MIS licensing and other developments from the FMA

MIS licensing and other developments from the FMA

Introduction

The tail end of this week has seen a dump of important new material from the FMA, particularly in the realm of Managed Investment Scheme (MIS) licensing.

The headline announcement has been a new class exemption affecting property schemes. Whilst the FMA has said that full compliance with the Financial Markets Conduct Act 2013 (FMC Act) is desirable for property schemes, the class exemption is designed to address the practical likelihood that some requirements of the FMC Act may be unnecessary and the costs may outweigh the benefits.

At the same time, the FMA has released a licensing guide for forestry schemes seeking an MIS licence. However, the FMA has also embarked on dialogue with a number of managers of forest schemes about a class exemption (again to recognise the practical likelihood that the costs of full MIS licensing outweigh the benefits).

The balance of MIS must be licensed by 30 November and the FMA has been urging a broad spectrum of schemes and syndicates to get in early (in reality late August is going to be cutting things rather fine). One metric suggested that, to date, only four property syndicates had been licensed. And there is presently a great deal of interest in various forms of property syndication – vehicles to invest in the Auckland housing market being one such example.

In addition, in its latest Regulatory Update, the FMA has given further guidance on:

• Policy decision made, but not yet implemented: matters where it has decided exemption relief is necessary or desirable; and

• Matters where policy decision still to be made: matters that the FMA is continuing to explore whether exemption relief is necessary or desirable.

Property schemes

The FMA has signalled that, generally, property schemes should be the subject of MIS licensing. However, after industry consultation, it has conceded that there are some specific compliance obligations that (in the case of some property schemes) the costs of compliance may be unnecessary and are likely to outweigh benefits for investors.

As a result, the FMA has approved class exemptions for property schemes and their custodians. These relate to the custody of scheme assets and the frequency of cash reconciliations, which tend to be a lot lower in volume than for other forms of MIS.

However, the FMA is continuing to seek to engage with the managers of property schemes and talk them through the minimum standards and level of compliance they will need to meet in order to continue offering property schemes to investors.

The FMA has also indicated that individual exemptions for property schemes already in the wind-down phase (or about to do so in the short term) may also be available.

Forestry schemes

After several rounds of industry-led consultation, the FMA has also published a licensing guide providing forestry schemes that are an MIS with help on how to approach their licence application.

At the same time, the FMA has been firming up likely class exemption relief for – again recognising the same cost / benefit issues as that relevant to small property schemes. Whilst there is still work to do, the emphasis is likely to be on those small schemes (many of which were developed in the 80s and 90s) that are at or close to the point of harvesting – and not those which intend to re-plant and/or raise new capital.

Policy decision made, legislative notice to be put into effect

Amongst the matters in the latest Regulatory Update where the FMA has indicated where it has decided support from a legislative notice (exemption) is necessary or desirable are:

• Property schemes – as noted above;

• Employee share purchase schemes – where an exemption to extend the benefit of the statutory exclusion in the cases of:

o offers made to employee trusts and relatives
o offers made under share schemes that have an ancillary debt or managed investment scheme component (e.g. saving scheme securities)
o non-voting securities offered where there are no, or a limited number, of securities of the same class on issue,

is expected soon.

Policy decision still to be made

Those matters where the FMA is continuing to explore whether exemptions may be necessary or desirable (and the current thinking on the relevant policy settings) include:

• Communal facilities offered with real property – The FMA have been quite practical in realising that companies or incorporated societies (urrgh!) used to own communal facilities in a housing development should not be caught as financial products. The old class exemption was a compliance nightmare and so the FMA has been quite disciplined in terms of stating that:

o owning and managing such communal property does not pose financial markets-related risks; and
o fundamentally, the structure is still a property purchase which is more appropriately governed by other regulatory regimes, such as the Fair Trading Act 1986 (including the unfair contract terms regime) and the Unit Titles Act 2010 (itself in need of serious panel-beating), as well as contract law.

As a result, the FMA is working on how best to define the class of interests for which an exemption is appropriate.

• Overseas issuers – The delays here are a little frustrating. The relief should largely follow the approach under the Securities Act and not be confined to dividend reinvestment exclusion. Historically, class exemptions for overseas issuers provided relief from disclosure, governance, financial reporting and audit requirements of the Securities Act and financial reporting regimes where:

o the overseas issuer comes from a high quality regulatory regime, with requirements broadly equivalent to New Zealand’s (one recent draft left out Hong Kong – surely a mistake); and
o New Zealand investors are not the primary target.

Without seeing the working papers – it is difficult to know why grandfathering this class relief is a difficult policy decision.

Small co-ops – the FMC Act provides “tailored” disclosure for offers of co-operative shares. The disclosure can be tailored to focus on the risks and benefits of being a member of the co-op, which may or may not relate to (just) for financial returns. Some smaller co-ops can take advantage of the exclusions in Schedule 1. Some smaller co-ops and industrial and provident societies have requested further relief for lower value equity issues. The FMA has indicated that there may be a case for relief where the level of financial investment is small and the shares offered are being used for transacting purposes. Further work is required before the final shape of an exemption is known.

Irrigation schemes – the work on vehicles for owning communal property (see above) has been expanded to include irrigation schemes. There seem to have been a number of older, run of river, type schemes formed as companies with the shares in the company being ‘stapled’ to land ownership. The FMA has signalled that it is awaiting information from a number of irrigation companies, before finalising its policy proposals and making a decision.

Small issuers – the FMA has signalled that there is a supportable case for a class exemption for small issuers with securities allotted under Securities Act to receive similar exemptions from the governance and financial reporting obligations that would be applicable if the issue had been made in reliance on Schedule 1 exclusions. However, stakeholder consultation is continuing, before the FMA finalises its policy proposals and makes a decision.

Further information

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