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The Financial Markets Authority (FMA) was created in 2011 as a new government agency replacing the Securities Commission to be responsible for enforcing securities, financial reporting and company law as they apply to financial services and securities markets. The FMA has proved to be more proactive in its leadership and enforcement roles than its predecessors.
The most significant recent legislative change has been the enactment of the Financial Markets Conduct Act (FMCA) 2013, the impacts of which are materially changing the fund industry. The FMCA governs how financial products are created, promoted and sold. It replaces the Securities Act 1978 and Securities Markets Act 1988, and incorporates and amends a range of other related investment legislation. What does this mean for investors?
The first change that investors will notice is that prospectuses and investment statements have been replaced by a product disclosure statement (PDS), supported by an extensive array of online documents. The new law states the purpose of the PDS is "to provide information that is likely to assist a prudent but non-expert person to decide whether or not to acquire the securities". It has prescribed content and text and is limited in length to either 6000 words or 12 pages. The aim is to provide consistency and comparability across different investment offers. Like the old investment statement, the new product disclosure statement must be provided to investors before units are issued.
Each PDS is supported by online information, which is located on a central government website called the "Disclose Register" www.business.govt.nz/disclose. Two registers are located at this address: the Offer Register and the Scheme Register.
The Offer Register must contain all other material information about the offer. Other material information is information that would be likely to influence people who commonly invest in deciding whether or not to acquire the financial product. This information will be contained in one or more documents filed on this register.
The Scheme Register provides more extensive information about any managed investment scheme. It provides access to the scheme trust deed, financial statements and annual reports. One of the key documents in this registry is the "Statement of Investment Policy and Objectives", or SIPO for short. As the name suggests, this document sets out the scheme manager’s investment philosophy and management style.
The changes detailed thus far are designed to address the issue of access to quality information, but the new Act moves well beyond just improving access to information; it also seeks to increase the capabilities of groups (fund managers) promoting investment schemes such as KiwiSaver.
Up until now, fund managers only needed to be registered on the Financial Service Providers Register. There was no requirement to prove what kind of experience or skills their organisation had or that they had the right processes in place to ensure investors’ money was not put at undue risk.
From December 1, the new Act requires that all fund managers be ‘‘licensed’’ and registered on the Disclose Register. The licensing process is not just a one-off event but also requires the new licence holders to meet ongoing reporting standards. The process of applying for a licence is both arduous and costly.
As at early November, a total of 60 groups had been licensed as fund managers by the FMA. At the time of writing, there are still several fund managers who have yet to be licensed.
The stricter regulations have resulted in a number of schemes, primarily employer-sponsored superannuation schemes, closing. In these situations, most closing schemes have provided transfer recommendations to a new scheme with a licensed manager.
Although it is helpful for a client to receive transfer recommendations, each client situation will be different. I therefore recommend, should you be in this situation, that you take the time to talk to an authorised financial adviser about your circumstances and the proposed transfer options.
- Peter Ashworth is a principal of NZ Funds Management and an authorised financial adviser based in Dunedin. The opinions expressed in this column are his own and not necessarily those of his employer. His disclosure statements are available on request.