Previously, financial services entities were able to obtain Financial Services Provider (“FSP”) registration and offer short-term derivative contracts (i.e. those that are settled within 3 days) to both retail and wholesale clients based in New Zealand without the need to be formally licensed by the FMA. This meant that these entities could operate a trading platform with limited regulation in a respected jurisdiction.
However, as we previously reported, the lack of regulation around short-term derivative trading and other derivative products led to a vast number of retail client complaints to the FSP. The FMA attributes this large number of client complaints to the number of unlicensed Issuers, such as online foreign exchange traders, who targeted the New Zealand retail market. The lack of licensing meant it was very difficult for clients to recover their money from these entities and the lack of regulation meant that the FMA did not have the jurisdiction to assist clients with this recovery.
The FMA has addressed these issues through a new licensing requirement for short-term Issuers.
Who must be licensed?
Any Issuer who wishes to make a regulated offer of derivatives (including short-term derivatives) to one or more New Zealand clients, regardless of whether the Issuer themselves is based in New Zealand or abroad must be licensed by the FMA.
An offer of derivatives exclusively to wholesale clients in New Zealand will not be a regulated offer under the Financial Markets Conduct Act 2013 (“the Act”). However, if even one client in a group of clients to whom an offer is made is a type that would require disclosure, for example, is a retail client, then the whole offer will be regulated and the Issuer must be licensed as well as registered with the FSP. Therefore, it is possible to offer derivatives to New Zealand based wholesale clients, without requiring a FMA licence, however the Issuer would need to have compliance protocols in place to ensure that the offer is only made to wholesale clients and that there were no circumstances in which a retail client could receive and accept such an offer, and this may be rather an onerous exercise for the Issuer.
What is a derivative?
Section 8(4) of the Act provides a broad definition of ‘derivatives’ which includes:
- futures contracts and forwards;
- options (except options to acquire an equity security, a debt security, or a managed investment product by way of issue);
- contracts for difference, margin contracts and rolling spot contracts; and
- caps, collars, floors and spreads.
What is a regulated offer?
A regulated offer, as defined by s41 of the Act, is any offer of derivatives where disclosure must be made to one or more investors, for example, because the investor is a retail investor. The types of investors that require disclosure are detailed in Part 3 of the Act.
Pursuant to the Act an ‘offer’ includes:
- inviting applications for the issue of financial products; and
- inviting applications to purchase financial products
Sophie Grace understands from discussion with the FMA that active solicitation or marketing is not required to constitute an offer. Indeed having financial products available to be issued or even having a website where New Zealand regulated clients can sign up to trade with the Issuer may both be interpreted by the FMA as an offer to those clients. Therefore the provision of any regulated offer to a New Zealand client will require an FMA licence regardless of whether the Issuer instigated the relationship.
What steps do Issuers need to take?
In anticipation of the new rules, Issuers with New Zealand based clients who are not currently licensed by the FMA have two options:
- Close the accounts of all New Zealand based clients and not on-board any future New Zealand clients.This is likely to be the simplest approach depending on the number of clients and their trading volume; or
- Apply to the FMA for an Issuer licence and comply with the relevant FMC Act obligations.In order to meet the 1 December 2017 deadline, the FMA advised Issuers to start their licensing process by 1 August 2017, on that basis it would not be possible to start the licensing process now and meet the December deadline. That being said, Issuers may still apply for a licence but cannot make a regulated offer of derivatives to New Zealand clients from 1 December 2017 until their licence is granted.
This article contains general information only and we suggest that you take advice specific to your circumstances before relying on the information contained herein.
Sophie Grace can assist with licensing in New Zealand. If you would like to discuss the new requirements or require assistance in the face of the licensing deadline, please contact us.
Victoria works primarily with the legal services team at Sophie Grace Legal and assists in the drafting and review of legal documentation for participants in the financial services industry. Victoria also supports the Compliance Consultants in the provision of AFSL, ACL and on-going compliance services to clients. Victoria provides advice and legal services to clients and assists with the preparation of legal documentation, negotiation and advocacy on behalf of clients. Victoria also assists in implementing ongoing compliance support and the preparation of AFSL and ACL applications and variations. Victoria is admitted as a Barrister and Solicitor in New Zealand and as a Solicitor in New South Wales.