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:

• Being licensed. 
• Reporting to us at least once every 6 months. The reports ensure we are aware of any changes which may affect supervisors' ability to perform their role to the required standard. It also satisfies us that supervisors are meeting their obligations (See section 25 of the FMS Act). The regulations provide further detail on the matters that are covered in a supervisor's report.
• Report to us right away where supervisors believe:
• they have or may have breached their obligations (section 26(1)(a) of the FMS Act) or
• a material change of circumstances has or may have occurred, or may be likely to occur, for the licensee (section 26(1)(b) of the FMS Act) or
• the information provided for a licence application was, or may have been, wrong, misleading or incomplete (section 26(1)(c) of the FMS Act).
• Disclose to us where the relevant issuer being supervised is, or is likely to become insolvent (section 204, FMC Act) or is in material contravention of their obligations (section 203 of the FMC Act).

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.

When to report

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: 

• the purpose and function of section 203 reports
• a focus on investor protection
• the development of a mutually supportive relationship between us and supervisors.

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.

What to report

We expect each report under section 203 to fully comply with sections 203(1)(a) and 203(1)(b) to tell us:

• what steps the supervisor plans to take when there is a contravention or possible contravention
• what date the steps are to be taken.

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:

• every governing document
• the financial product’s terms of offer
• a court order on a supervised interest
• the FMS Act 2011
• the Financial Markets Conduct Act 2013
• the KiwiSaver Act 2006
• the Non-bank Deposit Takers Act 2013
• the Retirement Villages Act 2003.

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 a supervisor, you have the core supervisory and compliance monitoring role for your supervised interests. 
• To avoid any duplication in the supervision of MIS, our focus will be on monitoring supervisors to ensure you meet your general obligations under the FMC Act.
• The business of detailed day-to-day supervision of specific MIS is the role of the supervisor. We believe this is the best way to build investor trust and achieve greater regulatory efficiencies, improved compliance standards, and consistency across the industry. 
• We will check you are meeting your obligations and hold you accountable for the proper discharge of frontline supervisory functions through the FMC Act, the Financial Markets Supervisors Act, and licence conditions.

As an FMC reporting entity, you must do all of the following:

• keep proper accounting records to help you prepare compliant financial statements — records must be kept in English and a copy must be kept in NZ
• prepare financial statements for your group's operations — those financial statements must comply with a generally accepted accounting practice in NZ
• have your financial statements audited by a licensed auditor or registered audit firm
• lodge your financial statements and the auditor’s report on them with the Companies Office within 4 months after your balance date
  

The Anti-Money Laundering and Countering Financing of Terrorism Act 2009 (the Act) imposes several obligations: 

• You must provide a written risk assessment of the money laundering and financing of terrorism activity you could expect in the course of running your business.
• You are required to implement an anti-money laundering and countering financing of terrorism programme that includes procedures to detect, deter, manage and mitigate money laundering and the financing of terrorism.
• You are required to appoint a compliance officer to administer and maintain your programme.
• You are required to perform due diligence processes on your customers. This includes customer identification and verification of identity.
• You are required to report suspicious transactions. 

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:

• misleading or deceptive conduct
• false or misleading representations
• unsubstantiated representations
• offers of financial products in the course of unsolicited meetings.

Read more about fair dealing.

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.