Registration of Financial Service Providers
Background: Currently, there is no way of identifying or monitoring providers of financial services. Data identifying all providers of financial services is important to regulators for the purpose of identifying risks in the sector, as well as those who are not complying with statutory requirements. Data is also necessary so that market participants (i.e. business analysts, financial advisers and consumers) can access information on a financial services provider. There is currently no assurance to consumers and investors that financial service providers have not been convicted of financial crimes or other misconduct or that they are fit to run financial institutions.
Submissions on the Ministry's discussion document generally supported the proposal for a registration system. Submitters also indicated the need to clearly delineate the functions and powers of the regulators and ensure that it is clear to financial services providers which regulator they need to deal with in a given situation.
The registration system for financial service providers will:
- identify financial service providers;
- allow more effective monitoring and evaluation;
- provide easy access to information about financial service providers;
- give some assurance about the integrity of people running financial service providers
- assist in meeting New Zealand's anti-money laundering obligations under the Financial Action Task Force (FATF) Recommendations.
- ensure that the directors and senior management of entities providing financial services have no record of criminal activities or having been bankrupt, or having been the subject of a director/management ban under companies or securities legislation.
Financial service providers providing defined financial services will be required to be registered in order to carry on business in New Zealand. The Registrar of Companies will have responsibility for establishing and maintaining the register. The Registrar will undertake enforcement functions in relation to breaches of the registration requirements, and will have the power to share information with the Securities Commission, the Reserve Bank, and other agencies that carry out anti-money laundering supervisory and enforcement functions, such as the Financial Intelligence Unit of the Police.
Who will be required to register as financial service providers?
Entities that will be required to register as financial service providers include: banks; friendly societies; credit unions; building societies; finance companies; issuers of equity and debt securities; issuers of collective investment schemes; trustees supervising these issuers; insurers; platform and portfolio service providers and custodians; investment brokers; dealers in securities and futures contracts; lending businesses; financial leasing businesses; money or value transfer services (e.g. money remittance); money and currency changers.
The definition is based on the Financial Action Task Force (FATF) definition of a financial institution.
Why are banks included, given this is for non-bank financial service providers?
The FATF definition covers a broader range of entities than those within the scope of the RFPP. While banks will be included in the same registration system as other financial service providers, this will not alter the Reserve Bank's supervision functions in relation to banks under the Reserve Bank of New Zealand Act 1989.
Who will not be required to register as financial service providers?
Those defined by FATF as 'designated non-financial businesses and professions'; examples of which are accountants and lawyers. The Ministry of Justice's review of NZ's compliance with FATF recommendations will deal with any issues relating to those businesses and professions.
Why register Financial Service Providers?
The overarching objective is to promote confidence in the financial sector. The purposes of the proposed register are: to identify financial service providers and ensure that the controlling shareholders, directors and senior managers are subject to criminal checks, to enable members of the public to access information on the products and services provided by the entity, and to provide information about which consumer dispute resolution scheme the entity belongs to; and to assist the registrar and other regulators to enforce legislation regulating the financial sector.
The proposed registration system will also contribute to compliance with FATF recommendation 23 which requires New Zealand to have a comprehensive supervisory framework for "financial institutions".
The proposed registration system will also help regulatory authorities to assess what regulatory requirements are applicable to an entity (for example, prudential or market conduct regulatory requirements and anti-money laundering and countering the financing of terrorism (AML/CFT) monitoring requirements) because it will contain information on the types of financial services the entity provides. This means that it will be easier for the regulators to monitor and enforce the law.
Why not use the existing registration requirements?
(e.g. the Building Societies Act 1965, the Friendly Societies and Credit Unions Act 1982, and the prospectus registration requirement under the Securities Act 1978.)
These registration systems have been put in place for a range of purposes and do not provide complete coverage of financial service providers and the services they provide. As the information available on the registers does not identify the nature of the financial services an entity provides, it is difficult to build up a complete picture of a provider's details and activities.
The current regulatory framework does not provide assurance to consumers and investors that financial service providers have not been convicted of financial crimes or other misconduct. This increases the risk of unfair, fraudulent or negligent misconduct in relation to financial service providers.
New Zealand is currently not compliant with Recommendation 23 of the Financial Action Task Force's 40 Recommendations on Money Laundering which provides for the implementation of measures to prevent criminals from controlling or managing financial institutions and to subject directors and senior managers of some financial institutions to fit and proper evaluations.
What information sharing arrangements are there to avoid duplicating Financial Service Providers registration requirements?
The regulatory agencies involved in the financial sector do have related roles. It is therefore proposed that the Registrar have the power to share information, for the purpose of assisting in the exercise of financial sector regulatory functions, with the Securities Commission, the Reserve Bank, and other agencies that carry out anti-money laundering supervisory and enforcement functions, such as the Financial Intelligence Unit (FIU) of the Police. The regulatory agencies will have a duty to cooperate with each other in performing these functions. The specific agencies involved will be determined by the outcome of the Ministry of Justice FATF Compliance Review. The Registrar will also have the ability to use information communicated to it by the other agencies in the performance of its functions and duties.
Who will be the Registrar of Financial Service Providers and what will be the Registrar's responsibilities?
The Registrar of Financial Service Providers (the Registrar) will be the person holding office as the Registrar of Companies. The Registrar will be responsible for establishing and maintaining a register of financial service providers. As part of the registration procedure, the Registrar will carry out checks of applicants. The Registrar will check that the controlling shareholders, directors and senior management of entities applying for registration meet negative assurance criteria.
The Registrar of Financial Service Providers will also be responsible for removing entities from the register where he or she receives notification from an entity or from the relevant regulator or a consumer dispute resolution scheme that the entity no longer meets the registration requirements.
What information is required for Registration of Financial Service Providers?
Registration will require the following information
- name of entity;
- name of dispute resolution scheme to which the entity belongs (this is a requirement of registration and is part of the changes to consumer dispute resolution and redress
- list of categories of financial services provided (as prescribed in regulations).
- details of controlling shareholders, directors, and senior management for negative assurance checks
Registered financial service providers will be obliged to notify the Registrar within a specified period of changes in the information they have provided.
The Registrar will be required to notify the financial service provider where a director or senior manager does not meet the negative assurance criteria. The entity will then be required to advise the Registrar within a time period prescribed in the Act of the action that has been taken to ensure that it meets the registration criteria. If the Registrar receives no notification within the required time period the entity will be removed from the register.
What are the negative assurance criteria for Registration of Financial Service Providers?
The negative assurance criteria require that no controlling shareholder, director or senior manager of a financial service provider:
- is an undischarged bankrupt;
- is a person who is prohibited from being a director or promoter of or concerned in the management of a company under the Companies Act, Securities Act, Securities Markets Act or the Takeovers Act;
- has been convicted of a crime involving dishonesty or fraud within the preceding five years, or has been convicted of a crime involving money laundering or financing of terrorism; and
- is or has been subject to a confiscation or forfeiture order under the Proceeds of Crime Act 1991 or, in the event that it is enacted, such an order under the Criminal Proceeds (Recovery) Bill, which is before the Justice & Electoral Select Committee.
What are the positive assurance ("fit and proper") criteria for Registration of Financial Service Providers?
The system will link in to other parts of the financial sector regulatory framework aimed at ensuring that persons managing or controlling some kinds of financial service providers (e.g. trustees, non-bank deposit-takers) meet "fit and proper" criteria regarding expertise and capability.
When is a registered Financial Service Provider required to update information provided to the Registrar?
Financial service providers will be required to confirm annually that the information they have provided is still correct or to make any necessary changes.
Registered financial service providers will be obliged to notify the Registrar within a specified period of changes in the information they have provided with regard to details of their directors and senior management.
What happens to the registration process for Financial Service Providers when there are additional regulatory requirements e.g. for trustees?
Where an entity wishes to provide a service which has additional regulatory requirements, for example that it be licensed or meet specific criteria as to capacity, qualifications or experience, it will not be able to complete the registration process for that service until the relevant regulator (for example the Reserve Bank or the Securities Commission) advises the Registrar that the specific criteria have been met. An example of a service that has additional regulatory requirements is that provided by a trustee who supervises issuers of securities.
What are the penalties for offences?
A maximum penalty of up to 2 years imprisonment or a fine not exceeding $100,000 for individuals; up to $300,000 fine for a body corporate for the most serious of the proposed offences, with lower penalties for less serious offending. These penalties are set at a level which is a meaningful punishment and deterrent. These penalties are similar to penalties found in the Companies Act 1993, the Securities Act 1978 and the KiwiSaver Act 2006.
Will there be a charge to access information on the Register of Financial Service Providers?
No there will be no charge. The aim is to provide an easily accessible means for consumers and market participants to find information on financial services providers and products.
CONSUMER DISPUTE RESOLUTION AND REDRESS
Background:
Effective dispute resolution and redress mechanisms are essential to encouraging consumers to participate in financial markets and promoting market discipline for financial providers.
The discussion paper put forward a number of options for improving consumer access to dispute resolution and redress. These options included improved consumer education, enhanced civil remedies and specialist courts/tribunals, and voluntary and/or mandatory industry-based dispute resolution schemes. Submissions on the discussion paper supported the view that there is sufficient evidence of a problem to warrant further government action to improve access to redress in order to promote consumer confidence in financial markets. Submissions were generally in favour of a mandatory industry-based dispute resolution system, however there were also arguments in favour of a voluntary dispute resolution system (status quo), and use of the courts as the appropriate place to resolve disputes.
Submissions were fairly evenly split between the single scheme and multiple schemes approaches, with a slight majority in favour of multiple schemes. The preferred option is the establishment of multiple schemes as submissions were not able to mount a convincing argument that the efficiency and economies of scale of a single scheme would be sufficient to outweigh the flexibility and greater industry involvement of a multiple schemes approach.
Participants in each sector should be free to choose the form of dispute resolution that best suits the particular characteristics of the sector, whether that be a sector-specific dispute resolution scheme or a wider scheme.
Key features include:
- the Minister of Commerce may approve a dispute resolution scheme if the scheme meets criteria of accessibility, independence, fairness, accountability, efficiency and effectiveness.
- Membership of an approved dispute resolution scheme will be mandatory for financial service providers who/that transact with consumers.
It is anticipated that more than one scheme will be approved, and financial service providers will have freedom to choose which scheme they wish to join. In the event of no schemes meeting the approval criteria or if there is not full coverage of the financial industry by those schemes which are approved, reserve powers will allow for a government-established scheme.
What are the objectives of Consumer Dispute Resolution & Redress?
The purpose of the dispute resolution system is to provide a simple, low-cost avenue for consumers to seek redress. The dispute resolution system will be fully funded by industry. Government involvement will be limited to approving schemes (including periodic renewal), receiving periodic reports, and powers of inspection if necessary, rather than involvement in the day-to-day operation of a scheme.
In the context of consumer dispute resolution and redress, three further policy objectives support the overarching aim of a robust and efficient financial sector:
- Promote consumer/investor confidence in financial markets.
- Reinforce market incentives, within a competitive environment, to encourage fair and reasonable behaviour by financial providers towards their customers;
- Maintain resilience and stability of financial markets.
Consumer confidence relies on three elements:
- Consumers' expectations of a transaction are met by suppliers;
- Consumers and suppliers have confidence in market rules and institutions;
- Consumers have effective access to redress.
How will customers be educated about this Act?
Officials will work with the industry to develop public information/ education about the new regime. Further details of such a campaign will be available at a later date.
How will customers know they can complain about a Financial Adviser?
The statutory disclosure obligations of Financial Advisers will require them to disclose to the customer, in writing, prior to advice being given, the nature and procedure of the dispute resolution process available to the consumer.
What changes are proposed?
The new regime will require that all registered financial service providers and financial advisers must join an approved dispute resolution scheme if they transact with consumers.
What will this mean for existing voluntary dispute resolution schemes?
The existing voluntary industry-based dispute resolution schemes, such as the Banking Ombudsman and Insurance & Savings Ombudsman, work very well. These schemes may choose to seek approval. However, voluntary schemes do not currently extend to building societies, credit unions, finance companies, financial advisers and some superannuation schemes. Establishing schemes to cover these sectors will improve access to redress and promote consumer confidence in financial markets.
How many approved dispute resolution schemes will there be?
The new legislation will not prescribe how many dispute resolution schemes there will be. Existing schemes are already operating efficiently. It would be counter-productive to tamper with them for the sake of creating a unified, cross-industry scheme. As each sector of the financial industry offers a distinct range of products and services, participants in each sector should be free to choose the form of dispute resolution that best suits the particular characteristics of that sector, whether that be a sector-specific dispute resolution scheme or a wider scheme.
Who is required to belong to an approved dispute resolution scheme?
Membership of an approved dispute resolution scheme will be mandatory for registered financial service providers and financial advisers who transact with consumers (see list p9).
What is the definition of "consumer" in the context of Consumer Dispute Resolution & Redress?
The definition of consumer will depend on the particular sector, and will need to be consistent with the other definitions of consumer that flow from the consumer protection and other regulatory requirements in that sector. MED is currently undertaking further work on these definitions. For example, the Securities Act provides consumer protection (through disclosure requirements) for "members of the public". The Credit Contracts and Consumer Finance Act applies to "consumer credit contracts", that is, where the debtor is a natural person and enters into the contract primarily for personal, domestic or household purposes.
Who will approve the dispute resolution schemes?
Approval of dispute resolution schemes will be by the Minister of Commerce in consultation with the Minister of Consumer Affairs and Minister of Finance. The legislation will provide for appropriate checks and balances in the approval process, including a requirement for the Minister to be satisfied that the scheme has undertaken appropriate consultation, timeframe for decisions, method of notifying approval, and other matters. There will be principle-based approval criteria and mandatory considerations.
What are the principle-based approval criteria for dispute resolution schemes?
The broad principle-based approval criteria for dispute resolution schemes are accessibility, independence, fairness, accountability, efficiency, and effectiveness.
What are the mandatory considerations for approval of dispute resolution schemes?
- Governance of schemes: independence, accountability, competency, negative assurance checks.
- Periodic reviews: renewal at 10 year intervals; annual reporting; internal or independent periodic reviews.
- Funding of schemes: procedures in place to ensure adequate funding.
- Cost to consumers: free or low cost to consumers to lodge a complaint with the scheme.
- Membership restrictions: the extent to which a scheme's members cover a particular sector or sectors, however, each scheme will be free to set restrictions or qualifications on membership of the scheme to ensure that the scheme operates in an efficient and effective way.
- Jurisdiction of schemes: a minimum jurisdiction covering breach of contract or statutory obligation, and breach of an industry code, as this reflects the jurisdiction available to consumers through the courts; whether a proposed monetary limit is appropriate for the particular sector or type of business carried on by scheme members.
- Evidence and processes: a scheme be based on rules which provide for simplified processes for the resolution of disputes.
- Awareness, promotion and education: the scheme should be promoted to consumers. Member firms will be required to inform their customers of the scheme's existence.
- Reporting to stakeholders: scheme management will be expected to report regularly to their members, the public and other stakeholders.
How will gaps in coverage of the financial industry by dispute resolution schemes be addressed?
The legislation will allow for reserve powers under which the Minister may, by regulation, establish a reserve dispute resolution scheme (the "reserve scheme") if there are no approved schemes, or if there is not full coverage of the financial industry by those schemes which are approved. The reserve scheme would be subject to the same regulatory requirements as an industry-based scheme and would be required to meet the principles of accessibility, independence, fairness, accountability, efficiency, and effectiveness.
Financial providers would be able to satisfy their mandatory membership obligation by joining either the reserve scheme or an approved scheme. The reserve powers will also permit a levy to be imposed on members of the reserve scheme to fund the establishment and operation of the reserve scheme.
What are the funding arrangements for the approved dispute resolution schemes?
It is expected that the dispute resolution system will be fully funded by industry. The Ministry of Economic Development will support the establishment of the schemes through providing guidance and working with scheme owners prior to approval.
What monitoring and supervision arrangements are there for the approved dispute resolution schemes?
Government involvement will be limited to approving schemes (including periodic renewal), receiving periodic reports, and powers of inspection if necessary. Regulations will require an annual report to the approving Minister, setting out basic information about the activities of the scheme (eg number and type of complaints considered, promotional activities undertaken), as well as identifying any issues which may have a wider impact on the financial sector and which the scheme considers require regulatory review by government.
There will also be an obligation for schemes to maintain a list of members and to immediately notify the Registrar of Financial Service Providers if a member is expelled from the scheme.
It is proposed that the Retirement Commissioner retain the power under section 83(e) of the New Zealand Superannuation and Retirement Income Act 2001 to monitor the effectiveness of persons who have been appointed (other than under statutory authority) to consider complaints and disputes about savings and investments.
What happens when a complaint involves firms who are members of more than one approved dispute resolution scheme?
It is expected that schemes will include procedures allowing voluntary cooperation. This could include sharing resources, establishing a single entry point (eg a shared call centre and/or website) for consumers, coordinating cases and learning from each other.
If consumers are dissatisfied with the approved dispute resolution scheme's decision, what can they do?
The proposed industry-based dispute resolution system is intended to operate as a complement to the courts. This means that consumers will still retain their right to take court action if they wish. The scheme's rules will not preclude a consumer from rejecting the approved dispute resolution scheme's decision and taking alternative court action against a financial provider if he or she is dissatisfied with the decision.
What is a member's right to appeal against a scheme's decision?
A member's limited right to appeal from a decision of an approved dispute resolution scheme will be similar to rights available under the Disputes Tribunal Act for appeals against an order of a Disputes Tribunal. That is, an appeal is only allowed on the grounds that the proceedings were carried out in an unfair manner.
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