Proposals on conduct reform could impact M&As, civil liberty

One of these is the proposal to introduce a requirement for the Financial Markets Authority (FMA) to approve changes in control of licensed firms.

Another is the proposal to introduce without-notice warrantless on-site inspection powers for the FMA.

“How many financial advisers are aware that this proposal would mean they would not be able sell their business without first getting FMA permission?

“How many people in wider NZ are aware that MBIE is proposing to give the FMA powers of entry without a warrant and without having demonstrated any need for this at all,” says Haines who has submitted feedback on behalf of BIG.

Both proposals are part of the Ministry of Business, Innovation and Employment’s (MBIE’s) consultation package which sought feedback on changes to the Financial Markets Conduct Act and the Financial Markets (Conduct of Financial Institutions) Amendment (CoFI) Act 2022.

There were two parts to the consultation; the first on streamlining CoFI and the second on changing the regulatory framework and powers of the FMA.

The submission from BIG, (which comprises most of New Zealand’s non-bank MIS managers) is confined to the second part only.

Among other issues, it addresses proposals that market services licences under CoFI and the FMC Act should be consolidated, that all FMC Act licensed businesses should have to get FMA approval for a change of control, and that the FMA should have extra powers.

Setting a precedent

Haines says the consultation was described in a way that would make most non-COFI or CCFA businesses believe it had nothing to do with them and maybe not even read the document.

But some of the proposals could affect the entire industry.

Although giving the FMA powers to enter without a warrant would rarely if ever be needed from an enforcement stand-point, it would further erode civil liberty and would be a net negative from a public welfare perspective.

“There should be a tension between the freedom of businesses to go about their work in their own way, and the ability to investigate. But this power would be quite intrusive and could open the door to being a precedent that could be used in other places, I think it’s quite wrong.”

Of more practical significance is the proposed power of the FMA over change of control. BIG’s submission describes the proposal as “sand in the gears” of the M&A process and trying to fix a problem that doesn’t exist.

“If everyone has to get the FMA’s permission to sell their businesses, imagine what would happen if you get people queuing to request permission.”

Not only would it add to the cost of merger and acquisitions, it would present another hurdle to what is already a complex and sensitive process, says Haines.

FMA powers

On whether the FMA needs more power, the discussion document should have asked the reverse, says Haines, whether any current powers are excessive; in particular FMA powers under the Financial Markets Authority Act to demand a financial services employee provide information on their employer without being able to tell the employer.

“There’s a tension that must be maintained between the freedom of people and businesses to go about their work and the ability to investigate. Both sides are important but to just give powers that are quite intrusive and open the door to a precedent that could be used in others places, is quite wrong. Once you’ve set the precedent for us, it’s a small step for other businesses.”

BIG also gave feedback on the proposal for having a single licence saying it would bring, “as many annoyances as efficiencies.”

Many BIG members hold both MIS manager licences and financial advice provider licences.

Applications for new licences could potentially be subject to a more complex “uber” application process designed to accommodate all financial market activities, rather than the single new form of business the MIS manager wants to take up.

For example if a business wanted to branch into discretionary investment management service (DIMS) they currently apply for a DIMS licence. This is easier than having to go through an application process designed to cover every single type of licence and work out how DIMS would fit, says Haines.

Although the consultation period has closed, Haines says there is probably scope to give feedback.

“If anything were to happen, they would have to make a law change anyway, so one way or another it should be possible to raise a point if people haven’t thought about it yet.”