Financial Markets Conduct Amendment Regulations 2020

25 New regulations 229K to 229ZE and cross-headings inserted

Before the cross-heading above regulation 230, insert:

Financial advice that is not regulated

229K Circumstances in which financial advice is not regulated financial advice

Schedule 21B prescribes circumstances in which financial advice is not regulated financial advice for the purposes of clause 17 of Schedule 5 of the Act.

229L Lender’s duty to ensure borrower understands that advice about credit contract or insurance is not regulated financial advice

(1)

This regulation applies for the purposes of clause 10(2) of Schedule 5 of the Act (which provides that a lender is taken to have complied with clause 10(1)(b) of that schedule if the lender gives the borrower a statement in the prescribed manner).

(2)

The statement must be in the following form:

You are protected by responsible lending laws. Because of these protections, the recommendations given to you about [briefly specify (for example, “this home loan”)] are not regulated financial advice.

This means that duties and requirements imposed on people who give financial advice do not apply to these recommendations. This includes a duty to comply with a code of conduct and a requirement to be licensed.”

(3)

The lender must ensure that the statement,—

(a)

if it is presented with other information, is given prominence; and

(b)

if it is presented in writing, is in a format, font, and font size that is easily readable; and

(c)

is made available or given free of charge.

(4)

The lender may otherwise make the information available or give the information in the form and manner they reasonably consider appropriate.

(5)

Regulation 9 applies to a statement under this regulation.

(6)

If the lender gives a statement in oral form under this regulation, the lender must maintain records that demonstrate that it has met the requirements of this regulation.

Record of nominated representatives

229M Record of nominated representatives

For the purposes of section 431T(5) of the Act, a financial advice provider must ensure that the record of its nominated representatives contains the following:

(a)

the name of each nominated representative:

(b)

if a nominated representative is engaged indirectly through 1 or more interposed persons, the name of each interposed person:

(c)

the date on which the nomination of each nominated representative takes effect:

(d)

if the nomination is specified as expiring on a particular date, that date:

(e)

if the nomination has expired, the date on which it expired.

Custodians of financial products

229N Application of regulations relating to custodians of financial products

(1)

Regulations 229P to 229V apply to a person who provides relevant custodial services to a client.

(2)

However, those regulations do not apply to any of the following:

(a)

a person who provides relevant custodial services if the person and all of its associated persons provide the services to no more than 5 clients in aggregate:

(b)

services provided by—

(i)

a trustee of a family trust in respect of the trust’s assets:

(ii)

an executor, an administrator, or a trustee of a deceased person’s estate in respect of the estate’s assets:

(iii)

an attorney acting under an enduring power of attorney in respect of a donor’s property in circumstances where the donor becomes mentally incapable:

(iv)

any person appointed by the court in respect of a person’s assets:

(c)

a sub-custodian acting in that capacity.

Compare: LI 2014/48 r 4(1), (2)

229O Definitions in regulations 229N to 229W

In regulations 229N to 229W,—

assurance report means a report for an assurance engagement under regulation 229U

custodian means a person to whom regulations 229P to 229V apply under regulation 229N

family trust has the same meaning as in section 173M(5) of the Tax Administration Act 1994

relevant custodial service

(a)

means a custodial service that—

(i)

is a regulated client money or property service; and

(ii)

relates to a financial product; but

(b)

does not include any service to the extent that client money or client property is held solely for completing a transaction, securing an obligation, or both

sub-custodian means a person who provides relevant custodial services under an arrangement with a custodian where the custodian holds a beneficial interest in the financial product (to which the services relate) in trust for, or on behalf of, the client.

Compare: LI 2014/48 r 3

229P Relevant custodial services provided on behalf of business of another person

(1)

This regulation applies to relevant custodial services provided to a client (C) if—

(a)

a person (A) provides the services to C on behalf of the business of another person (B); and

(b)

B does not itself provide the services but, by virtue of section 431ZI of the Act, is treated (instead of A) as the provider having the obligations under subpart 5B of Part 6 of the Act.

(2)

If this regulation applies,—

(a)

B must ensure that A complies with the requirements of regulations 229Q to 229ZC in respect of the relevant custodial services (applied as if references to a custodian were references to A); and

(b)

B must be treated as having complied with the requirements of regulations 229Q to 229ZC in respect of the relevant custodial services if A complies with the requirements as referred to in paragraph (a).

Compare: LI 2014/48 r 4(3), (4)

229Q Custodian must provide information to clients

(1)

For the purposes of section 431ZF of the Act, a custodian must, in relation to its relevant custodial service, provide the following information to a client for each reporting period in respect of client money and client property received or held by the custodian and any of its sub-custodians:

(a)

a record of all transactions effected by the custodian or any of its sub-custodians for the client during the reporting period, which for each transaction must, at a minimum, include—

(i)

the date of the transaction; and

(ii)

the name of the issuer and the number (if applicable) and class of financial products to which the transaction relates; and

(iii)

the balance of that class of financial products held on behalf of the client on completion of the transaction; and

(b)

all entries made in a ledger of client money held on behalf of the client during the reporting period, which for each entry must, at a minimum, include—

(i)

a date; and

(ii)

references that identify the source or destination of client money and that enable it to be traced backward or forward; and

(c)

information on client property currently held on behalf of the client, which, at a minimum, must include—

(i)

the name of the issuer and the number (if applicable) and class of financial products currently held on behalf of the client; and

(ii)

the name, if known, of the custodian or sub-custodian that holds those products; and

(d)

the amount of the fees (if any) charged by the custodian in respect of client money or client property held on behalf of the client; and

(e)

a statement that the client may request the latest assurance report required by regulations 229U and 229V.

(2)

The information—

(a)

must be prepared as at the last day of the reporting period and in respect of the last reporting period; and

(b)

must be provided to the client not later than 20 working days after the last day of each reporting period by giving it to the client or delivering or sending it to the client’s address.

(3)

In this regulation, reporting period means—

(a)

each period of 6 months (or any shorter period determined by the custodian) for which the person is a client of the custodian; or

(b)

if the person ceases to be a client of a custodian on a date within that period, the shorter period ending on that date.

Compare: LI 2014/48 r 5

229R Alternative means of providing information required by regulation 229Q(1)

(1)

A custodian does not have to comply with regulation 229Q(2) and (3) if—

(a)

the information required by regulation 229Q(1) is available through an electronic facility on a substantially continuous basis; and

(b)

the client agrees to the information being provided in that way; and

(c)

the client has been given access to the facility.

(2)

The information that is made available on the facility must include a statement of the date at which the information is prepared.

(3)

For the purposes of this regulation, a reference in regulation 229Q(1) to a reporting period means the period—

(a)

beginning on the date on which the person becomes a client of a custodian; and

(b)

ending on the date that is not earlier than 48 hours before the information is made available.

Compare: LI 2014/48 r 6

229S Client request for information from custodian

For the purposes of section 431ZF of the Act, if a client has made a written request to the custodian for any information required by regulation 229Q(1), the custodian must provide the information by giving it to the client or delivering or sending it to the client’s address not later than 10 working days after the date on which the request is received.

Compare: LI 2014/48 r 7

229T Procedures for reconciling custodian’s records

(1)

This regulation applies for the purposes of section 431ZE(4)(b) of the Act.

(2)

For the purpose of ensuring that the custodian’s records accurately state the custodian’s holding of client money and client property and all transactions relating to that money and property, the custodian must, in relation to its relevant custodial service,—

(a)

take adequate steps to reconcile records of client money and client property held for each client with the overall records of client money and client property held by the custodian; and

(b)

take adequate steps to reconcile records of client money and client property kept by the custodian with records kept by sub-custodians and third parties; and

(c)

have in place adequate procedures for promptly identifying discrepancies in those records and determining the cause of those discrepancies; and

(d)

promptly and fully rectify any discrepancies.

(3)

The frequency of the reconciliation of client property must be appropriate to—

(a)

the type of client property to which the records relate; and

(b)

the frequency with which client property is traded; and

(c)

the timing of any custody reports provided.

(4)

All records of client money must be reconciled daily.

Compare: LI 2014/48 r 8

229U Custodian must obtain assurance engagement

(1)

This regulation and regulation 229V apply for the purposes of sections 431ZC(4), 431ZE(4)(b), and 431ZF of the Act.

(2)

A custodian must obtain, within 4 months after the relevant date, an assurance engagement with a qualified auditor in relation to its relevant custodial service (including obtaining the assurance report within that period).

(3)

The assurance engagement must be done in accordance with applicable auditing and assurance standards.

(4)

The custodian must,—

(a)

within 20 working days after obtaining an assurance report, provide a copy of the report to the FMA unless the FMA waives this requirement; and

(b)

at the request of a client, send the client a copy of the most recent assurance report within 10 working days after receiving the request.

(5)

In this regulation and regulation 229V, relevant date, in relation to a custodian, means—

(a)

the custodian’s balance date; or

(b)

a date in each calendar year that is—

(i)

determined by the custodian; and

(ii)

notified to the FMA in writing within 10 working days after the determination is made.

(6)

The following apply for the purposes of the date under subclause (5)(b):

(a)

in the case of a date that is adopted as the first relevant date, the date must be within the first 12 months of this regulation applying to the custodian in respect of a client; and

(b)

the custodian may change the date if—

(i)

the period between any 2 dates does not exceed 15 months; and

(ii)

the change is notified to the FMA in writing within 10 working days after the custodian decides to make the change; and

(c)

if the custodian adopts a date in accordance with paragraph (a) or changes the date in accordance with paragraph (b), it need not have a date in a particular calendar year.

Compare: LI 2014/48 r 9

229V Requirements of assurance engagement and report

(1)

An assurance report must state whether, in the auditor’s opinion,—

(a)

the custodian’s processes, procedures, and controls were suitably designed to meet the control objectives in subclause (2) throughout the most recently completed relevant period; and

(b)

the custodian’s processes, procedures, and controls operated effectively throughout that relevant period.

(2)

The control objectives are that—

(a)

new accounts are set up completely and accurately in accordance with client agreements and any applicable regulations:

(b)

complete agreements that properly authorise the holding of client money and client property (authorising agreements) are established before the custodian starts providing relevant custodial services:

(c)

transactions are authorised, processed, and recorded in an appropriate, accurate, and timely manner:

(d)

accounts are administered in accordance with the Act, these regulations, and authorising agreements:

(e)

records and changes to records relating to relevant custodial services are accurate and are kept—

(i)

in an appropriate and timely manner; and

(ii)

in accordance with the Act, these regulations, and authorising agreements:

(f)

there are adequate safeguards against the loss, misappropriation, and unauthorised use of client money and client property:

(g)

sub-custodians are appropriately approved and managed and adequately monitored:

(h)

reports to the client in respect of holdings of client money and client property—

(i)

are complete and accurate; and

(ii)

are provided within the time frames in the Act, these regulations, and client agreements:

(i)

information technology systems and processes are appropriate to allow the custodian to accurately and reliably meet the objectives in paragraphs (a) to (h).

(3)

In this regulation, relevant period, in relation to a custodian, means a 12-month period ending on the relevant date of the custodian, and if, as a result of the date on which it became a custodian or a change of the relevant date of the custodian, the period ending on that date is longer or shorter than 12 months, that longer or shorter period is a relevant period.

Compare: LI 2014/48 r 10

Application of obligations to custodial services provided to wholesale clients

229W Application of sections 431ZC to 431ZH of Act and regulations to wholesale clients

(1)

The following apply to relevant custodial services provided by a custodian to wholesale clients:

(a)

sections 431ZC to 431ZH of the Act (obligations for handling client money and client property); and

(b)

regulations 229Q to 229V and 229X to 229ZE.

(2)

Subclause (1) does not apply to a relevant custodial service if all of the clients for that service fall within 1 or more of the following categories:

(a)

investment businesses within the meaning of clause 37 of Schedule 1 of the Act:

(b)

large persons within the meaning of clause 39 of Schedule 1 of the Act:

(c)

government agencies within the meaning of clause 40 of Schedule 1 of the Act:

(d)

entities that are under the control of a person referred to in any of paragraphs (a) to (c) (where control has the same meaning as in clause 48 of Schedule 1 of the Act).

(3)

Subclause (1) does not apply to a relevant custodial service provided by a derivatives issuer to the extent that the client money or client property to which the service relates is derivatives investor money (as defined in regulation 239(1) to (3) and (6)) or derivatives investor property (as defined in regulation 239(4) to (6)).

(4)

In subclause (2)(b), for the purpose of applying Schedule 1 of the Act, relevant time (as referred to in clause 39 of that schedule) must be treated as the time immediately before the client agreement for the custodial service is entered into.

Compare: LI 2014/48 r 11; SR 2011/50 r 13

Holding client money or property together with other money or property

229X Application of regulations that allow client money or property to be held together with other money or property

(1)

Regulations 229Y to 229ZC apply for the purposes of section 431ZC(3) and (4) of the Act (which provides for when client money or client property may be held together with other money or property).

(2)

In those regulations, client money trust account, financial product transaction, firm money, firm property, non-NZX provider, NZX provider, and reasonably necessary have the meanings set out in clause 2 of Schedule 21C.

229Y Client money or property not held separately in order to facilitate settlements

(1)

Section 431ZC(2) of the Act does not apply to an NZX provider to the extent that—

(a)

client money or client property is held together with firm money or firm property for the purpose of facilitating or arranging the settlement of 1 or more financial product transactions for a client of the NZX provider; and

(b)

it is reasonably necessary for client money or client property to be held together with firm money or firm property.

(2)

However, this regulation applies only if the NZX provider is satisfied on reasonable grounds that it has adequate systems and procedures for ensuring that it complies with the applicable duties set out in Schedule 21C.

229Z When firm money or property not held separately in order to facilitate settlements is treated as client money or property

(1)

This regulation applies for the purposes of section 431ZC(3)(b) of the Act.

(2)

Firm money or firm property (the money or property) that is held together with client money or client property under regulation 229Y must be treated as client money or client property for all purposes (subject to subclause (3)).

(3)

However, the NZX provider must separate the money or property from the client money or client property in order to comply with clause 3(2)(a) of Schedule 21C (in which case, the separated money or property ceases to be client money or client property).

229ZA Client money not held separately in order to rectify or reduce risk of shortfall

(1)

Section 431ZC(2) of the Act does not apply to an NZX provider or a non-NZX provider to the extent that it is reasonably necessary for firm money to be held together with client money in a client money trust account in order to rectify, or reduce the risk of, a shortfall arising in the client money held for a client in that account.

(2)

However, this regulation applies to—

(a)

an NZX provider only if the provider is satisfied on reasonable grounds that it has adequate systems and procedures for ensuring that it complies with the applicable duties set out in Schedule 21C; and

(b)

a non-NZX provider only if—

(i)

the provider is satisfied on reasonable grounds that it has adequate systems and procedures for ensuring that it complies with the applicable duties set out in Schedule 21C; and

(ii)

the provider has notified the FMA in writing that it intends to rely on this regulation; and

(iii)

the provider maintains, at a bank in New Zealand, at least 1 client money trust account in each currency in which it accepts money from or on behalf of clients; and

(iv)

the provider has obtained from each bank that holds a client money trust account a written acknowledgement of the trust status of that account; and

(v)

the provider has ensured that the words “client funds account”, “trust account”, “client funds a/c”, or “trust a/c” appear in the name of each client money trust account.

229ZB When firm money not held separately in order to rectify or reduce risk of shortfall is treated as client money

(1)

This regulation applies for the purposes of section 431ZC(3)(b) of the Act.

(2)

Firm money (the money) that is held together with client money under regulation 229ZA must be treated as client money for all purposes (subject to subclause (3)).

(3)

However, the NZX provider or non-NZX provider must separate the money from the client money in order to comply with clause 4(2)(a) or (c) of Schedule 21C (in which case, the separated money ceases to be client money).

229ZC Provider that holds client money or property together with other money or property must comply with duties

For the purposes of section 431ZC(4) of the Act, a provider must comply with the applicable duties set out in Schedule 21C if the provider relies on regulation 229Y or 229ZA.

Miscellaneous provisions relating to regulation of client money or property services

229ZD Custodianship of property of registered scheme is not regulated client money or property service

(1)

This regulation applies for the purposes of clause 22 of Schedule 5 of the Act.

(2)

To the extent that the holding of scheme property under sections 156 to 160 of the Act is a client money or property service, that service is not a regulated client money or property service.

229ZE Overseas banks prescribed entities for purposes of section 431ZC of Act

(1)

Overseas banks are prescribed entities for the purposes of section 431ZC(1)(b) of the Act.

(2)

In this regulation,—

overseas bank means a bank that is—

(a)

an overseas person; and

(b)

subject to regulatory controls that are substantially the same as those applying in New Zealand in relation to—

(i)

the composition of the board of directors or other governing body of the bank; and

(ii)

the disclosure requirements relating to the bank’s financial position; and

(iii)

the requirements relating to the capital adequacy of the bank; and

(iv)

the requirements relating to the taking of deposits

overseas person means—

(a)

a body corporate incorporated outside New Zealand; or

(b)

an unincorporated body that has its head office or principal place of business outside New Zealand.