Details of Phase 1 of the Financial Markets Conduct Act now confirmed

Tuesday 4 March 2014

Author: Toby Sharpe

​​Phase 1 – from 1 April 2014

With less than a month to go, we now have certainty over the first implementation phase of the Financial Markets Conduct Act 2013 (FMCA). Following the enactment of a raft of legislation last week, the Phase 1 provisions (and the regulations required to give effect to those provisions) will come into force on 1 April. It is reassuring to see that there are no major changes from the Government’s earlier announcements.

As expected, the Government has fast-tracked a number of measures directed at improving access to New Zealand’s capital markets, particularly for smaller fundraising initiatives. This includes the provisions which facilitate equity crowd funding and peer-to-peer lending, which are intended to provide further avenues for early-stage and growth companies to raise capital. Companies will also be able to take advantage of the new “small offers” regime and the reduced disclosure required for offers made under employee share schemes. Listed issuers will be able to conduct rights issues through market announcements (similar to the Australian “cleansing notice” regime) rather than a simplified disclosure prospectus. A summary of Phase 1 is set out in the table below.

We are pleased to see that the Government has decided to delay the introduction of the separate trust account obligations for brokers which, once enacted, would prohibit brokers from placing “buffers” of broker funds in client money trust accounts. This will now come in as part of the second implementation phase.

The key provisions of the FMCA have been reserved for Phase 2, which is expected to be brought into force on 1 December this year. This is when we will see a complete overhaul of the disclosure requirements for offers of securities – including the new look “Product Disclosure Statement” and the online offer registers. There is still a lot of work to be done in this area and we look forward to the next consultation round on the disclosure requirements, which is scheduled to take place during April and May.

Overview of Phase 1

What provisions of the FMCA come into effect on 1 April​​?​​ What do the Phase 1 FMC Regulations do?
  • Preliminary provisions, including definitions in Part 1 of the FMCA.
  • Refine the definitions for debt securities and derivatives.
  • General fair dealing provisions (excluding prohibitions on unsubstantiated representations and unsolicited meetings) in Part 2 of the FMCA.

  • The associated amendments to the Fair Trading Act to bring in the dual regulatory regime for fair dealing.

  • The prohibition on unsubstantiated representations and the related provisions (i.e., sections 23 to 29 of the FMCA) will come into force on 17 June 2014 to coincide with the commencement of the equivalent provisions in the Fair Trading Act.
  • Declare the service of providing credit under a credit contract not to be a financial service for the purposes of Part 2. This service will only be regulated by the fair dealing provisions under the Fair Trading Act.
  • Part 6 of the FMCA to allow the Financial Markets Authority (FMA) to grant licences to market service providers before the main substantive provisions come into force in December 2014, but not:

    • sections 388 and 389 (which relate to when a provider of market services needs to be licensed and exemptions);
    • section 422(a) (which relates to the application of subpart 4 to the provision of discretionary investment management services (DIMS));
    • section 429(a) and (b) (which relate to the application of subpart 5 to the provision of DIMS and derivatives issuers);
    • and subpart 6 (additional regulation of DIMS):

  • Crowd funding service providers and peer-to-peer lending service providers will be required to hold a licence under the Part 6 provisions before they can take advantage of the disclosure exclusions for offers which will apply from 1 April 2014 under transitional arrangements.
  • Prescribe conditions for various market service licence holders, including a general condition to report various matters to FMA.

  • Prescribe additional conditions that FMA may impose on a licence, including a condition about professional indemnity insurance.

  • Prescribe exemptions from the licensing requirement for DIMS.

  • Prescribe crowd funding services and peer-to-peer lending services as prescribed intermediary services and prescribe additional licensing criteria for those services.

  • Apply client agreement requirements for crowd funding services and peer-to-peer lending services and prescribe implied terms and other matters relating to these agreements.

  • Prescribe service disclosure statement requirements for crowd funding services and peer-to-peer lending services.
Some disclosure and other requirements for providers of DIMS and derivatives issuers will be included in later regulations because such persons will not be operating under market services licences until the second implementation stage.
  • Prescribe entities that are to become FMC reporting entities as a result of reliance on the small offer disclosure exclusion in Schedule 1.
  • Most of the provisions of Part 8 of the FMCA (enforcement, liability, and appeals). These provisions will come into force to allow for the enforcement of the substantive provisions of the FMCA that come into force on 1 April 2014. They do not include:

    • sections 470 to 473 (which relate to various FMA orders):
    • sections 510 and 511 (which relate to offences for defective disclosure)
  • Prescribe infringement fees for various infringement offences that apply in the first implementation stage and forms for infringement notices and reminder notices.
  • The following disclosure exclusionsin Schedule 1 of the FMCA (subject to FMA’s power to require disclosure):

    • clause 6 (for offers of financial products through licensed intermediaries i.e., crowd funding services and peer-to-peer lending services);
    • clause 8 (for offers made under employee share purchase schemes);
    • parts of clause 9 (for offers to persons under control in respect of the employee share purchase scheme exclusion in clause 8)
    • clause 10 (for dividend reinvestment plans)
    • clauses 12 to 14 (which relate to small offers involving a $2 million limit each 12 months for 20 investors)
    • clause 15 (for offers of controlling interests where there are five or fewer investors)
    • clause 19 (for offers of financial products of the same class as quoted financial products e.g., rights issues by NZX listed companies)
    • clause 21 (specified offers by registered banks relating to category 2 products and currency forwards, but not the exclusion for offers of debt securities by registered banks.)

    Under the transitional provisions of the FMCA, offers made under any of the above Schedule 1 exclusions will be treated as exempt from the restrictions in Part 2 of the Securities Act 1978 (see clause 59 of Schedule 4 of the FMCA).

  • The disclosure and other requirements in clauses 25 to 29 of Schedule 1 of the FMCA which will apply to offers made under these exclusions.

  • The definitions for Schedule 1 (in clauses 48 and 49).
  • Provide for the small offers and employee share purchase scheme exclusions to take into account offers made under the Securities Act for the purposes of the calculations to be made in those exclusions.

  • Provide for the relevant Securities Act and Securities Markets Act references to be treated as applying to the quoted financial products exclusion.

  • Limit offers made under the licensed intermediaries exclusion for each offeror to a $2 million aggregate limit in any 12-month period raised either under a clause 6 exclusion or the small offer exclusion in clause 12.

  • Prescribe limited disclosure requirements and, in some cases, reporting requirements for offers made under the following exclusions:

    • employee share purchase schemes exclusion;
    • persons under control exclusion;
    • dividend reinvestment plan exclusion;
    • small offer exclusion;
    • quoted financial products exclusion;
    • registered banks exclusion.

  • Prescribe that the registered bank disclosure exclusion applies to:

    • a currency forward for which settlement is at a time no later than 12 months after the time at which the currency forward is entered into; and
    • PIE call fund units, PIE term fund units and bank notice products with specified limits issued by a subsidiary of a registered bank.
  • Various amendments to the Financial Advisers Act 2008 relating to custodian obligations and regulation-making powers, but not the amendments to section 77P of the Financial Advisers Act which, once enacted, will explicitly prohibit brokers from placing their own money in client money trust accounts, i.e. it clarifies that the practice of holding ‘buffers’ of broker funds in client money trust accounts is not permitted. The amendments to section 77P are expected to come into force on 1 December 2014.
  • Deem the definitions of client money, client property, and custodial service in the Financial Markets (Repeals & Amendments) Act 2013 to apply to amended sections of the FAA.
In addition, the Financial Advisers (Custodians of FMCA Financial Products) Regulations 2014 will:
  • require custodians to regularly provide clients with specified information relating to client money and client property;

  • allow for clients to receive that information electronically and to make written requests for that information; and

  • provide for the reconciliation of records of client money and client property held by the custodian;

  • require custodians to obtain assurance engagements with qualified auditors and prescribe requirements that apply to an assurance engagement;

  • require persons who, by virtue of section 77U of the FAA, are treated as having broker obligations but do not themselves provide FMCA custodial services to ensure that persons that provide those services on their behalf comply with these regulations (for example, a provider of DIMS); and

  • provide for certain provisions of the FAA and the regulations to apply to FMCA custodial services provided by a custodian to wholesale clients (but this regulation does not come into force until 1 December 2014).
  • Various amendments to the Financial Markets Authority Act 2011, including provisions relating to undertakings and the Financial Markets Authority's functions.
  • Inserts the definition of involved in a contravention in the interpretation section of the FMA Act.

  • Includes the FMCA as financial markets legislation.
  • Various amendments to the Companies Act 1993 and the Takeovers Act 1993 that relate to court banning orders (allowing those orders to be permanent or to apply for any period specified in the order).



Links to the relevant legislation

To access the legislation relevant to the implementation of Phase 1 of the FMCA click on the links below:

Financial Markets Conduct Act 2013
Financial Markets (Repeals and Amendments) Act 2013
Financial Markets Legislation (Phase 1) Commencement Order 2014
Financial Markets Conduct (Phase 1) Regulations 2014
Financial Advisers (Custodians of FMCA Financial Products) Regulations 2014
Securities Amendment Regulations 2014
Financial Reporting Legislation Commencement Order 2014
Companies Act 1993 Amendment Regulations 2014
Financial Reporting (Amendments to Other Enactments) Act 2013

Also see the Financial Reporting Act 2013 (FRA) for related provisions to the financial reporting regime in Part 7 of the FMCA.

As a result of the changes being made to the financial reporting regime the Financial Markets Authority (Levies) Regulations 2012 are being amended by the Financial Markets Authority (Levies) Amendment Regulations 2014 to take into account new definitions under the FRA and the Financial Reporting (Levies) Regulations 2014 will replace the Financial Reporting Levies Regulations 2012. Both of these regulations come into force on 1 April 2014.

1 The Financial Reporting Legislation Commencement Order 2014 brings most of the provisions of this Act (including amendments to the FMCA) and the Financial Reporting Act 2013 into force on 1 April 2014. For details of the financial reporting changes being brought in under these Acts see our earlier client update here.


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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