Why the 'once in a generation' Financial Markets Conduct Bill is bigger than Ben-Hur

By Gareth Vaughan

When you hear politicians talking about a once in a generation opportunity it's easy to dismiss it as political hyperbole.

But in the case of the Financial Markets Conduct Bill, introduced to Parliament by then-Commerce Minister Simon Power on October 12, 2011 as a 560 page door stopper, and inching closer to becoming law after a three part 681 page report recommending it be passed by Parliament's Commerce Select Committee, such statements appear hard to dispute.

Both Power and his successor Craig Foss have used the "once in a generation" description for this particular Bill. For Power it was "a once-in-a generation opportunity to re-write our securities law - which has been subject to decades of ad hoc reform - in an integrated and coherent manner." And for Foss it's "a once-in-a-generation opportunity to make New Zealand's financial markets more efficient."

Both Power and Foss have also respectively stated that the Bill is "crucial" and "critical" to restoring investor confidence in New Zealand's financial markets. It has also been a long time coming, taking into account recommendations from the Government's Capital Markets Development Taskforce, which released its final report on December 16, 2009, the effects of the global financial crisis, the meltdown of dozens of finance companies, and the Ross Asset Management debacle.

I asked Minter Ellison Rudd Watts partner Lloyd Kavanagh, a securities law specialist, whether the Financial Markets Conduct Bill was really bigger than Ben-Hur and is indeed the Big Kahuna of financial markets reform that it's touted as.

"It's a huge deal. Basically it's a complete rewrite of New Zealand's securities law," Kavanagh said. "The current Securities Act 1978 obviously has been around for more than 30 years. It's a go back to basics, fundamental change."

"People will see it first of all in public offer documents and also the introduction of licencing regimes for some participants in the New Zealand capital markets who have not previously been licenced."

"So it's enormous," Kavanagh added.

Changes for 'ma & pa'

For "ma and pa" retail investors he said the key change would be visible through offer documents, currently prospectuses and investment statements.

"The fundamental change is compared with the current investment statement and prospectus, in future there will be what's called a PDS, product disclosure statement, and an online register."

"The product disclosure statement is intended to be simplified to have a front two pages, which explain the basics, and then to answer a whole set of questions, that will be set out in regulations, in clear concise and effective language."

"But then the replacement of a prospectus, a written document as such, by an online register will be a huge change and really quite market leading in the world, I think."

He said basic information will feature in the PDS, but all material information, the detailed nuts and bolts, will be in the online register.

"So that means that for retail investors the document they will get should contain the information they need to make basic investment decisions. But for analysts and experts, they will be looking to this online register, which is like a website."

The Bill's also set to beef up the Financial Markets Authority's powers. The FMA will have a new role licencing fund managers and the providers of discretionary investment management services, or DIMS.

"That's going to be a massive job for them to get underway as soon as the legislation's in final form. And we know from the licencing of securities trustees last year, of whom there are relatively few, this will be a lot of work, both for the FMA and the industry," said Kavanagh.

The Blue Chip effect

The FMA's also getting new powers enabling it to reclassify things as financial products or securities when they aren't currently regarded as such.

"So that the kind of issue that arose in (residential property investment scheme) Blue Chip, where you had things that were constructed with the intent of being outside the regime, they will have the power simply to go and say 'hey, guess what, we're bringing you inside the regime and from now on you are going to comply'," Kavanagh said.

Pulling things into the regulatory net would be at the FMA's discretion, but it'll have to establish reasonable grounds and make an objective consideration of the facts, added Kavanagh.

"But yes, they'll have a broad power to reclassify things that fall outside the technical words of the definitions and to bring them in, or to reclassify them from one of the categories of securities into another category if they think that's appropriate. And that's one of the things that we're all waiting to see how that will work in practise. For example, if securities have already been offered, or are in the process of being offered."

Then there's KiwiSaver, where providers are among the fund managers who''ll be applying for a licence.

Banks get improved opportunity to offer derivatives to the public

Banks, meanwhile, will remain exempt from prospectus requirements due to already having to issue General Disclosure Statements every quarter. And banks will be more easily able to offer the public derivatives products.

"The bill has a whole new section in it about derivative products and with a specific regime, if they were to choose to offer derivatives to members of the public, that will be more straight forward than it is at the moment where there's no specific regime," Kavanagh said.

As for company directors, Kavanagh said those involved in investment management or the issuing of financial products, need to get up to speed quickly.

"The expectation at the moment is that the regime will go live around about April next year and there are two big areas that directors need to be thinking about."

"The biggest issue is the strategic one; How will it impact on what they do by way of business process and their competitors? Because I think it does change the landscape. And then secondarily, what does it mean for them in terms of the detail of their particular responsibilities in terms of the content of the documents and conduct? But it's really that first issue that they should be thinking about and asking questions about right now."

A spokeswoman for Foss said he hoped to progress the Bill, whose second reading in Parliament concluded in February, in the House "shortly."