Questions and Answers
[ Last Updated 31 August 2006 ]
General
Why is the Government undertaking the RFPP?
The review is being undertaken as there is a host of legislation in the non-bank financial sector that has been developed at different times with confusing or conflicting objectives. This creates the potential for gaps in coverage, inconsistencies in the regulatory treatment of similar products and regulatory arbitrage. It also leads to unnecessary compliance costs and inefficient regulation that impedes business innovation. In some areas there are also concerns about inadequate consumer protections, the overall effectiveness of the regulation in achieving its objectives and the need to meet international principles and agreements.
What does it cover?
The RFPP covers the regulation of insurance, superannuation, collective investment schemes, platforms and portfolio management services, non-bank financial institutions, the offerings of securities, mutuals’ corporate governance and consumer dispute resolution and redress in the financial sector.
How have the problems been identified and addressed?
Many of the problems identified with the regulatory regime have come directly from industry. The problem identification for the review was developed in conjunction with a range of market participants, consumer groups and self regulatory organisations. The options for reform contained in the discussion documents were also developed in conjunction with advisory groups made up of industry participants based in Auckland and Wellington.
Where any costs may be imposed on business they will be necessary, kept to a minimum and proportionate to the risks posed. Advisory groups have assisted officials in trying to effectively make these trade offs. We would also like feedback through the submission process on how the objectives of the regime can be met in the most cost-effective way and information about the actual costs of any proposal.
How does this review relate to the Quality Regulation Review?
The RFPP is consistent with the Quality Regulation Review (QRR), where the government is focusing on the removal of unnecessary constraints on economic growth as well as the continuous improvement of regulatory frameworks and processes. In particular, the papers remove some unnecessary costs and inflexibility on business, and make regulation more transparent and effective. Also, consistent with the QRR, the documents propose a range of regulatory measures to address issues raised. The documents attempt to leverage off industry standards and practice where possible by proposing options for public/private supervision and legislative backing for self-regulation.
Does the RFPP have inter-linkages to the government’s economic transformation agenda?
The RFPP aims to encourage confidence in the financial sector by more effective disclosure and access to information, appropriate dispute resolution and redress, and greater assurance for consumers about the competency and supervision of those running financial institutions. Increased participation should provide greater access to capital for business and other changes proposed should remove unnecessary compliance costs and regulatory inflexibility and make access to capital easier. This all contributes to the government’s economic transformation agenda by enhancing the reputation and soundness and efficiency of our market and has the potential to lead to greater investment in the economy.
How much of this is influenced by international principles and obligations, including the single economic market agenda with Australia?
The Financial Sector Assessment Programme assessed NZ against international principles in 2003/4 and found that in some areas we were not meeting international best practice. In undertaking any regulatory reform we need to consider the Memorandum of Understanding on Coordination of Business Law between Australia and New Zealand.
Some of the discussion documents propose that we move closer into line with international practice and obligations and also consider further coordination with Australia, particularly in areas where this would reduce costs for people operating trans-Tasman. However, this has been balanced by consideration of whether in each case the proposals are appropriate for domestic conditions and what the impacts will be on small players.
With the amount of reform/change being undertaken in the Financial Sector, why is all of this work being done at once?
As many of the problems with the current regime (e.g. inconsistencies, gaps, differing objectives and regulatory arbitrage) have occurred because different parts of the regulatory regime have been developed in a piece meal fashion and in isolation, we want to consider all non-bank financial products and providers together to ensure that any new regulatory regime will avoid these problems.
The discussion documents also have a number of inter-linkages with each other, which make it difficult to extract parts of the review.
How does this work relate to the Review of Financial Intermediaries?
The RFPP deals with products and providers and the Review of Intermediaries with the role of intermediaries play in providing these products. The RFPP is linked with the Review of Financial Intermediaries; for example, there may be links between product disclosure on financial products and intermediary disclosure. The same team within the Ministry is considering both of these issues and ensuring any work is coordinated.
How does this work relate to the Review of New Zealand’s compliance with the Anti- Money Laundering Financial Action Task Force Recommendations?
The review being undertaken by the Ministry of Justice on the FATF Recommendations has close links to the RFPP. The third discussion document on the FATF review is likely to be released around the same time as these documents, and will explore supervisory options which leverage of processes and procedures designed through the RFPP, so that businesses are supervised by the same regulator for RFPP and anti-money laundering and combating the financing of terrorism (AML/CFT) purposes. This would mean businesses may only have to deal with one regulator and one set of processes where possible, reducing costs for business.
How does the Review relate to KiwiSaver?
The current KiwiSaver regime is based on the current Superannuation Schemes Act. The Review does propose changes to that Act. Any changes made will then apply to KiwiSaver schemes as well. Some of the requirements in the KiwiSaver Bill are consistent with the RFPP objectives and principles. KiwiSaver schemes would be effectively transitioned into any new regime.
Non- Bank Deposit Takers
Why does the discussion paper make a distinction between non-bank financial institutions and other debt issuers?
Non-bank deposit takers (NBDT) are different from other debt issuers largely because their core business involves borrowing money from retail investors (mainly in the form of deposits or debentures – whether secured or unsecured) for lending to many different entities so it is difficult for the investor to assess the risks they are exposing themselves to. NBDTs also tend to be highly geared and are subject to contagion risks due to the short term nature of deposits. Unlike debentures or notes issued by a non-financial corporation, depositors are directly reliant on the NBDT to liquefy their deposits.
Why do consumers in non-bank financial institutions need additional protections?
There is anecdotal evidence that consumers are not distinguishing between higher and lower risk institutions. Also, the information that potential depositors would need to compare the risk/return trade-off of deposits is complex and beyond the capacity of many depositors to analyse. We are not aiming for zero-failure in this area, rather a better understanding of the risks posed, so consumers can make more informed choices.
Are new regulatory requirements being proposed (such as credit ratings and changes to the trust deeds) as a response to the recent failures of some finance companies?
The RFPP commenced before any finance company failed and is not a reaction to the recent failures. However, although the causes of these recent failures are still being ascertained by the receivers, these failures have provided a timely reminder of improvements that can be made in this sector. The changes will not prevent future failures but should strengthen this sector by allowing consumers to make more informed judgments about the risks posed and provide a better basis for comparability across institutions
The discussion documents place additional entry requirements on the NBDT sector? Are these really necessary? Could they impose unnecessary barriers to entry to the detriment of access to capital?
The NBDT sector is a significant channel for saving and investment and provides credit to a wide range of businesses and consumers in New Zealand. It is not the intention of the RFPP to put the institutions in the non-bank financial sector out of business. Options will be assessed for their ability to promote institutional risk management, promote depositor confidence, reduce contagion risks within sector, minimise efficiency and compliance costs, facilitate exit/distress management, and be competitively neutral. We are seeking people’s views on what options meet these objectives and the impacts they will have on the sector.
Apart from the problems facing finance companies that operate in the used car market, is there any evidence that there is a problem in the NBDT sector in general?
There is some evidence of mis-pricing of risks in the sector, suggesting that returns offered to some investors may not adequately compensate them for the risks they are taking in some cases. Also, although the sector is currently a relatively small part of the total financial system, it performs important functions and has been growing in market share over recent years. Consequently it is important that the NBDT sector is sound and efficient so that it can make an effective contribution to economic performance and meet the needs of depositors and borrowers.
The requirement of mandatory credit ratings will increase compliance costs and such costs will be relatively burdensome for the smaller deposit-takers. Credit ratings have tended to favour the larger institutions. Will smaller deposit-takers be unfairly disadvantaged?
The option of credit ratings is still open at this stage and the costs and benefits of ratings are outlined in the discussion document. One option proposed in the paper is that if a credit rating regime is proposed that there may be consideration of exemptions for small institutions, and that they would have to disclose that they did not have a rating.
How does the RFPP relate to the changes being made to credit unions through the Business Law Reform Bill and the in principle changes agreed to by Cabinet? In particular can credit unions that wish to remain small do so?
Credit unions will be treated in a way that is consistent with the in-principle decisions, where possible. The intention is to design a regulatory regime that is flexible so that credit unions that wish to expand can do so and those wishing to remain small regional providers can also continue to operate in that way. However, while the substance of the in-principle decisions in Phase 2 of the credit union review will be retained, some of the decisions may need to be implemented in a slightly different way. Officials intend to have discussions with credit unions to ascertain the most effective way of achieving this
Insurance Discussion Document
The existing regulatory regime for insurance has resulted in a relatively stable sector in New Zealand, so why is anything else needed?
While there is a strong self-regulatory environment in New Zealand which instils a number of disciplines on the market, there are a number of problems with the current regulatory regime which need to be addressed. These include that much of the legislation is out of date or inflexible and therefore does not meet current market conditions; there are some insurers operating at the fringes that are not adhering to industry standards or are operating overseas and holding out they are NZ insurers which may have impacts on the reputation of the NZ market; there is a lack of sufficient monitoring and supervision tools available to the Regulator; and New Zealand is not complying with international obligations relating to insurance supervision. Many in the industry agree that there is a need for change and there is a consensus regarding what form of change is needed in many areas.
The proposed new regime looks like it represents significant change from the current regime, what will be the compliance costs on industry?
While the list of proposals and options is comprehensive, the intention is to continue a non-intrusive regulatory environment reinforcing existing market and self-disciplines.
We are trying to design a set of base level requirements that build on the standards most insurers in the market are currently meeting. The proposals and options for change set out in the discussion paper should not significantly impact on most insurers, but we are open-minded about their relevance and fit with what the insurance sector is doing. We are also interested in feedback on the costs and benefits of the proposals and options.
Many insurance companies are branches and subsidiaries of overseas parents, particularly Australia. How does the regime coordinate with Australia and other countries and is that at the detriment of NZ based insurers?
Many of the insurance standards used currently in the NZ market are Australian or international standards. The discussion document proposes these standards, modified as appropriate, and subject to supervisor approval, be maintained with regulatory backing and approval by the regulator. Also proposed as an option is an exemption process and that New Zealand pursue information sharing agreements with other jurisdictions which should reduce regulatory burdens. In saying this, we have also considered the New Zealand-based firms and are keen to create a flexible regime that works for New Zealand based insurers.
Collective Investment Schemes
What are collective investment schemes?
Collective investment schemes are schemes where people pool their assets together, but do not have day-to-day control over the operation of the investment scheme.
The proposed definition of collective investment scheme includes unit trusts, superannuation schemes, all KiwiSaver schemes, life insurance policies with an investment component and most participatory securities.
Why are we amending the current regulation?
While the objectives behind the regulation of collective investment schemes are fundamentally sound a number of problems have been identified with the current regime. The various pieces of regulation applying to different CISs create inconsistent and complex obligations that are difficult for investors to differentiate and understand. They also create both inefficiencies and costs for providers and the potential for regulatory arbitrage.
In addition, there are inconsistent and in some cases inadequate regulatory protections for investors (for example inadequate and inconsistent regulatory controls and trust deed requirements); there are no entry requirements on the competency or capacity of those running CISs and other potential issues with the governance of these schemes; and in some areas the regulation is outdated, inflexible and fails to meet international principles.
Will the reforms proposed in this review encourage superannuation schemes to wind-up?
We are aware that over the last couple of decades there has been a trend for wind-up of employer stand-alone superannuation schemes. When schemes wind up money is generally released from savings and spent, which is contrary to the government’s policies in relation to savings and the objectives of the review. In order not to exacerbate scheme wind-up, the discussion document proposes a transitional structure. This will involve not imposing large change on these schemes and maintaining the current structure under the Superannuation Schemes Act, with some smaller additional improvements being made in relation to monitoring and enforcement are proposed to ensure that investors have adequate protections.
Platforms and portfolio management services
What are platforms and portfolio management services?
A platform is a computerised administration services designed to hold, trade and report on investments. There are three separate functions that can be bundled together in the offer of a platform namely, a financial adviser, an administrator and a custodian. Portfolio management services provide similar services to platforms. The main difference being that portfolio management services have two functions, namely a manager/broker/financial adviser and a custodian.
What are the problems with the current regulation?
Currently there are few regulatory protections for consumers using platforms and portfolio management services. Platforms and portfolio management services do not fall within the Securities Act 1978. Many investors may not know that their investments are being channelled through platforms or they may not be informed about all the fees and charges associated with platforms or the portfolio management service. Platform providers, portfolio service providers and custodians are not subject to supervision, and there is no requirement that they comply with minimum governance requirements (that is, they are not currently required to demonstrate that they have the competence and capacity to perform their functions and duties).
Securities Offerings (Application, Disclosure)
Why are you changing the offer documents?
The objectives behind the current regulatory regime for securities offerings are sound. However, the Securities Act 1978 and the Securities Regulations 1983 have been around for a while now and we have identified, through consultation with regulators, industry and consumers, a number of areas where the regulatory regime could be improved by reducing compliance costs for market participants and enhancing investor protection.
We are proposing changes that make disclosure more accessible, timely and user-friendly for investors. In addition, the new regime will reduce compliance costs for market participants by simplifying access to capital through providing workable exemptions from the regime for offers to sophisticated and professional investors and addressing and removing where appropriate, any disclosure requirements which are ill-targeted, duplicative, inflexible, or uncertain.
Improving the disclosure regime will not address the problem that many investors do not bother to read, or cannot understand, the information that is disclosed
Disclosure is a key tool for securities regulation, and we want to ensure it is as effective as it can be. However, we recognise there are limits to what disclosure can achieve and that it is not the only tool that can be used. As part of the RFPP and the Review of Financial Intermediaries, we are making efforts to improve financial capability by considering how we can educate investors about financial concepts; and for those investors who prefer to rely on financial advice to make their investment decisions, we are ensuring that there is a sound regulatory regime for financial intermediaries. We want to make sure we are using all of the levers we can to assist investors in making good investment decisions.
There has been a lot of discussion in the media about whether issuers, particularly finance companies should have to comply with ongoing/continuous disclosure requirements. What does the discussion document propose?
The discussion document proposes that issuers register and communicate to investors, in a timely fashion, all material changes to both the offer document and trust deed and that financial companies register six-monthly audited financial statements and a key information summary, which sets out in brief form key financial and risk-related information. We are also seeking feedback as to whether the continuous disclosure regime should extend to those issuers who hold out that their securities have an established market. We are keen to canvass views on these issues and to understand what the compliance costs may be.
Supervision of Issuers
Have problems been identified with the way in which trustees are performing their role?
The government recognises that trustees do play a play a vital role in NZ’s financial markets and are doing a good job as frontline supervisors. The discussion document aims to retain all the benefits of the current model, while putting in place additional measures to provide some assurance that issuers are adequately and effectively supervised. In particular, the proposals in the paper intend to provide transparency to trustee supervision of issuers, ensure that trustees have the capability, capacity and powers to carry out their role effectively and enable the government to gather whole of sector data and monitor the sector. In addition, the paper considers whether there should be consistent minimum protections in trust deeds so that people to compare products and that consumers have the important protections they need.
Why do the discussion documents propose that the existing trustee model for employer master trusts and other retail superannuation schemes be changed? Could this impose costs on these schemes?
Currently, in a superannuation scheme, the trustee of the scheme is also the issuer of interests in the scheme. This raises concerns, particularly where the trustee is a subsidiary of the provider of the scheme as there is the potential for the trustee to have competing incentives and for conflicts of interest to occur. As the current regime has limited checks and balances on trustees this makes it difficult to also gauge whether trustees’ are performing their role appropriately and whether the regulatory objectives are being met.
It is acknowledged that the proposed reform will impose additional compliance costs on employer master trusts and other retail superannuation schemes by the fact that getting someone independent to carry out the trustee role rather than doing it in-house may cost more. However, these additional costs should not be huge for these as schemes as they already have to pay for the costs of the trustee role in-house.
Won’t the costs of the Commission supervising trustees simply be passed on to issuers?
As the existing regime is largely being retained, the costs of the proposed changes should be minimal. There will be some costs involved in the Securities Commission’s supervision of trustees. However, the entry requirements for trustees will be no more than is necessary for adequate supervision; and trustees should already be collecting the information that the Commission will require them to report. Where any costs may be imposed, it is intended that they be proportionate to the risks posed and not impose unnecessary burdens. We would like feedback through the submission process on how the objectives of the regime can be met in the most cost-effective way and information about the actual costs of any proposal.
Registration
With all of the other registration systems why do we need registration of financial institutions?
Currently, there is no comprehensive way of identifying or monitoring providers of financial services. While there are registration requirements for some providers and for particular financial products under specific legislation, the information available doesn’t identify the nature of the financial services an entity provides so it is difficult to build up a complete picture of a provider’s details and activities.
This makes it difficult for regulators to collect data in order to monitor and identify risks in the sector or people who are not complying with the law. It also makes it difficult for market participants (i.e. business analysts, intermediaries and consumers) to access information on a financial services provider. There is also limited requirements regarding the capability and integrity of those running financial institutions, and no way of monitoring them.
What are the costs of registration for financial services providers?
The Companies Office already registers nearly all financial institutions either under their corporate form (companies, credit unions, building societies, etc.) or for offering document purposes (i.e. prospectuses). The registration proposal involves adding additional fields of data to existing registries. Therefore businesses will have to provide a little more information than they currently do, but as they will already be familiar with Companies Office registration and filing processes, there will be minimal extra time needed to become familiar with the financial services registration processes.
Consumer Redress
Is there really a problem with consumer dispute resolution in the New Zealand market?
There has been some survey evidence that consumers do face problems getting redress in many areas. The existing voluntary industry-based dispute resolution schemes (Banking Ombudsman and Insurance & Savings Ombudsman) provide effective access to redress for customers of member firms, however these schemes do not have full coverage across the financial industry. Officials are keen to further test the magnitude of the problem.
Do the existing voluntary ombudsman schemes and/or the industry support the proposals?
There are a range of options proposed in the discussion document. As this discussion document has not been the subject of an advisory group, we are keen to hear submissions on all of the options. While officials did discuss the paper with the Ombudsman schemes prior to release of the discussion paper, these were only preliminary discussions and more discussion is needed with both the Banking Ombudsman and Insurance and Savings Ombudsman. It will be important that any reform proposals leverage off the existing industry goodwill generated by the BO and ISO.
Won’t these options be costly and won’t the costs simply be put on to consumers?
We recognise that improvements to consumer dispute resolution and redress mechanisms will impose costs on financial providers, and that these may be passed on to consumers. The discussion paper allows us to undertake further work as stated above on the magnitude of the problem and to find out further information on how many complaints may be involved.
Who is going to administer and enforce the proposed dispute resolution system?
The main proposal in the discussion paper is for an industry-based dispute resolution system. Primary responsibility for establishing and operating the system will rest with financial providers, although there will be oversight by MED/MCA and the Securities Commission to ensure that the dispute resolution and redress arrangements provide sufficient protection for consumers.
Mutuals Governance
What are the problems with mutuals governance?
Currently different mutual financial institutions (ie. friendly societies and credit unions, mutual insurance associations, industrial and provident societies and building societies) have varying levels of corporate governance requirements. This can lead to confusion for investors. However, of greater concern is that there are gaps between many of these governance requirements and international principles of good governance. These gaps increase the risks of business failure, the consequences of which can be severe for consumers investing money in mutual financial institutions.
How can a one size fits all approach be adopted for friendly societies and credit unions, mutual insurance associations, industrial and provident societies and building societies?
The preferred option in the discussion paper is that there be one statute containing base-level corporate governance requirements for mutual financial institutions. While these base level requirements would apply to all mutuals, they are focused on the fundamentals of good corporate governance. Because they focus only on fundamental requirements, there is still considerable flexibility for mutuals to organise themselves in ways that reflect their special characteristics.
What are the costs of the proposals for mutual financial institutions and their members?
In some cases many of the proposed requirements are already being met by mutual financial institutions and will not result in any increase in costs for these organisations. In other cases the proposed requirements will impose some initial transitional costs, and higher ongoing administrative costs. These costs should be outweighed by the strengthened protections for members and reduced risk of business failure provided by the adoption of the new base level corporate governance requirements.
If it was decided to adopt a single set of base level governance requirements for all mutuals, how would transitional arrangements work?
Different issues may arise for different mutuals transitioning to the proposed new base level corporate governance requirements. We are seeking submissions on how a transition process should be structured, so as to make the process as simple as possible, and reduce any associated costs.
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