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CEO Rob Everett says the FMA would prefer to be rid of the Financial Service Providers Register, but is hopeful MBIE's planned tougher registration rules will help with oversight

CEO Rob Everett says the FMA would prefer to be rid of the Financial Service Providers Register, but is hopeful MBIE's planned tougher registration rules will help with oversight

By Gareth Vaughan

Financial Markets Authority (FMA) CEO Rob Everett says the regulator, tasked with oversight of the troublesome Financial Service Providers Register (FSPR), would prefer it was disestablished rather than reformed.

However, a recent Ministry of Business, Innovation & Employment (MBIE) review, which has been accepted by Minister of Commerce and Consumer Affairs Paul Goldsmith, recommends retaining the FSPR, but says companies registered on it will have to have a "strong connection" to New Zealand

Asked in a Double Shot interview whether NZ even needs the FSPR anymore, or whether all entities on it should require a licence, Everett said this was a good question.

"And one of the difficulties with the register is it was designed pre-Financial Markets Conduct [FMC] Act, pre anti-money laundering regulations, so actually a lot of the original purpose, you could argue, has basically made it somewhat redundant. And I think there probably are other mechanisms that you can catch those financial service providers who aren't licensed in another way," said Everett.

"But the MBIE view is the Register still provides some purpose, it still provides some information that's of use to consumers looking to look up firms. So in their recommendations the basic approach is to keep the register and tighten it up. [But] I think you could argue that maybe the Register as a whole is not sufficiently useful at this point that you could have gone a different route. And that actually would probably have been where we would have preferred to go. But MBIE's of the view that we should keep it and that's where we'll end up," Everett said.

Ho noted that part of the objective when the FSPR was established was to have a single place where anyone providing financial services could be found.

"And it is true that if you leave it with a multiplicity of places people have to go to to find providers, that does get complicated for people. But the reality is people tend to look for providers by the service they're providing. So actually people tend to go to 'is it a financial adviser I want to look at, is it a fund manager, is it something else'."

"So actually I think there is a way of having the appropriate lists of those providers available to people who want to look for them, which would also meet the FATF [global anti-money laundering overseer the Financial Action Task Force] requirements about having a register which doesn't mean you have to run something quite as big and unwieldy as the FSPR. But as I say the reality is the direction is to keep it and to tighten it up, and we're pleased with the aspects of tightening up that we just talked about in terms of connection to New Zealand," said Everett.

Other countries don't have the same problems

Since December 2010 anyone providing a financial service, such as insurers, banks, lenders and financial advisers, has been required to be registered on the FSPR, operated by the Companies Office. The FSPR records the name, address and financial dispute resolution service membership of the provider, along with the services it's registered to provide and any licences it may have.

There has been extensive misuse of the FSPR by what are ostensibly overseas entities. Currently a firm can register on the FSPR if it has a place of business in NZ, regardless of where in the world the financial service is provided. MBIE points out firms misusing the FSPR often set up a superficial operation in NZ by leasing an office and employing a person to provide back-office services. These firms register to provide financial services that don't require licensing in NZ, such as foreign exchange services. And nor is there pre-vetting by a regulator. They don't offer financial services within NZ, but can use their NZ registration overseas to give a false impression that they are regulated in NZ and trade off the country's good reputation.

MBIE points out other similar jurisdictions don't have the type of problem NZ has, or at least not to the same extent, because typically they licence all types of financial service providers.

"For example, in Australia all entities that provide financial services are required to obtain an Australian Financial Service Licence. New Zealand does not license all financial service providers because licensing can impose significant costs, create a barrier to entry and reduce competition in the market," MBIE says.

The FMA was given powers in 2014 to direct Mandy McDonald, the Registrar of Companies, to decline a FSPR registration or de-register an entity if it considers that registration creates a misleading impression about the extent the provider is regulated in NZ, or will damage the integrity or reputation of NZ’s financial markets.

'There's no logic in having a register for offshore entities who aren't doing business in NZ'

Everett said he certainly hopes the incoming "strong connection to NZ" criteria will make FMA oversight easier.

"I certainly hope so and we've pushed throughout this process for the strongest possible connection to New Zealand and the best definition that we can come up with for doing business, or providing financial services in New Zealand." 

"There's no logic really in having a register for offshore entities who aren't doing business in New Zealand. So we're going to push quite hard, and obviously the devil's in the detail here. But we're going to push quite hard to see the closest connection we can get to actually providing financial services business in New Zealand," said Everett.

MBIE also has other complementary measures that could help address misuse of the FSPR on the table. These include more stringent requirements for those registering on the FSPR such as requiring applicants to provide information showing they are licensed and/or supervised in their home jurisdiction before they can register, and prohibiting firms from referring to their NZ registered status in any offshore advertising. MBIE will consider these measures and report back to Cabinet in September. The Government then plans to introduce a Bill to Parliament at the end of 2016 covering off the range of changes.

FMA's costs & why MBIE says the FSPR is needed

The FMA estimates that during the June year its cost in resources dedicated to FSPR issues was between $500,000 and $1 million. This excludes net costs of about $60,000 from ultimately successful court cases countering attempts by Vivier and Company and Excelsior Markets to stay on the FSPR after the FMA moved to deregister them. The FMA's 2015 annual report shows a government grant - taxpayer funding - of $26.184 million.

For its part MBIE says the FSPR is still needed because it satisfies NZ’s international obligations under the FATF recommendations on combating money laundering and the financing of terrorism. Access to information on the FSPR also has other benefits, MBIE adds, such as allowing the public to check whether an entity is complying with its obligations to be registered on the FSPR, and to provide details on a registered entity’s dispute resolution scheme.

Since the FSPR was established in 2010 the FMA has rolled out a range of licensing regimes for financial service providers, and NZ's Anti-Money Laundering and Countering Financing of Terrorism Act took effect in 2013.

The services entities can register for on the FSPR but don't require NZ licensing to offer include; being a creditor under a credit contract, changing foreign currency, and operating money or value transfer services.

MBIE says the costs associated with even "a relatively light fit and proper" licensing system for all financial service providers would be significant and would only be justified if there were a broader public benefit in imposing further requirements. Asked how much is "significant", an MBIE spokesman said the cost of the licensing regime would depend on the minimum standards required to obtain a licence.

"As an example, the application fee to become a manager of a registered managed investment scheme is $3,565, with further fees payable for complex applications requiring more than 25 hours of the FMA’s time to assess. Other costs stem from preparation of the application and supporting documentation, ensuring the entity has appropriate systems in place to meet minimum standards, undergoing further checks, and submitting information on an ongoing basis," the MBIE spokesman said.

'Disproportionate to licence all NZ financial service providers'

MBIE says it would be "disproportionate" to licence all NZ financial service providers in order to address the "identified misuse problem" with offshore-based financial service providers, but also says acknowledges it's possible that the problem is larger than has been identified.

Asked to elaborate on this the MBIE spokesman said: "We consider it disproportionate to licence all New Zealand financial service providers, even taking into account the possibility that the problem is larger than identified. The misuse problem is primarily one associated with offshore-controlled firms taking advantage of New Zealand’s reputation by setting up back-office administration services in New Zealand. The problem is a serious one, but we consider it would be disproportionate to impose costs on a large number of legitimate New Zealand-based businesses."

"Therefore, we are addressing the misuse problem by ensuring that any firms on the register have to be; in the business of providing financial services, not just back-office administrative services, from a place of business in NZ, or in the business of providing financial services to New Zealanders, or otherwise required to be licensed under any other NZ legislation. Our aim is to maintain the international reputation of New Zealand’s financial service providers, while ensuring we keep their compliance costs as low as possible," the MBIE spokesman said.

And in terms of why some types of financial service providers require licences and others don't, the MBIE spokesman said licensing is applied to financial services where there has been evidence of the greatest risks of harm to consumers from the service not being carried out competently.

"As noted, licensing imposes costs and can create a barrier to entry. It should be limited to those involved in providing services where there is significant risk of harm to consumers," the MBIE spokesman added.

Other services that may not require licences

Other services companies may be able to register on the FSPR as providers of without holding a licence include; Acting as an issuer for regulated products or financial products offered under an FMC offer, broking services, custodian of DIMS (Discretionary Investment Management Services) licensee, custodian of registered scheme, giving financial guarantees, issuing and managing means of payment, keeping, investing, administering, or managing money, securities, or investment portfolios on behalf of other persons, and participating in an FMC offer as an issuer or offeror of financial products.

However, the MBIE spokesman pointed out some of those categories are broad, and some entities that provide services within those categories may be required by other legislation to hold a licence, or be subject to other significant regulatory obligations, such as issuers of financial products under a FMC Act offer. · 

*This article first appeared in our email for paying subscribers early on Monday morning. See here for more details and how to subscribe.

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