Financial Services Quarterly AUTUMN 2018

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Welcome to the Autumn 2018 issue of Financial Services Quarterly, a review of current legal issues in the financial sector.

Each quarter, we summarise recent issues and preview upcoming developments in these areas:

In the courts

Legislation/In Parliament

Recent developments

Bell Gully news

Useful Web links

In this issue:

• Financial Services Legislation Amendment Bill with Select Committee • Robo-advice exemption – applications now open • Terms of reference released for review of the Reserve Bank of New Zealand Act • Cryptocurrency to be regulated in Australia

Need more information?

For more information on any of the cases, articles and features in Financial Services Quarterly, please email rachel.gowing@bellgully.com or call on 64 9 916 8825.

Disclaimer: this publication is necessarily brief and general in nature. You should seek professional advice before taking any action in relation to the matters dealt with in this publication.

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LEGISLATION/IN PARLIAMENT Financial Services Legislation Amendment Bill with Select Committee The Financial Services Legislation Amendment Bill, which was introduced into Parliament in August 2017 by the former Government, has passed its first reading and has been referred to the Economic Development, Science and Innovation Select Committee. First tranche of AML/CFT Phase 2 regulations enacted The first tranche of regulations has been enacted under the Anti-Money Laundering and Countering Financing of Terrorism Act, following recent amendments to put in place Phase 2 of New Zealand’s AML/CFT laws. Facilitating digital interactions in existing legislation The Electronic Interactions Reform Act 2017 came into force at the end of 2017.

Terms of reference released for review of the Reserve Bank Act The Minister of Finance has released Terms of Reference for the Government’s review of the Reserve Bank of New Zealand Act 1989, delivering on the coalition agreement signed between Labour and New Zealand First to review and reform the Act.

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RECENT DEVELOPMENTS How open is New Zealand to Open Banking? New Zealand hosted the Digital Nations 2030 to discuss what is required to become a truly digital nation by 2030. Open Banking is a critical first step, but where is it on the Government’s agenda?

Cryptocurrency to be regulated in Australia Australia has introduced new laws to regulate digital currency exchange service providers.

AML/CFT guidance notes updated Several AML/CFT guidance and explanatory notes were updated in December 2017.

New requirements for trans-Tasman mutual recognition offer regime in the pipeline In December last year, the Australian Treasury released a consultation paper on draft legislation, which will implement new design and distribution obligations for entities that issue or distribute financial products to retail investors in Australia.

NZBNs required for FSPR registrations and annual confirmations Changes to the Financial Service Providers (Registration) Regulations 2010 require corporate and public entities to include their New Zealand Business Number in certain circumstances.

Latest from the Financial Markets Authority

Robo-advice exemption – applications now open The Financial Markets Authority is now accepting applications from entities that wish to provide personalised robo-advice to consumers.

FMA publishes 2017 Conduct Outcomes Report The FMA has published its Conduct Outcomes Report for 2017, setting out some of the key issues and actions taken by its enforcement and supervision teams. FMA acts on AML/CFT non-compliance Following an inspection of a New Zealand-based foreign exchange brokerage, the FMA has issued a formal warning.

FMA publishes snapshot of P2P and crowd funding sectors The FMA has published an interactive report on the sectors for the year ended 30 June 2017.

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LEGISLATION/IN PARLIAMENT Financial Services Legislation Amendment Bill with Select Committee The Financial Services Legislation Amendment Bill (the Bill), which was introduced into Parliament in August 2017 by the former Government, has passed its first reading and been referred to the Economic Development, Science and Innovation Select Committee. The Bill creates a new regulatory regime for providing financial advice and other financial services. It will change the way financial advice on products such as mortgages, investments, insurance, KiwiSaver funds and other bank products are regulated, by repealing the Financial Advisers Act 2008 (the FAA) and amending both the Financial Markets Conduct Act 2013 (the FMC Act) and the Financial Service Providers (Registration and Dispute Resolution) Act 2008 (the FSP Act). Once the Bill is enacted, the majority of financial advice regulation will sit within the FMC Act. The Bill also addresses the misuse of the Financial Service Providers Register (the FSPR) through amendments to the FSP Act, and includes some other minor changes and improvements to the FMC Act to address issues that have emerged since the implementation of the FMC Act regime. The Economic Development, Science and Innovation Select Committee called for submissions on the Bill at the end of last year, with submissions closing on 23 February. This leaves the Committee with just over three months to consider submissions and report back to the House on 7 June 2018. Submissions made on the Bill will be available to view on Parliament’s website here once the Committee has considered them. Click here for a detailed summary of the Bill.

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First tranche of AML/CFT Phase 2 regulations enacted

The first tranche of regulations has been enacted under the Anti-Money Laundering and Countering Financing of Terrorism Act 2009 (the Act) following recent amendments to put in place Phase 2 of New Zealand’s AML/CFT laws. Consistent with the staged implementation of the Phase 2 sectors, new regulations will be made in separate tranches. This first tranche covers matters that need to be addressed before the first Phase 2 reporting entities (lawyers, conveyancers and trust and company service providers) are required to comply on 1 July 2018. Wider changes to the AML/CFT regime that are also due to come into effect on 1 July 2018, and that affect all (Phase 1 and Phase 2) reporting entities have also been addressed. Click here for more information.

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Facilitating digital interactions in existing legislation

The Electronic Interactions Reform Act 2017 came into force at the end of 2017.

This Act amends a range of legislation to facilitate specific digital interactions, and includes amendments to provisions relating to the giving of evidence and notice under the Commerce Act 1986, the Companies Act 1993 and the Fair Trading Act 1986.

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Terms of reference released for review of the Reserve Bank of New Zealand Act

Grant Robertson, the Minister of Finance, has released Terms of Reference for the Government’s review of the Reserve Bank of New Zealand Act 1989, delivering on the coalition agreement signed between Labour and New Zealand First to review and reform the Act. The review will be undertaken in two phases. The first phase will focus on the election commitments made by Labour to add maximising employment to the price stability objective of the Reserve Bank of New Zealand (RBNZ), and to provide for a committee decision-making model for monetary policy decisions. The review will also consider whether changes are required to the role of the RBNZ Board as a consequence of the alterations to the decision-making model. In the second phase of the review, RBNZ and Treasury will jointly produce a list of areas where further investigations of RBNZ’s activities are desirable. This list will be produced in consultation with an Independent Expert Advisory Panel appointed by the Minister of Finance to provide input and support to both phases of the review.

Click here for more information.

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RECENT DEVELOPMENTS How open is New Zealand to Open Banking?

New Zealand hosted the Digital Nations 2030 to discuss what is required to become a truly digital nation by 2030. Open Banking is a critical first step, but where is it on the Government’s agenda?

Click here to read Bell Gully’s article How open is New Zealand to Open Banking?

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Cryptocurrency to be regulated in Australia

Australia has introduced new laws to regulate digital currency exchange service providers.

Following similar steps in the European Union, the United States, and Canada, Australia has introduced the Anti-Money Laundering and Counter-Terrorism Financing Amendment Act 2017 (the Act).

The Act extends Australia’s AML/CFT legislation to cryptocurrency exchanges, affecting digital currency exchange (DCE) service providers. The extended regulation will involve mandatory registration and compliance obligations for DCEs, including:

• customer identification and due diligence;

• adopting and maintaining an AML/CFT programme;

• suspicious matter reporting;

• threshold transaction reporting of cash amounts of $10,000 or more; and

• record keeping.

The new laws are expected to come into effect on 3 April 2018. Click here for more information.

At this stage, there is no word on whether New Zealand intends to follow suit by introducing cryptocurrency regulation.

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AML/CFT guidance notes updated

Several Anti-money Laundering/Countering Financing of Terrorism guidance and explanatory notes were updated in December 2017. They are: • the ordinary course of business guideline, which replaces the 2012 version; • the designated business group formation guideline and the designated business group scope guideline, which

replace 2012 versions; • the enhanced customer due diligence guideline; and • the explanatory note to the identity verification code of practice, which replaces the 2013 version. In addition, the Department of Internal Affairs (DIA) has published a guideline titled AML/CFT Risk Assessment and Programme: Prompts and Notes for DIA reporting entities. This guideline provides DIA-supervised reporting entities with a series of questions, supervisory expectation, reference material and suggested best practice to help guide their risk assessment and programme. The DIA has also published the first AML/CFT risk assessment for reporting entities covered by Phase 2 of the AML/CFT Act here.

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New requirements for trans-Tasman mutual recognition offer regime in the pipeline

In December last year, the Australian Treasury released a consultation on draft legislation, which will implement new design and distribution obligations for entities that issue or distribute financial products to retail investors in Australia. The new obligations generally apply to offers of financial products that require disclosure under the Australian Corporations Act 2001 or that are exempt from such disclosure due to a mutual recognition scheme, such as ‘recognised offers’ of New Zealand products under the trans-Tasman mutual recognition regime. Click here for more information.

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NZBNs required for FSPR registrations and annual confirmations

Changes to the Financial Service Providers (Registration) Regulations 2010 require corporate and public entities to include their New Zealand Business Number (NZBN) in certain circumstances. The new requirements under section 9 of the New Zealand Business Number Act 2016 came into effect on 31 December 2017. Click here for more information. The Financial Markets Conduct Amendment Regulations (No 2) 2017 also require NZBNs to be provided for specified market participants (if they have an NZBN) when they register a regulated offer on the Disclose Register. This will allow searches on Disclose to be undertaken by reference to NZBNs.

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LATEST FROM THE FINANCIAL MARKETS AUTHORITY

Robo-advice exemption – applications now open The Financial Markets Authority (FMA) is now accepting applications from entities that wish to provide personalised robo-advice to consumers. This represents another big step forward in closing the financial advice gap for consumers, and provides more regulatory certainty for businesses that wish to innovate and provide personalised digital advice services through a computer program using algorithms (also referred to as "robo-advice"). Click here for more information.

FMA publishes 2017 Conduct Outcomes Report The FMA has published its Conduct Outcomes Report for 2017, setting out some of the key issues and actions taken by its enforcement and supervision teams. The report explains the FMA’s rationale for its responses to misconduct, includes good practice suggestions for licensed financial service providers, and touches on investors’ perception of provider conduct. According to the FMA’s General Counsel Nick Kynoch “The FMA is fully prepared to use its enforcement powers to deal with misconduct by bringing cases to both civil and criminal courts where necessary. We also look to use our full range of regulatory tools to achieve the right outcome and a proportionate use of our resources. We strive, through all of our interactions, to guide and influence providers to improve their focus on delivering good outcomes for investors. This includes engagement with the industry by our frontline supervisory teams, for example through licensing and monitoring activities, as well as publishing reports to communicate our expectations to the market.” Click here for more information.

FMA acts on AML/CFT non-compliance

Following an inspection of a New Zealand-based foreign exchange brokerage, the FMA has issued a formal warning to it for: • not having in place adequate Anti-Money Laundering and Countering Financing of Terrorism Act (the AML/CFT

Act) compliance and risk assessment programmes; and • failing to carry out customer due diligence on politically exposed persons as required under section 26 of the

AML/CFT Act. Under the warning, the company is required to undertake a series of actions to address the issues and, if it fails to do so, the FMA has indicated that it will consider taking enforcement action. This could include civil action, which can lead to penalties of up to NZ$2 million per offence. A copy of the formal warning is available here.

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FMA publishes snapshot of P2P and crowd funding sectors

Drawing on data provided to the FMA by the licensed providers of peer-to-peer lending and crowd funding services in their annual regulatory returns, the FMA has published an interactive report on the sectors for the year ended 30 June 2017. Click here to read the report.

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BELL GULLY NEWS

For further details and more news visit the publications section of our website.

Robo-advice exemption: Ready, steady, go (applications are now open)

New Zealand favours English approach to penalties

Government puts cartel criminalisation back on the table

Class actions – what’s ahead in 2018

Open for business? Shop trading on Easter Sunday

Proposed Bill shakes up 90-Day trial periods, employee rights

International tax information exchange in the spotlight after judicial review blocks IRD information request

Auckland’s 30 year plan to open for consultation – have your say in Auckland’s future

New Bill proposes overseas investment approval requirement for residential land purchases

New report suggests the time is right to review the electricity sector

IRD confirms its view that partnership contributions are taxable events

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USEFUL WEB LINKS New Zealand Government

• Consumer Affairs • Inland Revenue Department • Ministry of Business, Innovation & Employment • Ministry of Foreign Affairs and Trade • New Zealand Government • NZ Treasury • Office of the Clerk of the House of Representatives [New Zealand Parliament] • Parliamentary Counsel Office

New Zealand financial agencies and organisations

• Commerce Commission • The Companies Office • Export Credit Office • NZ Law Commission • Office of the Banking Ombudsman – password required • Insurance and Savings Ombudsman • Privacy Commissioner • Personal Property Securities Register • Reserve Bank of New Zealand • Takeovers Panel • Financial Markets Authority

New Zealand commercial sites

• NZFMA • ILANZ • Financial Services Federation • Chartered Accountants Australia and New Zealand • NZ Bankers’ Association • NZ Institute of Economic Research • NZX • The New Zealand Initiative

Australian Government sites

• Banking Ombudsman

Australian commercial sites

• Australian Financial Markets Association • Australian Securities and Investment Commission • Australian Stock Exchange

International sites

• Bank for International Settlements • International Monetary Fund • International Swaps and Derivatives Association • NASDAQ • New York Stock Exchange • United States Securities and Exchange Commission

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• World Bank

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