Digest No. 1777
Purpose
"The intention of this Bill is to make amendments to the Financial Advisers Act 2008 (the FAA) and to the Financial Service Providers (Registration and Dispute Resolution) Act 2008 (the FSP) to ensure that those Acts can be implemented effectively and consistently within existing policy frameworks"
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The Bill as introduced is described in Bills Digest No 1740.
Supplementary Order Paper No 113 amends the Bill to change the provisions regulating broking services from those currently contained in the FAA " ... so as to enable the FAA to be effectively implemented in relation to entities operating broking services"
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"In the FAA at present 'investment transactions' are regulated as part of the 'financial adviser services' provided by financial advisers. As a consequence, only appropriately registered or authorised individuals may perform these transactions, and not entities. The changes set out in this Supplementary Order Paper will enable entities to carry out these transactions under the FAA"
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In the FAA at present “investment transactions” are regulated as part of the “financial adviser services” provided by financial advisers. As a consequence, only appropriately registered or authorised individuals may perform these transactions, and not entities. The changes set out in this Supplementary Order Paper will enable entities to carry out these transactions under the FAA.
The general intent of the changes is as follows:
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“investment transactions” are renamed “broking services” in the FAA and the scope of the services is clarified as being the receipt, holding, and payment of client money and client property by a person acting on behalf of a client (so including the handling of dividends by intermediaries);
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any individual or entity can provide broking services, the FSP Act applying to require individuals or entities in the business of providing broking services to be registered unless exempted but employees will not need to be separately registered as brokers themselves;
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New Part 3A is inserted into the FAA to contain the provisions regulating brokers;
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the disclosure and conduct obligations applied to brokers in new Part 3A are essentially the same as the obligations that applied previously to investment transactions carried out by financial advisers. However, these obligations are generally applied to the entity or employer that is the broker rather than to the individual employee;
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the disclosure obligations applied to brokers are similar to those applying to financial advisers (however, they do not require disclosure by brokers to other brokers or to product providers);
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the conduct obligations for brokers are the same (with some small adjustments) as the general conduct requirements (for example, to take due care) and the money-handling obligations that previously applied to authorised financial advisers carrying out investment transactions;
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the Securities Commission continues to have the role of enforcing compliance with these obligations and has the power to direct brokers to comply with them;
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the previous offences that applied to authorised financial advisers carrying out investment transactions have been adjusted to apply to brokers that are entities as well as individuals;
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changes are made to the FSP Act to require dispute resolution schemes to share information relating to disputes about brokers with the Securities Commission. This information sharing is intended to assist in monitoring the extent of problems with the handling of client money and client property by brokers
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Main changes proposed
Who is a broker and what is broking service?
SOP No 113 proposes that a broker
is an individual or an entity who carries on a business of providing or offering to provide a broking service (whether or not the business is the provider's only business or the provider's principal business). A broking service is the receipt, holding, or payment of client money or client property by a person acting on behalf of a client, but the mere transmission of a non-negotiable instrument payable to another person is not a broking service.
A person does not provide a broking service in the following cases:
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a lawyer or incorporated law firm providing a broking service in the course of professional practice in providing legal services if the broking is a necessary incident of legal practice; or
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a conveyancing practitioner providing a broking service in the course of professional practice in providing conveyancing services if the broking is a necessary incident of conveyancing practice; or
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a chartered accountant providing a broking service in the course of professional practice as a chartered accountant if the broking is a necessary incident of professional accounting practice; or
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a tax agent providing a broking service in the course of professional practice as a tax agent if the broking is a necessary incident of professional tax agency; or
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a real estate agent providing a broking service in the course of the agent's occupation as a real estate agent if the broking is a necessary incident of working as a real estate agent; or
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a designated settlement system under section 156N of the Reserve Bank of New Zealand Act 1989, and any operator of that system, receiving, holding, or paying client money or client property in accordance with the rules of the settlement system; or
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a Crown organisation or an employee of a Crown organisation providing a broking service in the course of its functions; or
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the Reserve Bank of New Zealand (the Reserve Bank), a member of the board of the Reserve Bank, or an employee of the Reserve Bank providing a broking service in the course of the functions of the Reserve Bank; or
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an employee receiving, holding, or paying money or property of his or her employer in the course of his or her employment; or
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an employer, or an employee of the employer, providing assistance to a person who is an employee of the employer with the implementation of a decision to acquire or dispose of a financial product made available through the person's workplace; or
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a company or an employee of a company providing a broking service, in the course of the company's business, on behalf of no person other than a related company; or
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any other person or class of persons specified in the regulations providing a broking service in circumstances specified in the regulations (Clause 18A, inserting New Part 3A into the FAA, New Sections 77A-77C).
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Brokers' disclosure obligations
SOP No 113 proposes generally that a broker must make disclosure to a client, in accordance with the FAA and regulations, before (or if not practicable before, as soon as practicable after) receiving client money or client property from the client.
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The details of disclosure would be provided for in regulations which, in relation to the broker and, if the broker is an entity, each principal officer, may prescribe disclosure in relation to any or all of the following: criminal convictions, disciplinary proceedings, adverse findings by a court or the Securities Commission, bankruptcy or other insolvency proceedings. Regulations may also be made in relation to procedures for handling client money or client property, fees, indemnity insurance, dispute resolution arrangements, location of business premises, telephone, email, and fax details. It is enjoined that disclosure under a disclosure obligation must not be misleading, deceptive, or confusing at the time that the disclosure is made. It is made clear that previous disclosure does not discharge a broker from a disclosure obligation if the previous disclosure is out of date when the client money or client property is received by the broker. A previous disclosure is out of date if:
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since the date of the disclosure, there has been a material change in any matter that must be disclosed; and
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a reasonable person in the position of the client would consider that the change would materially affect any of the following decisions by the client:
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to proceed with the broking service by the broker in question (B);
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to postpone or countermand the performance of a broking service by B (Clause 18A, inserting New Part 3A into the FAA, New Sections 77D-77I).
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Brokers' conduct obligations
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Supplementary Order Paper No 113 proposes that a broker must, when providing a broking service, exercise the care, diligence, and skill that a reasonable broker would exercise in the same circumstances, taking into account, but without limitation, the nature and requirements of the client and the nature of the services performed for the client.
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The SOP sets out such conduct obligations as:
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a broker must not engage in misleading or deceptive conduct;
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advertisement of broking services must not be misleading, deceptive, or confusing;
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the term sharebroker must not be used in connection with a person in any advertising or promotional material unless the person, or the person's employer, is a member of a registered exchange;
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a broker must not receive client money if offer for subscription illegal;
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a broker must pay client money into separate trust account;
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a broker must account for client money and client property;
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a broker must keep records of client money and client property;
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a broker must keep the records required by the FAA, or ensure that they are kept, in a manner that enables those records to be conveniently and properly audited or inspected;
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a person must not use or apply client money or client property received or held on trust for a client by a broker in any way except as expressly directed by the client (Clause 18A, inserting New Part 3A into the FAA, New Sections 77J-77S).
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Protection of client money and client property held on trust
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The Bill generally provides that client money or client property that is received or held by a broker on trust for a client is not available for the payment of the debts of any other creditor of the broker and is not liable to be attached or taken in execution under the order or process of any court at the instance of another creditor of the broker. This does not apply to any lawful lien or claim that a broker who holds client money has against the client money (Clause 18A, inserting New Part 3A into the FAA, New Section 77T).
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Securities Commission may direct broker on disclosure or conduct obligations
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Supplementary Order Paper No 113 proposes that where the Commission has reason to believe that a broker is in breach of a disclosure or conduct obligation, it may give the broker notice of his or her alleged breach and, if the Commission does give a notice of breach, the Commission must also give the broker a reasonable opportunity to respond. If the Commission concludes, after considering the broker's response, that the broker is in breach, the Commission may give the broker a direction in writing:
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to comply with the disclosure or conduct obligation;
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stipulate any steps that the broker must take in order to comply with the obligation;
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require the broker to report to the Commission within 28 days of the date of the direction stating how and when the Commission's direction will be implemented (Clause 18A, inserting New Part 3A into the FAA, New Section 77V).
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Offences
The Bill adjusts the current offences that apply to authorised financial advisers carrying out investment transactions so that they apply to brokers that are entities as well as to individuals (Clause 24D, substituting Sections 118-120 of the FAA; Clause 26A, inserting New Sections 134A-134F into the FAA).
