Financial markets conduct regulatory system

This page describes the financial markets conduct regulatory system, its objectives and our qualitative assessment of it. It also lists the main statutes and changes to regulation either planned or in progress.

System description and objectives

The financial markets conduct regulatory system is a foundational system providing the legal framework for New Zealand’s capital markets and financial services. That legal framework:

  • provides for fair dealing in financial markets
  • regulates offers of financial products and the governance of certain types of financial products
  • regulates financial product markets
  • regulates certain financial market services (including financial advisers and registration and dispute resolution requirements) and
  • establishes and funds the Financial Markets Authority as the system enforcement agency.

The system excludes prudential regulation of banks, non-bank deposit takers and insurers (the Reserve Bank of New Zealand leads this) and financial reporting matters (this sits within the corporate governance regulatory system). Prudential regulation is focused on institutional soundness, and promoting the maintenance of a sound and efficient financial system. 

The system also excludes the consumer credit protections in the Credit Contracts and Consumer Finance Act (this forms part of the consumer and commercial regulatory system).

The objective of the financial markets conduct regulatory system is to promote the confident and informed participation of businesses, investors and consumers in financial markets, and to promote and facilitate fair, efficient and transparent financial markets.

Ministerial portfolio and key statutes

Portfolio Key statutes

Commerce and Consumer Affairs(external link)

  • Financial Advisers Act 2008
  • Financial Markets Authority Act 2011
  • Financial Markets Conduct Act 2013
  • Financial Markets Supervisors Act 2011
  • Financial Service Providers (Registration and Dispute Resolution) Act 2008
  • KiwiSaver Act 2006 (Part 4 and Schedule 1)
  • Insurance Intermediaries Act 1994
  • Insurance Law Reform Act 1977
  • Insurance Law Reform Act 1985
  • Law Reform Act 1936
  • Life Insurance Act 1908
  • Marine Insurance Act 1908
  • New Zealand Superannuation and Retirement Income Act 2001

Regulatory agencies and their roles

Agency Role

MBIE

MBIE’s role in the system is to provide policy advice on a range of issues relating to the financial markets regulatory system, specifically including:

  • the Financial Markets Conduct Act, which governs how products are created, promoted and sold, and the ongoing responsibilities of those who offer, deal and trade them
  • regulation of financial advice
  • regulation of the conduct of banks and insurers
  • insurance contract law
  • the KiwiSaver Act – specifically, Part 4 (governance of KiwiSaver schemes) and Schedule 1 (scheme rules that apply to all KiwiSaver schemes)
  • international financial reforms.

MBIE is also the monitoring agency for the Financial Markets Authority and the Commission for Financial Capability, which both play key roles in the financial markets regulatory system, outlined below.

The Financial Markets Authority (FMA)

The FMA is the government agency responsible for acting as the market conduct regulator of New Zealand’s capital markets and financial services. Broadly, the FMA is responsible for ensuring public confidence in New Zealand’s financial markets and supporting the growth of New Zealand’s capital base through effective regulation. More specifically, the FMA does this through licensing a number of financial market participants, supervising market participants and ensuring compliance with the regulatory rules, and providing guidance and information.

The Commission for Financial Capability (CFFC)

The CFFC is a Crown entity responsible for leading the government’s efforts to support New Zealanders to become financially capable and improve well-being. CFFC equips New Zealanders of all ages with the financial knowledge, skills and confidence to make good financial decisions at every stage of their lives and reach retirement in strong financial health.  CFFC does this through publishing information and delivering a comprehensive public financial education programme. It also develops and promotes methods of improving the effectiveness of retirement income policies.

Collaboration and information-sharing between regulatory agencies 

The Council of Financial Regulators (CoFR) is a forum for sharing information and considering and addressing financial markets regulatory issues more broadly, and risks or gaps that arise or are being monitored.  It comprises MBIE, the Treasury, the Reserve Bank and the FMA, which are the key central government agencies responsible for the financial markets regulatory systems – both conduct and prudential.

The FMA also co-ordinates, and shares intelligence, with government agencies to ensure the FMA’s work is informed, proportionate and effective. Those agencies include: the Reserve Bank, Companies Office, Department of Internal Affairs, Commerce Commission, Serious Fraud Office and the Inland Revenue Department.

CFFC leads the National Strategy for Financial Capability, which is a practical framework for raising the financial capability of New Zealanders. It relies on government, community and the private sector working together to have the biggest impact.

CFFC leads a quarterly cross-government group to share information and learnings and contribute to the design and delivery of locally led communities of practice.

Regulated parties and main stakeholders

Regulated parties and key stakeholders include:

  • Fund managers and managed investment schemes
  • Financial advisers
  • Entities involved in the creation of financial instruments (e.g. investment banks)
  • Frontline supervisors (such as trustees and supervisors) and custodians
  • Capital markets (debt and equity)
  • Foreign exchange markets
  • Money markets
  • Derivative markets
  • Banks and non-bank deposit takers (from a conduct perspective, not a prudential perspective)
  • Insurers (from a conduct perspective, not a prudential perspective) and
  • Investors and consumers.

Processes for engagement with regulated parties and stakeholders

We actively engage with the financial markets industry to ensure that the regulation in this area is fit for purpose.

When we create new policy, or change current requirements, we follow good regulatory practice, including where possible by:

  • engaging with interested stakeholders
  • consulting on any changes through discussion documents and options documents
  • releasing exposure drafts of new legislation or regulation.  

System’s fitness for purpose

Effectiveness

System performing well against criteria

New Zealand’s financial market regulation is well regarded internationally following the significant policy and operational changes made in the wake of the global financial crisis. Compared to many other jurisdictions, New Zealand has adopted a flexible and innovative approach while still putting in place protections to support fair, efficient and transparent financial markets.

The relative infancy of the new regulatory system makes it difficult to draw definitive conclusions about its effectiveness, with the Financial Markets Conduct Act only coming fully into force on 1 December 2016. The initial round of evaluation activity has found good take-up of innovations like crowdfunding and peer to peer lending, and same class offers disclosure exemptions by debt issuers. However, the impacts on wider capital raising activities are unclear and some market participants hold the view that investors are not making full use of the information available to them. Recent volatility in global financial markets has made the evaluation task more difficult. New Zealanders' confidence in financial markets is quite volatile, having reduced from 60% of investors in 2014/15 to 56% in 2015/16 and then increasing to 65% in 2016/17. While market conditions appear to play a large role in investor confidence, it is possible the recent reforms are also playing a role.

The International Monetary Fund (IMF) completed a Financial System Stability Assessment in April 2017 and found New Zealand’s financial markets reforms had significantly improved the regulatory framework, and recommended further consideration be given to: (i) including wholesale asset managers and custodians in the regulatory system; and (ii) the resourcing of the FMA. Recommendations were also made to improve the regulation of some insurance intermediaries. These recommendations are being progressed through the ongoing comprehensive reform of financial advice regulation.

Significant additional funding has been provided to the Financial Markets Authority (FMA) from 1 July 2017 to ensure it can fulfil its mandate as a pro-active intelligence led regulator.

Efficiency

System performing well against criteria

Feedback from most market participants suggests the design and implementation of the system is efficient. A regulatory charter for the wider financial sector has been put in place under the auspices of the Council of Financial Regulators involving MBIE, FMA, RBNZ, and Treasury.

The Financial Markets Authority (FMA) is well regarded by key system stakeholders as a pragmatic, efficient, and risk-based regulator. An efficiency and effectiveness review of the FMA was completed in 2016.

Resilience

System performing well against criteria

The principle-based approach employed by the system provides considerable flexibility to adjust to the impacts of market and technological changes. Many key aspects of the regime are contained in regulations, which can be changed more easily than primary legislation. In addition, FMA has considerable scope to make adjustments to the system via exemptions. Nonetheless, careful regulatory stewardship will be required to ensure implementation is efficient and effective, and to ensure any emerging issues are appropriately diagnosed and addressed. This is likely to require significant ongoing regulatory maintenance efforts.

New Zealanders’ underlying levels of financial capability do not appear to have significantly changed since the finance company collapses of 2006-2012. This issue represents a source of ongoing potential instability to the regulatory system in the event a substantial group of investors suffer material wealth losses due to a lack of understanding about the underlying characteristics of their investments.

Fairness and accountability

System performing well against criteria

Information about the regulatory system is widely distributed by the FMA. However, there is room to raise awareness levels amongst some system participants.

Enforcement action for serious breaches of system legal frameworks is generally via the High Court which provides an independent and transparent process with appeal rights. While the FMA takes the majority of enforcement actions, private enforcement is also available. The FMA has published an enforcement policy(external link) setting out how they intend to approach their broad regulatory powers and functions.

The Financial Markets Authority (FMA) is the Crown entity with the mandate to promote and facilitate the development of fair, efficient and transparent financial markets. It plays a critical role in regulating capital markets and financial services in New Zealand. For more detail read its Statement of Intent(external link).

Planned regulatory changes

The timeframes for improvements noted in this section are indicative and may change. We will review this information at least quarterly and update timeframes as required.

Matter name Policy intention Planned consultation Status

Financial Services Legislation Amendment Bill and associated regulations

Matter type: Bill and legislative instrument

Will introduce a new regulatory regime for financial advice in New Zealand, aimed at improving access to, and the quality of, financial advice.

 

We expect to consult on an exposure draft of the disclosure regulations in 2019.

The Bill is awaiting its third reading in the House.

MBIE will continue to develop supporting regulations in the first half of 2019.

The new regime is expected to come into force in Q2 2020.

More information 

Conduct regime for financial institutions (eg insurers and banks)

Matter type: Any changes would require a Bill and, most likely, associated regulations

Addresses issues with the conduct of financial institutions that have been highlighted through the RBNZ and FMA reports on the conduct and culture of banks and life insurers, along with the Australian Royal Commission into financial services and other sources of evidence such as the IMF’s review of NZ through the Financial Sector Assessment Programme.

Consultation an options paper in May 2019.

Currently at policy work stage.

Bill to be introduced by end of 2019.

The Financial Markets (Derivatives Margin and Benchmarking) Reform Amendment Bill and supporting regulations

Matter type: Bill and legislative instrument

 

Will implement response to G20 reforms related to margin requirements for over-the-counter derivatives and EU regulations related to financial benchmarks

 

Submissions to the Finance and Expenditure Select Committee close on 4 April 2019.

 

The Finance and Expenditure Select Committee is due to report back to the House on the Bill by 22 July 2019.  The Bill and associated regulations are expected to be implemented before the end of 2019.

Financial Markets (Asian Passport Funds) Regulations 

Matter type: Legislative instrument

Further regulations for Financial Markets Conduct Act regime to implement rules for Asian Passport Funds (Asian Passport Funds are the subject of an international arrangement which New Zealand is a party to).

 

Regulations to be made mid 2019.

 

Financial Markets Conduct (KiwiSaver) Amendment Regulations

Matter type: Legislative instrument

Regulations to include retirement savings projections on KiwiSaver annual statements.

 

Consultation completed.

These are likely to come into effect in mid 2019, and the requirements to include retirement savings projections will apply to the statements sent out in 2020 (which apply to the financial year 2019/20).

Amendments to Insurance Contract Law

Matter type: Bill

Addresses a range of long-standing problems with insurance contract law and consolidates statutes. Some of these issues were first highlighted by the Law Commission in 1998.

Consultation on an options paper in May 2019.

Bill to be introduced around mid-2020.

Planned service and operational changes

No service or operational changes are planned.

In February 2019, MBIE, the FMA and, the Commission for Financial Capability launched a new online tool Smart Investor(external link), which allows investors to search and compare New Zealand investments such as KiwiSaver, other managed funds, shares, bonds and other types of managed products. It’s designed to help people make informed decisions about their investments.

The information on Smart Investor is pulled from the Disclose Register, which is run by the Companies Office. Financial Service Providers are required to provide this information as part of the disclosure requirements under the Financial Markets Conduct Act 2013.

Last updated: 03 April 2019