Consultation on new financial market regulations

7 November 2013

Introduction

The Financial Markets Conduct Act (FMC Act) has been passed and received the assent on 13 September 2013. The FMC Act will be implemented in two phases with Phase 1 coming into effect on 1 April 2014 and the second phase on 1 December 2014.

Last week, Commerce Minister Craig Foss released for consultation the first set of draft regulations to bring the FMC Act into effect. The material released for consultation by the Ministry of Business, Innovation and Employment (MBIE) comprises:

• Draft regulations needed to implement Phase 1 – covering general fair dealing obligations and key growth-focussed initiatives such as employee share schemes and licensing of financial market participants including crowd-funding; and

• Draft requirements for disclosure documents that will be required to be given to investors before they invest. The feedback on these draft requirements will be used to assist the drafting of the actual regulations that will cover the disclosure documents.

Submissions on the consultation documents are due by 5 December 2013.

Phase 1 – matters to apply from 1 April 2014

The matters to be implemented in Phase 1 are:

• General fair dealing obligations will begin under the FMC Act (and associated changes to the Fair Trading Act), making FMA the primary regulator of fair dealing in financial markets.
• FMA will be able to begin licensing applicants, including applicants for crowd funding and peer-to-peer lending licences.
• Financial reporting obligations (yet to be inserted by the Financial Reporting Bill) will begin to apply under the FMC Act.
• Some key growth-focussed initiatives will commence as early exemptions from securities law disclosure, including exemptions for small offers and employee share purchase schemes.
• Custody obligations will begin under the Financial Advisers Act 2008.

The “growth focused initiatives” have been selected as they are relatively stand-alone, and do not have substantial limited disclosure requirements. It is noted that there is no proposal to commence any exclusions that affect the key definitions of what is an offer to the public under the Securities Act 1978.

The relevant exclusions are those for:

• Crowd funding and peer-to-peer lending service providers – with a proposed $15,000 per investor limit in addition to the previously announced caps applying also to small offers –the $2 million limit each 12 months, although contributions from wholesale investors will not count toward the cap)
• Employee share purchase schemes
• Persons under control – making it clear that if an offer of financial products to a person (A) would not require disclosure, then an offer of those financial products to an entity controlled by A does not require disclosure
• Dividend reinvestment plans
• Small offers – the 20 x 12 exception (for offers up to a $2 million limit in each 12 months from not more than 20 investors)
• Transfer of controlling interest – relating to an offer of equity securities that comprise more than 50% of the voting products of an entity does not require disclosure if 5 or fewer persons acquire equity securities under the offer and certain other conditions are met
• Quoted financial products – relating to offers of securities of the same class as those listed (this exclusion may allow greater retail participation in placements and provide more flexibility for some listed issuers – such as regular issuers of debt securities)
• Registered bank exclusion – for unsubordinated debt only

It is important to note that the Phase 1 regulations are a holding pattern only – and will be replaced by a full set of regulations in mid-2014. (For more detail see the discussion about further consultation rounds below).

Disclosure requirements

The new disclosure regime is complex and, as a result, a further round of consultation is to be undertaken before drafting the detailed PDS content regulations.

The consultation material published by MBIE includes mock Key Information Summaries (KIS) for equity securities, debt securities and other managed investment schemes as well as a full mock-up PDS for managed funds.

These templates are interesting (and timely) in light of a report from the FMA , given the Financial Market Authority’s recent report on the first year of implementation of its Guidance Note on effective disclosure for offer documents. In short, the FMA highlights the need for issuers to lift their game.

The FMA’s 2012 Guidance Note on Effective Disclosure explains the approach FMA will take to reviewing disclosure documents for compliance with the law. That Guidance Note encourages issuers to set out information in a clear, concise and effective way to assist investors to make investment decisions.

One year on, the FMA has said that while there were some positive signs, issuers have some way to go in providing better quality information to retail investors. Specifically, the disclosure documents for IPOs were so long and dense that the FMA doubted many retail investors would have read them. And the FMA is concerned that such long documents may in fact have deterred members of the public from investing in the offers.

As a result, the FMA considered that it had reviewed are unlikely to meet the requirements under the FMC Act.

The consultation material includes amongst the options being a discussed, a proposal for an 80-page limit on offer documents for equity offers – in an effort to push market participants toward shorter documents.

The primary purpose of this round of consultation on the draft disclosure requirements is to seek feedback on:

• Information: The information required for the PDS, offer register and ongoing disclosure requirements – including whether any necessary information is missing or whether any unnecessary information is included. For the offer register, this includes whether there is any other information that would be valuable for retail investors or analysts searching for or comparing offers.
• Approach: Flexibility vs. standardisation of content in a PDS– whether the requirements are overly prescriptive, or too flexible, reducing comparability.
• Structure and ordering: Whether the structure and order of information is logical and supports the reader.
• Appropriate simplicity: Whether the draft requirements over simplify, or require too much complex information.
• Technical detail: Whether there are any technical issues we should be mindful of in converting the requirements into regulations, to ensure they achieve the desired effect.

Feedback on the exposure drafts is due by 5 December 2013.

Further consultation rounds

As noted above, the Phase 1 regulations are only a holding pattern. As part of the process of moving to a full set of regulations, there are to be two further consultation rounds covering:

• Draft regulations covering Phase 2 of the FMC Act (the governance requirements, financial products markets, DIMS provider and derivatives issuer obligations) and licensing fees. This material is expected either later this year or early in 2014.
• Draft disclosure requirements, for the replacement full set of regulations (replacing the Phase 1 material).

Further information

If you would like more information about any of the matters discussed in this note, please contact me.