By Gareth Vaughan
A pyramid investment scheme primarily operating in China that Reuters suggests has at least 3,700 victims who've lost more than US$1 billion. This may sound well removed from New Zealand. But it isn't.
Half a dozen registered NZ financial service providers were used by the people behind this scheme to help fleece investors. Promotional material featured a NZ Companies Office logo. And the British man who was purportedly the CEO falsely told investors the scheme had NZ financial services licences.
I'm talking about an entity that called itself Euro Forex and, as the bell tolled, FXCap.
It's a prime example of how NZ's Financial Service Providers Register (FSPR) is ripe for the picking, by people located anywhere in the world with little or no connection to NZ, for nefarious purposes.
The problems associated with NZ's FSPR haven't yet led to parliamentary press gallery reporters breathlessly demanding Prime Minister John Key tell them whether NZ is a tax haven, as we saw earlier this year when the Panama Papers shone a spotlight on the misuse of NZ foreign trusts. But the FSPR has been damaging NZ's international reputation, in many corners of the world, for several years now.
The FSPR is being used as a tool to help inflict misery on thousands of investors overseas, and as a tool to assist with money laundering, among other things. And the thing is we don't even need it.
So if a country has something it doesn't need that's causing it embarrassment overseas and damaging its reputation, why keep it?
That's a question I was pondering back in July when Commerce and Consumer Affairs Minister Paul Goldsmith detailed the Government's latest crack at cleaning the stain off NZ's reputation caused by the disastrous FSPR.
And it's a question I found myself mulling again recently when reading the expose of NZ financial service provider Breder Suasso by Naked Capitalism's Richard Smith, and whilst penning this article about 11 curious NZ financial service providers all linked by a Gold Coast based director.
FMA boss wants rid of it
In July I put the question to both Goldsmith and Financial Markets Authority (FMA) CEO Rob Everett.
Goldsmith acknowledged that scrapping the FSPR had been raised as a possibility within government circles. But, he said, the advice he'd received indicated there was still use in having it.
Everett, however, took a different perspective expressing support for the idea of abolishing the FSPR.
For an overview of how this problem came to be, let's go back to the beginning. Then I'll look at why we don't need it and should abolish it.
The FSPR came out of a 2006 government review of financial products and providers that recommended the introduction of a comprehensive register of financial service providers. Among other things, this was designed to help satisfy NZ’s international obligations under the Financial Action Task Force (FATF) recommendations requiring the licencing or registration of all financial institutions to ensure effective monitoring of anti-money laundering and countering terrorist financing obligations.
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. Similar to a telephone directory, 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 are about 12,000 financial service providers, both companies and individuals, registered on the FSPR. Of these, the Ministry of Business, Innovation & Employment (MBIE) estimates a couple of thousand are registered only for services that don't require licensing.
Currently a firm can register on the FSPR if it has a place of business in NZ, regardless of where in the world its financial services are pitched or provided. This means entities can, and do, set up superficial operations in NZ by leasing an office and perhaps 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. There's no pre-vetting by a NZ regulator, and they don't offer financial services within NZ. These entities can, however, use their NZ registration overseas to give a false impression that they are regulated in NZ and trade off this country's good name.
As MBIE has put it, "Registration on the FSPR allows these firms to misrepresent to overseas customers that they are licensed or actively regulated in New Zealand, and enables them to enjoy a lesser degree of scrutiny overseas than might otherwise be the case. The public often interprets 'registration' on the FSPR to mean that an entity is actively regulated in New Zealand."
'Drivers licences for people who can go and drive anywhere in the world apart from NZ'
Dozens of overseas operating companies have deliberately misled customers into believing they're fully fledged "licensed" and "regulated" NZ financial service providers, with a significant NZ presence, when this isn't the case. And overseas regulators have been confused by these NZ "registered" entities operating in their jurisdictions. These issues have been covered extensively by interest.co.nz with our stories here.
The inability, or unwillingness, of NZ authorities to do anything about the overseas actions of some of these NZ registered entities has damaged NZ's reputation. As David Mapley, a Swiss-based Brit who found himself caught up in nefarious activity by NZ financial service provider London Capital NZ Ltd, put it; "You [NZ] are giving drivers licences to people who can go and drive anywhere in the world apart from New Zealand and cause whatever carnage and crashes, but it's not your remit, you don't care."
Last year MBIE acknowledged misuse of the FSPR "creates a risk to both New Zealand's reputation as a well-regulated jurisdiction and to the reputation of legitimate New Zealand financial service providers." MBIE has also pointed 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.
In Australia, for example, all entities that provide financial services are required to obtain an Australian Financial Service Licence. But MBIE argues NZ doesn't license all financial service providers because licensing can impose significant costs, create a barrier to entry and reduce competition.
Against this backdrop, the Government's third and current attempt to clean up the FSPR following an MBIE review, plans to introduce changes so that in order to register on the FSPR businesses must 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.
Goldsmith has said other complementary measures that could help address misuse of the FSPR are also 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.
Last month Goldsmith told interest.co.nz officials were continuing to analyse these complementary measures.
"I will be publicly consulting on draft legislation, including any amendments resulting from the complementary measures, later this year," the Minister added.
Although the changes being proposed are welcome and should make it harder for crooks to misuse the FSPR, why take the unnecessary risk of keeping it at all? There'll be dodgy and clever people already plotting ways around the new rules. And there are entities registered on NZ's FSPR operating overseas in numerous languages that few, if any, NZ bureaucrats can speak or read.
Why waste the FMA's finite time and resources policing something that's simply not needed?
What price NZ's reputation?
MBIE maintains 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 argues, 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.
Really? That's it?
The Anti-Money Laundering and Countering the Financing of Terrorism Act took effect in 2013, addressing NZ's international obligations in those areas. And the Government is now moving (slowly) to enact phase two of this Act next year, bringing the likes of lawyers, accountants and real estate agents under its oversight.
Since the FSPR was set up in 2010 the FMA has been established with the Financial Markets Conduct (FMC) Act passed. This has seen the FMA roll out a range of licensing regimes for financial service providers covering the likes of authorised financial advisers, brokers and custodians, fund managers, trustees, derivatives issuers, plus equity or debt issuers. And of course banks, insurers and non-bank deposit takers are licensed by the Reserve Bank.
MBIE argues 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 acknowledges it's possible the problem is larger than has been identified.
In terms of why some types of financial service providers require licences and others don't, MBIE says 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.
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, acting as an issuer for regulated products or financial products, broking services, being a custodian of DIMS (Discretionary Investment Management Services) licensee, being a custodian of a 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 a FMC offer as an issuer or offeror of financial products.
Many of these categories are broad, and many entities who provide these services will 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, MBIE acknowledges. Thus if the FSPR was abolished there shouldn't be many cracks to fill. And some of those categories that don't require licensing could be tightened up easily enough.
FMA time & money better spent elsewhere
In 2014 the FMA was given powers 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, or NZ’s regulatory arrangements for those markets. The FMA has removed or prevented dozens of companies from registering on the FSPR. In the case of Vivier and Company the FMA had to go to the Court of Appeal to confirm a deregistration.
Everett notes that one of the difficulties with the FSPR is it was designed pre-FMC Act, pre-AML/CFT Act. Thus, as he puts it, "a lot of the original purpose, you could argue, has basically made it somewhat redundant."
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.
Those sums may not sound huge. But keep in mind since forming the FMA in 2011 as its shiny new regulator to replace the discredited Securities Commission and restore retail investors' confidence in the financial markets, the Government hasn't increased government/taxpayer funding of the FMA by a single cent. It remains at $11 million and is set to do so through a funding review that will see companies the FMA regulates cough up more money.
Rather than waste time pursuing entities operating overseas that aren't offering financial services to New Zealanders, I for one would prefer to see the FMA focused on core domestic responsibilities such as KiwiSaver, anti-money laundering oversight, overseeing sharemarket operator NZX and keeping a watchful eye on banking and insurance conduct. These are key areas of the financial markets that actually matter for New Zealanders.
Asked earlier this year to elaborate on the "significant" costs it associates with even a "relatively light fit and proper" licensing regime for non-licensed financial service providers, MBIE gave me the example of a $3,565 application fee to become a manager of a registered managed investment scheme. Further fees would be payable for complex applications requiring more than 25 hours of the FMA’s time to assess. And costs would arise through 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.
Really? That's it?
Let's ditch the FSPR and plug any licensing cracks its removal may create.
New Zealand's reputation is more important, and would be much more expensive and time consuming to rebuild, than the costs outlined by MBIE for peripheral financial markets participants.
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