Financial Services Quarterly SPRING 2017

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Welcome to the Spring 2017 issue of Financial Services Quarterly, a review of current legal issues in the financial sector.

Each quarter, we summarise recent issues and preview upcoming developments in these areas:

In the courts

Legislation/In Parliament

Recent developments

Bell Gully news

Useful Web links

In this issue:

• Supreme Court widens concept of “due debts” in voidable transactions • Trusts Bill will impact on financial markets structures • New financial advice legislation introduced to Parliament • Consumer Credit Fees Guidelines updated

Need more information?

For more information on any of the cases, articles and features in Financial Services Quarterly, please email rachel.gowing@bellgully.com or call on 64 9 916 8825.

Disclaimer: 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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IN THE COURTS Supreme Court widens concept of “due debts” in voidable transactions The Supreme Court has ruled that a disputed claim against a company for damages may be a “due debt” for the purposes of section 292(2)(a) of the Companies Act 1993 if a reasonable and prudent business person would be satisfied that there is sufficient certainty that such a claim would become a legally due debt at a “temporally proximate” point.

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LEGISLATION/IN PARLIAMENT Trusts Bill will impact on financial markets structures New Zealand's financial markets participants will be monitoring the path of the Trusts Bill that has been introduced into Parliament. The proposed legislation will impact on existing and new trusts established for use in both retail and wholesale banking and capital markets transactions.

Phase II of the AML/CFT Act regime in place The Anti-Money Laundering and Countering Financing of Terrorism Amendment Act 2017, which extends the Anti-Money Laundering and Countering Financing of Terrorism Act 2009 regime to the Phase II sectors (including lawyers, conveyancers, accountants and real estate agents), was enacted on 10 August 2017.

New financial advice legislation introduced to Parliament The Financial Services Legislation Amendment Bill creates a new regulatory regime for those providing financial advice.

Further modifications to the Financial Markets Conduct Act regime On 9 August 2017, the Financial Markets Conduct Amendment Regulations 2017, as well as most of the amendments to the Financial Markets Conduct Act 2013 set out in Part 7 of the Regulatory Systems (Commercial Matters) Amendment Act 2017, came into force.

Improved annual report notification requirements for listed companies and other FMC reporting entities Regulations have been introduced to facilitate a more simplified and cost-effective electronic notification process for making the annual reports of listed companies and certain other Financial Markets Conduct Act reporting entities available to their shareholders.

Proposed changes to derivatives investor money handling obligations The Ministry of Business, Innovation and Employment has published a consultation paper outlining proposed changes to the Financial Markets Conduct Regulations 2014.

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RECENT DEVELOPMENTS Consumer Credit Fees Guidelines updated The Commerce Commission has published its updated Credit Fees Guidelines, following the Ministry of Business, Innovation and Employment’s update of the Responsible Lending Code’s fees section.

Consultation on foreign margin requirements for OTC derivatives The Reserve Bank of New Zealand and the Ministry of Business, Innovation and Employment have published a consultation document seeking feedback on the implications of foreign margin requirements for uncleared over-the-counter derivatives in New Zealand.

NZBA reviewing Code of Banking Practice The New Zealand Bankers’ Association is reviewing the Code of Banking Practice.

Examination of corporate insolvency law The Insolvency Working Group was established in November 2015 by the Ministry of Business, Innovation and Employment to examine aspects of corporate insolvency law and presented its first report in July 2016. The second (and final) part of the review has now been released.

Latest from the Financial Markets Authority New FMA guidance on non-GAAP financial information Following a consultation earlier this year, the FMA has updated the market on its expectations of issuers when disclosing non-GAAP financial information.

FMA considering fast-tracking personalised robo-advice The FMA is considering using its powers to provide a class exemption to allow organisations to provide personalised automated financial advice (“robo-advice”) before the overhaul of the financial advisers legislation is passed by Parliament (which is not expected until 2019).

Relief provided for managers of schemes, unit trusts and funds being wound up The FMA has granted exemptions from the ongoing disclosure requirements of the Financial Markets Conduct Act 2013 for certain superannuation schemes, unit trusts and group investment funds that issued managed investment products under the Securities Act 1978 regime.

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IN THE COURTS Supreme Court widens concept of “due debts” in voidable transactions

The Supreme Court has ruled1 that a disputed claim against a company for damages may be a “due debt” for the purposes of section 292(2)(a) of the Companies Act 1993 if a reasonable and prudent business person would be satisfied that there is sufficient certainty that such a claim would become a legally due debt at a “temporally proximate” point.

That is, "debt" includes not only actual debts, but also contingent debts. So a debt is due if it is "reasonably temporally proximate". As a result, if a "reasonable and prudent business person" would be satisfied that there is sufficient certainty that a contingent debt will become legally due, then it must be taken into account in assessing whether a company can pay its due debts.

Under section 292, a transaction is deemed to be an insolvent transaction, and therefore voidable if, among other things, it is entered into at a time when a company is unable to pay its due debts.

Click here for a full summary of the case and its implications.

1 in David Browne Contractors v Petterson [2017] NZSC 116

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LEGISLATION/IN PARLIAMENT Trusts Bill will impact on financial markets structures

New Zealand's financial markets participants will be monitoring the path of the Trusts Bill that was introduced into Parliament on Tuesday 1 August. The proposed legislation will impact on existing and new trusts established for use in both retail and wholesale banking and capital markets transactions.

The new statute will replace the out-dated Trustee Act 1956 and the Perpetuities Act 1964.

The reforms are intended to clarify the law applicable to trusts and to make it more accessible to all New Zealanders, given the widespread use of family and other trusts in New Zealand. However, its scope goes well beyond family trusts and the legislation applies to trusts used in a broad range of financial markets transactions.

The Bill applies to all express trusts governed by New Zealand law. This includes trading trusts, commercial trusts and security trusts, as well as retail and wholesale investment funds, securitisation trusts, bond trusts and other trusts used in capital markets transactions. Courts will also be able to deem the new statute to apply to any non-express trust - including resulting trusts or constructive trusts – where "necessary or appropriate".

Limited exceptions apply for “specified commercial trusts”. In addition, certain provisions of the Bill, such as the default duties, can be expressly modified or excluded by the trust instrument.

Accordingly, financial markets participants will want to investigate whether appropriate amendments are required - and whether they are permitted - to existing trust deeds, and will need to factor the reforms into any proposed new transactions.

Click here for more information.

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Phase II of the AML/CFT Act regime in place

The Anti-Money Laundering and Countering Financing of Terrorism Amendment Act 2017 was enacted on 10 August 2017.

This extends the Anti-Money Laundering and Countering Financing of Terrorism Act 2009 regime to the Phase II sectors (including lawyers, conveyancers, accountants and real estate agents), and makes a number of amendments that will also apply to existing Phase I reporting entities. These include:

• expanding the current suspicious transaction reporting requirement to include “suspicious activities”,

• changes to the identity and verification requirements for customer due diligence (CDD), and

• modifications to the class of customers that apply for each type of CDD, as well as several other changes that will reduce compliance costs for reporting entities.

Read our update in Corporate Reporter here.

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New financial advice legislation introduced to Parliament

The Financial Services Legislation Amendment Bill (the Bill) creates a new regulatory regime for those providing financial advice.

The Bill, introduced into Parliament on 3 August 2017, is an omnibus bill that will repeal the Financial Advisers Act 2008 and amend both the Financial Markets Conduct Act 2013 (FMC Act) and the Financial Service Providers (Registration and Dispute Resolution) Act 2008.

Once the Bill is enacted, regulation of financial advisers will primarily be governed by the FMC Act.

The Bill introduces a number of changes that were made following a public consultation earlier this year on an exposure draft. The Ministry of Business, Innovation and Employment has summarised the key themes from submissions it received on the draft Bill, and has set out its responses to these (including a description of the changes that have been made to the Bill) on its website.

The new regime is intended to:

• improve the quality of financial advice and client care, • reduce undue compliance costs, complexity and barriers to innovation, • enable access to redress, and • address misuse of the financial services providers register by offshore entities.

Click here for more information.

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Further modifications to the Financial Markets Conduct Act regime

On 9 August 2017, the Financial Markets Conduct Amendment Regulations 2017, as well as most of the amendments to the Financial Markets Conduct Act 2013 (FMC Act) set out in Part 7 of the Regulatory Systems (Commercial Matters) Amendment Act 2017 came into force.

Amendments to the FMC Act include:

• allowing financial statements for registered schemes to be filed within four months of the scheme’s balance date (rather than the scheme manager’s balance date),

• extending the same class offer regime for quoted financial products in clause 19 of Schedule 1 to include offers of options to acquire quoted financial products of the same class,

• extending the time for disclosure by directors or senior managers who acquire a relevant interest in financial products as a result of being the trustee of a testamentary trust, or the executor or administrator of the estate of a deceased person, and

• allowing the FMA to grant exemptions in relation to indemnities for directors or employees of overseas issuers, offerors, or licensees.

Amendments to the Financial Markets Conduct Regulations include:

• relief for defined benefit schemes from the requirement to enter certain information on the Disclose register, • reduction of the level of civil liability associated with breaches of certain disclosure obligations applying to offers

made under the exclusions set out in Schedule 1 of the FMC Act, and • a definition of an investment grade credit rating for a newly registered credit rating agency “Equifax Australasia

Credit Ratings Pty Limited” for the purposes of the provisions determining whether non-bank deposit takers have to provide a credit risk statement to investors (which is required where a non-bank deposit taker does not have an investment-grade credit rating).

Read our update in Corporate Reporter here.

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Improved annual report notification requirements for listed companies and other FMC reporting entities

Regulations have been introduced to facilitate simpler and more cost-effective electronic notification process for making the annual reports of listed companies and certain other Financial Markets Conduct Act reporting entities available to their shareholders.

Read our update in Corporate Reporter here.

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Proposed changes to derivatives investor money handling obligations

The Ministry of Business, Innovation and Employment (MBIE) has published a consultation paper outlining proposed changes to the Financial Markets Conduct Regulations 2014 (the FMC Regulations).

The proposed changes are intended to clarify the application of the derivatives investor money handling rules to money received in connection with exchange-traded derivatives, and place limits on the use of derivatives investor money to meet obligations relating to exchange-traded derivatives.

MBIE has also sought feedback on whether enhanced reconciliation requirements are warranted, given the changes to the FMC Regulations outlined in the consultation paper.

Submissions on the issues raised in the consultation paper are due by 4 September 2017. For further details on the proposed changes, see our earlier client update here.

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RECENT DEVELOPMENTS Consumer Credit Fees Guidelines updated

The Commerce Commission has published its updated Credit Fees Guidelines, following the Ministry of Business, Innovation and Employment’s update of the Responsible Lending Code’s fees section.

The updated Credit Fees Guidelines (the Guidelines), which were published on 30 June 2017, include some helpful clarifications since the draft Guidelines were published in September 2016.

In the main, the updates should give lenders some practical comfort about the approach they are taking to assessing costs that underlie credit and default fees following the Supreme Court’s landmark Sportzone2 ruling last year.

Click here to read a summary of the key changes between the draft September Guidelines and the final Guidelines, and for a link to a more detailed summary of the Guidelines.

2 Sportzone Motorcycles Limited (in liquidation) v Commerce Commission [2016] NZSC 53

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Consultation on foreign margin requirements for OTC derivatives

The Reserve Bank of New Zealand and the Ministry of Business, Innovation and Employment published a consultation document seeking feedback on the implications of foreign margin requirements for uncleared over-the-counter derivatives in New Zealand.

In particular, the consultation document sought views on potential targeted legislative changes to enable affected New Zealand entities to comply with these margin rules.

Submissions closed on 24 August 2017.

Click here for Bell Gully’s commentary on this consultation.

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NZBA reviewing Code of Banking Practice

The New Zealand Bankers’ Association is reviewing the Code of Banking Practice (the Code).

“We’re proposing a new-look, principles-based Code,” said New Zealand Bankers’ Association chief executive Karen Scott-Howman.

The principles-based approach is intended to:

• make the Code more accessible to bank customers, and avoid duplicating bank terms and conditions, and • provide the Banking Ombudsman with more flexibility in determining what constitutes good banking practice.

The five principles set out in the draft Code are that banks will:

• treat their customers fairly and reasonably, • communicate with customers clearly and effectively, • respect customers’ privacy and confidentiality, and keep their own banking systems secure, • act responsibly if they offer or provide customers with credit, and • deal effectively with customer concerns and complaints.

Click here for more information.

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Examination of corporate insolvency law

The Insolvency Working Group was established in November 2015 by the Ministry of Business, Innovation and Employment to examine aspects of corporate insolvency law, and presented its first report in July 2016. The second (and final) part of the review has now been released.

One of the recommendations of the first report was to introduce a Director Identification Number (DIN). A DIN could help identify which companies a director is currently associated with, or has been a director of in the past. This information can be important for firms, creditors and consumers undertaking due diligence when deciding whether to do business with a company. It could also help enforcement agencies to detect suspicious activities.

The second report focuses on two areas:

• voidable transactions (recommending changes to the regime to better balance the competing interests of creditors), and

• whether the procedures for dealing with the liquidation of Ponzi schemes can be improved.

The report also recommends providing preferential status to gift card and voucher holders in an insolvency event.

Consultation on the recommendations closed on 23 June 2017. The Government expects to receive advice from officials by the end of the year, and will then decide what changes to make to insolvency law.

Click here for more information, and to read the consultation paper.

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LATEST FROM THE FINANCIAL MARKETS AUTHORITY New FMA guidance on non-GAAP financial information

Following a consultation earlier this year, the Financial Markets Authority (FMA) has updated the market on its expectations of issuers when disclosing non-GAAP financial information.

The updated guidance largely reflects the policy directions signalled by the FMA in its March 2017 consultation paper. However, the accompanying Q&A provides some useful clarifications and practical examples.

The updated Guidance Note (which replaces the FMA's 2012 Guidance Note) is available here and the associated Q&A is available here.

For further commentary on the new guidance, see our earlier client update here.

FMA considering fast-tracking personalised robo-advice

The FMA is considering using its powers to provide a class exemption to allow organisations to provide personalised automated financial advice (“robo-advice”) before the overhaul of the financial advisers legislation is passed by Parliament (which is not expected until 2019).

The Financial Advisers Act currently blocks the provision of personalised robo-advice by dictating that personalised advice must be given by a “natural person”, and changes proposed to address this issue aren’t expected to come into effect for another two years.

To safeguard consumers, the proposed limits and conditions of the exemption include:

• the provision of discretionary investment management services is not covered, • the range of products is limited to highly liquid instruments such as managed funds, listed equity securities and

debt, government bonds, general insurance and savings products, • investor safeguards, including processes to filter out clients who are not suited to receive the robo-advice. • the provider must:

• notify the FMA before offering the service, • comply with disclosure obligations tailored to robo-advice, • comply with modified conduct obligations, and • maintain appropriate expertise.

The FMA sought feedback in a consultation that closed on 19 July 2017.

Click here for more information, and to read the consultation paper.

Relief provided for managers of schemes, unit trusts and funds being wound up

The FMA has granted exemptions from the ongoing disclosure requirements of the Financial Markets Conduct Act 2013 (FMC Act) for certain superannuation schemes, unit trusts and group investment funds that issued managed investment products under the Securities Act 1978 regime.

The exemptions apply where, before the end of the FMC Act transition period (on 30 November 2016), a resolution was passed to wind up the scheme, trust or fund and the process of giving effect to the resolution was underway.

Read our update in Corporate Reporter here.

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BELL GULLY NEWS

For further details and more news visit the publications section of our website.

Commerce Commission releases third industry review on unfair contract terms

First sentencing decision under new Health and Safety at Work Act disappoints on guidance

Employment Court decision in first "availability case"

Supreme Court widens concept of due debts in voidable transactions

Data Futures Partnership Releases Guidelines for Trusted Data Use

2020 a key year for the Emissions Trading Scheme

Passing of Cartels Bill marks new era in New Zealand competition law

Proposed changes to derivatives investor money handling obligations

Trusts Bill will impact on financial markets structures

Businesses should prepare for new asbestos regime

Doing Business in New Zealand: a guide

Bell Gully releases guide to the NZX corporate governance code

New Zealand proposes steps to keep playing in the global OTC sandpit

Tender tags and a duty to warn?

Non-GAAP financial information - how prominent is too prominent?

Earthquake Prone Buildings timeframes commence

New Standards for drug contaminated properties

Consumer Credit Fees Guidelines updated

Contract interpretation update: Supreme Court considers relevance of pre-contractual negotiations

Unpacking enforceable undertakings - a fresh look at compliance in the workplace

Government announces proposed changes to the Commerce Act

Bell Gully's Takeovers Market Practice Report

First criminal sentence puts spotlight on insider trading laws

High Court refuses to strike out key questions in Commerce Commission's proceeding against Harmoney

Government amends the Responsible Lending Code's guidance on fees

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USEFUL WEB LINKS

New Zealand Government

• Consumer Affairs • Inland Revenue Department • Ministry of Business, Innovation & Employment • Ministry of Foreign Affairs and Trade • New Zealand Government • NZ Treasury • Office of the Clerk of the House of Representatives [New Zealand Parliament] • Parliamentary Counsel Office

New Zealand financial agencies and organisations

• Commerce Commission • The Companies Office • Export Credit Office • NZ Law Commission • Office of the Banking Ombudsman – password required • Insurance and Savings Ombudsman • Privacy Commissioner • Personal Property Securities Register • Reserve Bank of New Zealand • Takeovers Panel • Financial Markets Authority

New Zealand commercial sites

• NZFMA • ILANZ • Financial Services Federation • Chartered Accountants Australia and New Zealand • NZ Bankers’ Association • NZ Institute of Economic Research • NZX • The New Zealand Initiative

Australian Government sites

• Banking Ombudsman

Australian commercial sites

• Australian Financial Markets Association • Australian Securities and Investment Commission • Australian Stock Exchange

International sites

• Bank for International Settlements • International Monetary Fund • International Swaps and Derivatives Association • NASDAQ • New York Stock Exchange • United States Securities and Exchange Commission • World Bank

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