The FMA announced on 16 October 2015 its second internal restructure since it was established in 2011. In my view the most notable change is the creation of a greatly expanded general counsel (GC) role. The new GC role represents a marked change in FMA’s approach to the management of its lawyers and legal function. I think that the new structure should be positive for FMA and ultimately for market participants and investors. To understand the significance of the new GC role it helps to go back in time.

The FMA was established in part as a of result a 2009 review of the Securities Commission (FMA’s predecessor). The reviewers noted market perceptions that lawyers and accountants predominated at the Commission, contributing to a risk-averse, “legalistic”, approach and a lack of pro-active market engagement. The recommendations of the review influenced the FMA’s structure, choice of personnel and approach to regulation.

At establishment of the FMA in 2011 the GC role, while an executive committee position, had a much narrower scope than the equivalent role at the Securities Commission and few direct reports. Lawyers were dispersed in different teams and in most cases reported up to operational managers rather than to the GC. At the same time the FMA, following the recommendations of the review, employed staff from a wider range of backgrounds and set up a separate enforcement team (with its own contingent of lawyers). The overall effect was to reduce the collective influence of lawyers (in comparison to the Commission). It appears to me that this was intentional, at least in part, and a response to some of the concerns expressed about the Commission.

The new GC role will have a wide ambit and greater influence at the executive level and within the FMA as a whole. For example, the enforcement team has been disbanded and the GC will be responsible for lawyers from that team. While a significant departure from original GC role at the FMA I don’t think it suggests a return to a regulator where lawyers hold sway. Things have changed a lot since 2009. The FMA is a larger and more diverse organisation than the Commission, with enhanced governance and a different culture. Also, the regulatory landscape has changed significantly. The FMA has new powers that it states it will use to take a more “top of the cliff” (proactive) approach. So, to the extent that the concerns expressed in 2009 were valid, I doubt the same issues will resurface as a result of the restructure. In fact, I think that the new structure is a positive development.

The FMA encourages market participants to implement appropriate risk management functions and frameworks, so the new GC role might indicate that the FMA is “taking its own medicine” to a degree.  In a regulator a GC role is even more important than in the private sector. Not only is it imperative that the FMA, as a government agency, operates within the law, one of its key tasks is monitoring participants’ compliance with, and enforcing, financial markets law.  An experienced GC with oversight of legal support and compliance within the FMA will help to ensure that those outcomes are met and that legal resources are used effectively. The important role of lawyers in providing sound, objective, advice is supported by having a direct report to a GC. The new role will be able to contribute to a risk management framework that incorporates clear triggers for legal review and support at appropriate levels, which should facilitate both greater delegation of powers (another recommendation of the 2009 review) and improved compliance.

Overall, I think that the restructure gives the FMA a strong, coherent, platform for the future, which it can use to further its role as an effective financial markets conduct regulator and to support participants and investors.

Simon Papa

Since March 2015 the Fair Trading Act (FTA) has prohibited the use of unfair contract terms (UCTs) in “standard form consumer contracts” (pro forma contracts that consumers have no real ability to negotiate).  UCTs apply to all new contracts entered into, and to contracts that are renewed/varied, on or after the date the UCT provisions came into force (there are special rules for insurance contracts).  The UCT provisions impact a wide range of retail businesses.  Cygnus Law can assist and can advise on amendments to help you to comply.  I consider UCT provisions below.

Who is a consumer?

The definition of “consumer” follows the Consumer Guarantees Act (CGA) definition.  A consumer will generally be anyone who acquires goods or services for personal use.  There are exceptions and in some cases goods & services provided to a business could be subject to the UCT provisions.

When is a contract term “unfair”?

What is “unfair” will very much depend on the context. Key considerations include:

While context is important, there are some terms that are likely to be unfair in most circumstances e.g. a term providing that a supplier is not liable when its goods or services do not meet acceptable standards.  Not only is this likely to be unfair under the FTA but the CGA already imposes minimum standards for goods & services provided to consumers and restricts the ability of suppliers to contract out of liability.

Who enforces unfair contract terms?

The Commerce Commission is the responsible regulator, including for financial services and products. The Commission has indicated that it will take a proactive approach to enforcement.

An unfair term under the FTA cannot be challenged directly by a customer (unless there are other grounds e.g. under the CGA). Rather, the Commission can seek a court declaration that a term is unfair. If made, a declaration will prohibit the use of that term (unless used in a way permitted under the declaration).

A term declared unfair cannot be applied or enforced (even if the contract predates the declaration) and a supplier can be convicted & fined (up to $600,000 for a company) for using it and can be ordered to pay damages and to refund money to customers.

What should you consider?

The Commission has published Unfair Contract Terms Guidelines, which describe the UCT regime and provide examples of circumstances the Commission considers may make terms unfair.  The Commission has reviewed, and reported on, UCT compliance in relation to energy retail contracts,  telecommunications contracts and gym contracts.  The reports provide examples of how the UCT provisions are applied in practice and include  industry responses.

You can’t contract out of the UCT provisions unless the supplier and purchaser are businesses.  So if the UCT provisions apply to you the only option is to comply.

If your business already has a strong focus on delivering quality products & services, and on being “fair” to customers on an on-going basis, then there’s a reasonable chance that you’re already compliant. However, be aware of terms that may be lurking in your contracts that could operate unfairly. As a rule of thumb think about whether you’d feel happy as a customer if a particular term was applied to you- if you wouldn’t then it might be unfair.

The UCT provisions are only one part of a wider body of law that includes consumer protection provisions. Examples include the CGA, Financial Markets Conduct Act, Financial Advisers Act, Building Act, Privacy Act and Credit Contracts & Consumer Finance Act. In many cases that law includes recent new and expanded consumer protection provisions. So any assessment of your customer contracts should take into account that law, where relevant to your business.

Please note that this blog entry is a broad summary only, is not legal advice and should not be acted or relied upon without seeking legal advice.

I have 5 tips to help you to get a licence from the FMA.  There are 6 types of financial services businesses that need a “market services licence” to carry on business and there are a number of other licence types.  See the FMA website for more information on who needs a licence.  My tips reflect my previous experience working in the FMA team that helped to develop the relevant regulations & minimum standards and that assesses licence applications.  My focus is on market services licences but my tips apply equally to other licence types.

The businesses that need a market services licence are crowd funding & P2P lending platforms, providers of discretionary investment management services (DIMS), derivatives issuers, managers of managed investment schemes & trustees of restricted investment schemes.

My 5 tips are:

  1. Commit to getting a licence: Getting a licence isn’t a “box ticking” exercise – it will require real effort and commitment from a team of people. That’s especially true for smaller businesses and new businesses, which may not have all the existing systems and processes necessary to operate a licensed business. And it’s critical that you commit to understanding the relevant law, much of which is new and which is complex in places.
  2. Accentuate the positive: Getting a licence takes significant time & resource and distracts you from your business. However, assessing your business for compliance with minimum standards and implementing solutions should benefit your business overall (in addition to the benefit of holding a licence), for example in the form of improved processes, governance and legal compliance.
  3. Small is beautiful: The FMA highlights that the licensing process supports small financial services businesses. Small businesses aren’t expected to have the complex systems and controls of larger businesses and not everything they do needs to be documented. So think about simple and/or innovative things that you, as a small business, can do to show that you meet minimum standards.
  4. Read the application guide thoroughly: The relevant FMA application guide sets out the requirements to obtain a licence and is the key document – you need to read it thoroughly and to do all the things it asks (but don’t forget the standard conditions).  The FMA’s on-line application form does not directly ask for all the information the guide says you need to provide, so just completing the form won’t be enough. The form allows you to add additional documents – include the required information in those documents.
  5. Show me the money!: A common problem is applicants who confirm they meet minimum standards but fail to show how they do that. The FMA assessor won’t know much about your business so tell your “story” in full. For example, rather than simply saying that “staff will be appropriately trained” (a minimum standard) you could describe the type of training they will receive and when they will receive it, which might be evidenced by a training/CPD programme.

Cygnus Law can provide advice and guidance to help you to a get a licence and to comply with a licence.  Cygnus Law can provide high level guidance at an early stage in the licensing process to help to ensure that you focus your resources effectively and efficiently.

Please note that this blog entry is a broad summary only, is not legal advice and should not be acted or relied upon without seeking legal advice.

On 18 December 2014 the FMA issued a warning about potentially misleading advertising by New Zealand businesses that help to transfer UK pensions to New Zealand. The warning highlights the importance for all businesses, including providers of financial services, of ensuring that their advertising and marketing activities comply with the “fair dealing” requirements in the FMC Act (for financial markets participants) and the Fair Trading Act (for other businesses). These provide that, in broad terms, businesses must not make misleading or deceptive statements, or make unsubstantiated representations, in connection with their products and services.

A key concern noted in the FMA warning is advertising creating a sense of alarm about accessibility to pension entitlements and tax treatment, without balancing that with information on potential disadvantages of transfers. But what is misleading or deceptive is always very fact specific. An August 2014 Court of Appeal decision (Godfrey Hirst NZ Ltd v Cavalier Bremworth Ltd) was likely a key consideration for the FMA when it made the warning. That decision provides very useful guidance on the law in this area and its application. A key matter that decision confirmed, and that is likely relevant to the warning, is that in some circumstances a “dominant message” in marketing material can be misleading even if that message is later qualified.

The FMA’s 18 December 2014 warning and a September 2014 warning show that the FMA is monitoring financial markets participants’ compliance with the fair dealing requirements. This follows from the FMA’s expanded ability since 1 April 2014 to regulate misleading and deceptive conduct in relation to the provision of all financial products and services. Since then the FMA has stronger powers to take action, including the ability to make direction orders and stop orders.

The FMA has produced some limited information and guidance in relation to fair dealing, see:

Cygnus Law can contribute to the provision of compliant advertising and marketing, including by reviewing your marketing material to help to identify potential concerns and by proposing compliant solutions. Cygnus law can provide information to you on the law in this area and on how it applies in practice, and can contribute to the preparation of relevant internal guidelines and procedures.

Please note that this blog entry is a broad summary only, is not legal advice and should not be acted or relied upon without seeking legal advice.