and Dispute Resolution) Act 2008.
Option 1: Include stronger registration requirements.
More stringent requirements would be imposed prior to registration. Regulations could be made requiring applicants to confirm and provide proof that they are licensed and/or supervised in their home jurisdiction and in any jurisdiction that they are proposing to provide services to. Other changes could include requiring a level of indemnity cover or bonding for offshore-controlled entities providing services to New Zealand retail consumers to ensure compensation funds are available in the event of a dispute.
This option would enable the Registrar (of Companies)/FMA to more easily identify potentially fraudulent firms.
It would be unlikely to add material compliance costs to legitimate financial service providers, who are likely to have relevant documents readily available (depending on the nature of the requirements).
Time and resources would be required to verify documentation provided.
On its own, implementing this requirement may not enable the Registrar/FMA to refuse registration or de-register in all cases of misuse.
Option 2: Amend the grounds for de-registration.
Legislative changes would be made to clarify or provide additional circumstances under which the FMA may direct the Registrar to decline a registration or de-register an entity. The grounds could include where an entity does not provide a substantive amount of services from a place of business in New Zealand, or are a ‘repeat offender’ that has previously been de-registered.
The legislation could also prohibit firms from referring to their registered status in any offshore advertising, or it could provide that if firms wish to refer to their registered status, they must accurately describe that status and its limitations (and could provide standard wording, such as “registered in New Zealand but not licensed or subject to active supervision or oversight”). Failure to comply could then be a ground for de-registration.
Compared to the current situation, this option more clearly outlines the circumstances under which a firm can be de-registered and the evidence required to establish sufficient grounds for de-registration. It would likely better enable the FMA/Registrar to de-register fraudulent firms.
De-registration is at the FMA’s discretion, so this would be a more flexible means of addressing the misuses issue compared to amending the territorial scope of the legislation. It reduces the risk of unintended consequences.
It would be reasonably resource-intensive to gather the evidence required to establish sufficient grounds for de-registration (though less so compared to the current situation).
Option 3: Amend the territorial scope of the legislation to require a legitimate connection to New Zealand.
Legislative changes would be made to the territorial scope in the FSP Act so that the requirement to register applies only to entities with a stronger connection to New Zealand than is currently the case. Instead of simply requiring a place of business in New Zealand, the legislation could apply either to entities that are providing services to clients in New Zealand, or to entities carrying on business of providing a financial service in New Zealand.
It would preclude overseas-controlled entities that are not providing financial services in New Zealand from registering.
It could create other potential loopholes, uncertainty or unintended consequences. For example, if the territorial scope was entities providing services to New Zealand clients, it may impose compliance costs on overseas entities that could be required to register if they have one or two New Zealand clients. Conversely, an entity seeking to misuse the FSPR could potentially still do so by undertaking one or two transactions in New Zealand.
Option 4: Require trust and company service providers to register.
Regulations would be made to prescribe trust and company service providers subject to Anti-Money Laundering legislation as financial service providers required to register on the FSPR. The services of trust and company service providers can include acting as a director or nominee shareholder in order to provide anonymous registration for offshore interests.
It would assist the FMA to address misleading conduct by company agents. It would also align the registration obligations with anti-money laundering legislation, which includes trust and company service providers as “reporting entities”.
Option 5: Limit public access to all or parts of the FSP Register.
Under this option, certain parts of the FSPR would be available only to regulators and policy-makers. Those non-public parts could include entities that are not licensed or those not proposing to provide retail services in New Zealand.
It would reduce the likelihood of the FSPR creating or reinforcing a false impression that a firm was licensed or regulated in New Zealand.
An offshore-controlled firm could still claim (in a potentially misleading, but strictly true manner) that it was a New Zealand registered financial service provider.
It may reduce the usefulness of the FSPR as a consumer tool.
Option 6: Convert the current FSP Register into a non-public notification list.
Under this option, the current register would be converted into a non-public notification list. Legislative change would be made so that entities that are currently required to register would instead be required to notify a government agency of their intention to provide financial services. The agency would maintain a non-public list of notifications received. Existing registered entities could be deemed to have made a notification. All entities still must not be disqualified e.g. its directors must not be undischarged bankrupt. (If necessary, a separate publically-accessible register could be established to provide information for consumers. The public register could contain information of only those entities that provide financial services to New Zealand retail consumers.)
This option would reduce the benefit of registration for overseas-controlled firms that do not provide services in New Zealand. (Appears to be little benefit to a firm claiming “notified [New Zealand Companies Office] of intention to provide financial services” compared to “registered as financial service provider in New Zealand”).
This option likely still meets New Zealand’s international obligations under the Financial Action Task Force Recommendations to maintain a register of financial institutions to assist with anti-money laundering monitoring purposes.
Significant changes to legislation, the registration system and processes would be required.