By Joshua Brown*
In his opinion article in interest.co.nz, “It’s time to end the madness,” dated the 10th of May, Gareth Vaughan continues to express concern that the reputation of New Zealand’s financial industry is being damaged by charlatan financial entities, particularly by those offering their services online.
Mr Vaughan correctly points out that the ease and low-cost ability for foreign companies to register with the Companies Office and list on the Financial Service Providers Register (FSPR) attracts dodgy global entities that use and abuse the system and/or have ‘nefarious’ intentions. Mr Vaughan’s persistent and shrill calls to abolish the FSPR, banish offshore company service providers, increase regulation and close unregulated financial setups is no doubt grounded in legitimate fear that NZ’s financial industry is being vandalised. This sentiment is somewhat shared by the Financial Markets Authority (FMA), launching in 2015 a well-publicised and ongoing ousting campaign against unregulated online financial companies listed on the FSPR and uncompromisingly plugging loop holes to prevent their return.
This action seems understandable, being surrounded by a vast moat, our small financial sector and remoteness evokes king-of-the-castle suspicion and a collective need for austere financial protection and isolationism. Any product offered from a business that doesn’t have a shop-front window along with the FMA’s rubber stamp is reflexively shunned and considered unwelcome in our highly-integrous financial jurisdiction.
Yes, of course, there are financial sharks who have set up shop here with the intention to commit serious financial crimes such as money laundering and fraud and use the financial integrity of New Zealand to obtain credibility. Suspicious entities need to be appropriately warned or removed, however, simply blanket banning unregulated online financial companies, company service providers and making it more difficult for financial companies to expand here is myopic, a lost opportunity and altogether throwing the baby out with the bath water. It effectively cuts online collaboration, FinTech innovation, consumer choice, tax revenue, government fees and potential investor profits earned from diversified financial products.
Ever considered trading bitcoin? It’s now considered a genuine tradable currency. In fact, millions of people trade it worldwide for goods but what many investors don’t know is that it’s now also a recognised tool for hedging and speculating.
Unfortunately, the FMA has created such a restrictive financial regulatory environment that there is now not one single broker headquartered domestically that offers it to anybody (as a tradable derivative). There used to be a couple of platforms that listed bitcoin (FXOPEN NZ Ltd which is now in liquidation, and xCFD Ltd) but they were booted off the FSPR in the big purge. Sure, Kiwis are free to search for and trade on platforms that offer these exotic derivatives – nobody’s going to stop them if they know about it, however FMA legislation prevents any financial company offering their services in NZ unless they are regulated.
The prohibitive requirements and rigmarole in obtaining regulation is, shall we say… redoubtable and consequently the list of FMA licensed online brokers is light. In its desire to shield New Zealanders from online broker boiler rooms and reduce the number of complaints that these produce, while also protecting the integrity of New Zealand’s financial market, it has also unwittingly, but severely, stunted the growth of New Zealand’s financial services sector and reduced the variation of financial products that the retail Kiwi trader can access. Collateral damage so to speak.
As far as I can tell, there is no other company service provider that’s spoken up to say ‘hey, they’ve gone too far.’ I believe I am the first though I feel we are too small in number to effectively argue our case anyway. I doubt I can realistically take on the might of the FMA or the pen of Gareth Vaughan but I do feel it’s my professional obligation to speak up and say, ‘there are two sides to this story, and the other side isn’t being heard.’ I would like to remind the Companies Office and the FMA that not every financial company headquartered overseas but listed on the domestic FSPR is unethical or subversive.
In fact, from my experience, most of them just want to have a go, offer a niche product or take on larger competitors but are unable to do so in their home country due to prohibitive bureaucracy and regulation, excessive costs and capital requirements, corruption or country specific reputational problems. I mean, come on, as if financial New Zealand companies aren’t open to establishing a presence in New York or London just to gain credibility. The fact of the matter is that companies flocked here after New Zealand government slashed red tape and made it super easy to register a company here in order to attract business, increase economic activity and expand overseas. Yes, the program has had its flaws, but it’s worked wonderfully and done the job. So why then is the FMA and Companies Office determined to pull the rug from underneath?
I’m not saying that the FMA doesn’t have a responsibility to regulate financial markets or that Mr Vaughan doesn’t have a reason to be worried. There is obviously a problem that needs to be addressed especially after the numerous cases of fraud and money laundering coming to light in recent months. We should be diligent and proactive in preventing financial crime, but so far solutions put forward and implemented are anti-business, overly drastic and a blunt tool blow where a scalpel is necessary.
New Zealand is one of the best places to do business and our lack of red tape excites business and attracts foreign companies and that’s a good thing. We lead the world because bodies like the FSPR exist; why on earth would we then go and abolish it when fine tuning it would solve the problem? For example, say a foreign financial company with a great business idea wants to list here in NZ in order to gain FSPR registration. This registration will then be used to feign regulation because they can’t afford it in their home country but is nevertheless necessary for credibility purposes, to gain a liquidity provider or access to banking - valid business reasons. This application would be sent to the FMA from the Companies Office for approval but would be inevitably binned because the company has ‘no place of business in New Zealand;’ an FMA policy born out of a fear the company is merely taking advantage of NZ’s financial credibility but isn’t going to return anything except for complaints. For the FMA to turn a profitable, honourable company away when they could potentially add untold payments in fees, taxes and collaborative value to the NZ economy is a waste and a massive shame.
Here’s an idea: let’s offer a second tier, cost effective, lighter type of licence for foreign financial businesses that does not necessitate excessive capital requirements or application fees but isn’t as credible and thorough as full FMA regulation. This type of licence will focus on ensuring these companies are solvent, have appropriate anti-money laundering and countering financing of terrorism (AML/CFT) programmes in place, perform the necessary due diligence, have a dispute management process in place, maintain accountability and pay taxes. Instead of turning this business away, the company gains by obtaining actual regulation, NZ government and FMA gains by increased tax and fees revenue, company service providers and dispute resolution schemes gain by increased business and most importantly, NZ FinTech wins. If financial regulation becomes mandatory for all companies in New Zealand, while at the same time, FSPR registration rules are tightened, the FSPR will once again be returned to registry status, the form it was meant to take when it was first devised – the whole problem is solved and the motivation to advertise NZ registration deceptively as regulation is removed.
I run one of those dastardly disreputable company service providers that Mr Vaughan rails against. I’m an entrepreneur that feeds off the excitement of starting businesses and helping others to succeed, although ultimately, I started the venture because I realised there’s a buck to be made in one of the best countries for enterprising individuals. I absolutely have no intention to rip off anybody or do business with anybody that would, though admittedly, I have been bitten; it’s impossible to know the intentions of your clients at the start of a business relationship. I would be the first person to report financial crime to the Department of Internal Affairs (DIA) or the FMA as I certainly don’t want my name or reputation dragged through the mud in a small city like Wellington. Having said that, I want to work with the FMA, the Companies Office and government bodies instead of scavenging for loopholes and ways to get around them.
As cost-attractive online financial service companies proliferate online, the existing and established physical financial provider sector will start to lose substantial market share. Online brokers, robo-advisers, bitcoin techs, or online remitters are all passengers on an unstoppable bus passing over the proverbial bridge. Office based businesses need to jump out of the way, get on board or they will certainly be flattened. However, before this happens, I expect considerable pressure to be placed upon the government by the established order of financial businesses to close the bridge or at least lobby the FMA to narrow it. High tech hubs such as those in New York, Tel Aviv, and London are opportunistically creating and attracting online businesses creating innovative fin-tech sectors.
Estonia for example has created an online e-residency visa, a government issued digital residency, that anybody can apply for so that entrepreneurs can administer a location-independent business online. The FMA, the Companies Office and Mr Vaughan need to realise that we’ve fortunately attracted many online financial companies to our unlikely jurisdiction - far away from the action in Europe and the USA. Yes, there’s a few bad apples in the bunch and a degree of caution is prudent, but overall, it’s a blessing not an affliction and most certainly, the future. Let’s continue to offer regulated, fertile space for online financial companies and join the world in embracing them instead of hand-braking New Zealand’s participation in FinTech. We should be attracting respectable online foreign companies and expanding the FSPR instead of arguing for its closure.
*Originally from Australia, Joshua Brown is director of BrokerForge Ltd, a Wellington-based company service provider.
BrokerForge was formerly known as Transact Now Ltd, which was removed from the FSPR at the behest of the FMA. He was also briefly a director of Strategic Markets Ltd, previously known as FX Primus Ltd, which was also removed from the FSPR by the FMA and features in this interest.co.nz article here. Brown is also a director of the registered NZ financial service provider Direct Trading Technologies Ltd, whose shareholders are Saudis.
Here's a full list of the NZ registered companies in which Brown is, or was, a director and/or shareholder.
The FMA has powers to direct Companies Registrar Ross van der Schyff to remove companies from the FSPR where it is likely that a company is giving a false or misleading impression about the extent to which it is regulated in New Zealand. The FMA says some offshore companies have registered on the FSPR primarily to take advantage of New Zealand’s reputation as a well-regulated jurisdiction. The FMA has received complaints from offshore investors who have lost their money to forex companies, or other types of service providers operating abroad that are registered on the FSPR.
Interest.co.nz has covered problems with the FSPR extensively over the past few years. All our articles on these issues can be found here.