Supervisors
Supervisors are appointed to look after investors' interests for some types of financial products and the interests of residents of retirement villages. Supervisors covered by the Financial Markets Supervisors Act 2011 (the FMS Act) are those who supervise the following:
Trustees of restricted KiwiSaver schemes are not covered by the FMS Act. Under the requirements of the FMC Act 2013, restricted schemes must have a licensed independent trustee.
This guidance note explains the key steps involved in licensing. It also specifies the licensing criteria and describes the information we require to decide whether an applicant is capable of effectively performing the functions of a supervisor for a debt security, registered scheme or retirement village covered by the licence applied for.
Supervisors must comply with the Financial Markets Supervisors Act 2011 (the FMS Act) and supporting regulations.
Your duty to meet your professional standard of care and your obligation to act in the best interests of investors need to be at the forefront of determining how you go about your role as supervisor.
The FMC Act Part 4 provisions and obligations apply to supervisors. For more information, see our guidance note: Governance under part 4 of the FMC Act.
Compliance involves the following activities:
Supervisors must also tell us how they plan to respond if there is a contravention or insolvency. In such situations, we have the power to take action to protect the investors' interests.
Disclosing contraventions or potential contraventions by issuers is an important part of the licensing regime. It enables us to monitor the extent and nature of non-compliance by the issuers being supervised; assess whether the supervisor has adequate plans to respond to a breach; monitor the effectiveness of that action; if necessary work collaboratively, where appropriate, with supervisors to ensure they take steps to address any breach.
Under section 203 of the FMC Act, the supervisor of a debt security or registered scheme must report to us a material contravention, or a possible material contravention, of an issuer’s obligations. The supervisor must also tell how they plan to act, and the timeline for the action. The obligation to report contains a materiality threshold, which requires a judgment to be made. We recommend a supervisor takes a precautionary approach and matters are reported where they have begun an internal discussion between supervisor staff as to whether the matter is material or not. This approach is consistent with:
In particular, if a potential contravention relates to a matter that may result in a statutory penalty for the issuer, the contravention should only go unreported if deemed immaterial, and the supervisor is comfortable that the relevant regulator will not take action.
If a supervisor thinks a contravention or likely contravention has occurred which may adversely impact the investors' interests, the contravention should be reported. It may be helpful to view the matter from an investor's perspective (ie, if you were an investor in the licensed entity, would you consider the contravention to be material?).
Following a section 203 report to us, we might not necessarily direct the supervisor to take a course of action, unless we see a clear need to do so to protect investors. There have been concerns that a supervisor could be liable to action (from a supervised entity) should a contravention reported be found to be immaterial. Both sections 203 and 204 of the FMC Act have provisions detailing that the protections of section 214 of the FMC Act apply to reports made in good faith.
We expect each report under section 203 to fully comply with sections 203(1)(a) and 203(1)(b) to tell us:
A date range can be provided. You need to tell us if you do not plan further action.
Following the initial section 203 notification, we may ask the supervisor for reports on the progress and success of the action taken by the supervisor to ensure the supervised entity is taking remedial action. We should be told if the supervised entity does not respond to the supervisor's plan.
Under the FMS Act, the High Court may fine a supervisor up to $600,000, if the supervisor contravenes a licensee obligation. Licensee obligations mean an obligation imposed on a supervisor by one, any or all of the following:
Further, supervisors may also be liable to compensate investors as a result of the contravention. Under the FMS Act, anyone acting as a supervisor without a licence or claim to hold a licence may be fined up to $600,000.
With managed investment schemes
For managed investment schemes, you must actively supervise the manager’s performance of its functions and issuer obligations, and the financial position of the manager and the scheme. This is overlaid with the need to act on behalf of scheme participants in relation to the manager, the governing document, and issuer obligations. FMA’s licensing of MIS managers does not take away from your need to fulfil these requirements. Different MIS product classes will have different supervisory approaches and documentation. This reflects the need for a ‘fit for purpose’ tailored supervisory focus.
With debt issuers
For debt issuers, you must supervise the issuer’s performance of its issuer obligations. You must also satisfy yourself that the issuer’s assets are sufficient to discharge the amounts of the debt securities as they become due. Again this is overlaid with the responsibility to act on behalf of the debt security holders in relation to the issuer and the trust deed. Since debt securities are fundamentally different products with different risks, and with governing documents that serve a number of purposes, we expect that your supervisory approach to debt issuers will be different to that of MIS.
With the FMA
As an FMC reporting entity, you must do all of the following:
The Anti-Money Laundering and Countering Financing of Terrorism Act 2009 (the Act) imposes several obligations:
The FMA supervises designated business groups (DBGs) and reporting entities listed in Section 130 of the Act.
The FMC Act sets out minimum compliance standards of behaviour for people operating in the financial markets.
It prohibits:
The FMA completed a review of the licensed supervisors during the process to update their license status in 2017. Following the re-licensing application process, the FMA assessed the supervisors’ submissions, specifically reviewing their approaches to monitoring MIS managers. We wanted to determine whether supervisors were taking a consistent approach to their obligations.
View the Key findings from the recent re-licensing of supervisors report.