• Trustees Corporate Supervision

Feb 28, 2022

FMA reports on itself for 2020/21

Regulator gives key pointers for the future in accounting for its past

In January the FMA published its Annual Report 2020/21 (“Report”).  The report covers the financial year ended 30 June 2021 and includes the independent Crown entity’s audited annual financial statements.  By necessity, such a report contains much material that is retrospective.  In this particular case, the FMA took the opportunity to commemorate that 2021 marked that it had been in existence for a decade.  Of particular interest to readers such as licensed Supervisors, debt issuers, and managed investment scheme (MIS) managers, including KiwiSaver scheme managers, is the prospective material that foreshadows what to expect from the principal conduct regulator of New Zealand's financial markets over the year ahead.  In this article we sample some of these forward-looking topics.

Good conduct prevails over all else besides

In the report from the Chair, Mark Todd, the regulator took the opportunity to emphasise the primacy of good conduct over all the other values and principles it is responsible for within New Zealand’s financial markets.

For all the talk of change as we reflect on 10 years of the FMA, one thing that remains evergreen is our expectations for good conduct.

Firms are facing new obligations, new customers, new products, and new challenges such as cybersecurity threats and economic uncertainty. Good conduct, fuelled by sound governance and a focus on customers, is what will stand them in good stead as they navigate these changes, and is what we’ll be looking for in our future licensing, monitoring and oversight.

Report, p. 5

Debt issuers, MIS managers, and their Supervisors should take close heed of that implied warning.   If there is some doubt as to whether any actual or potential conduct may meet the threshold of being sufficiently good, then that should trigger further investigation.  Complacency about what good means could pose a risk as well, as the FMA’s words are careful to thread awareness of the reality of constant change through the enduring fabric of regulator vigilance.  What is good enough today may well not be tomorrow.

In what follows, we will look at some of the FMA’s most evidently prospective matters addressed under various headings selected from the Report.

Governance and culture

Value for money (“VfM”) in managed fund fees is a very significant forward-looking subject canvassed in the governance and culture section of the Report.  The section places a “spotlight” on the April 2021 FMA Guidance Managed fund fees and value for money.  In the commentary provided concerning the Guidance it is stated that:

We saw the need for guidance after research suggested fees often do not correlate with the features or returns of an investment and, in the case of KiwiSaver funds, that benefits of scale which should be realised as funds under management increase are not being passed on to investors.

The guidance includes an expectation that fund managers will conduct an annual review to show how they are meeting these requirements. It includes questions to help frame the review, covering fees and returns, and advice and other services that should be part of a complete evaluation of value for money.

Ibid. p. 11

MIS managers can likely expect the requirement to implement an annual VfM review cycle of all their managed funds, including KiwiSaver funds, on issue to be formally activated from around the second quarter of this year.  Supervisors will also be actively involved in these reviews.  Going forward, undertaking this regular cycle in perpetuity promises to deliver a significant workload for MIS managers and Supervisors alike to complete each year.  Further information on how the VfM reviews are to be conducted is planned to be provided to Supervisors and MIS managers within the first half of 2022, according to the FMA.

Of note in the “spotlight” is a quotation from FMA Director of Investment Management Paul Gregory:

“The guidance does not tell managers what to charge and accepts managers can profit from competently managing investors’ money. But the guidance also recognises investors are paying the cost and taking the risk and, if high fees mean investors are not getting an appropriate share of that profit, the manager’s competence is far less relevant, and the investor should walk away.”


This remark raises the question of how investors will know when to walk away from MIS managers overcharging for services and suggests that there is a further leg of the VfM regime to come.  At some stage, the results of annual VfM reviews will need to be reliably communicated to investors such as is done in the United Kingdom.  Until investors receive appropriate information from MIS managers as to whether or not VfM is being provided via the managed fund fees they are paying, it is surely not feasible for them to make an informed decision to quit an investment on the ground of excessive cost.

Implementation of remit changes

A number of the remit changes listed in the Report will have future bearing on the financial product issuers who come under their ambit.

For example, the Report specifies the Financial Markets (Conduct of Institutions) Amendment Bill (CoFI) under which the FMA will license and monitor banks, insurers and non-bank deposit takers in respect of their conduct with their customers.  MIS managers who are banks can expect to be affected.

Another topic of future relevance touched upon concerns the impending regime for climate-related financial disclosures (“CFD”) by NZX-listed issuers and some banks, insurers and other entities.  The FMA states that it has been engaged with MBIE and the External Reporting Board on developing proposed CFD standards.  The FMA states that, “Under the new regime we will be responsible for guidance, monitoring, enforcement and reporting related to these disclosures.”  Debt issuers and MIS managers of qualifying scale for CFD will need to prepare themselves to meet the new disclosure regime’s commitments as they are implemented.

A further subject broached in a “spotlight” concerns the new financial advice regulatory regime that came into effect on 15 March 2021 under the Financial Markets Conduct Act 2013.   The regime requires that anyone who gives regulated financial advice to retail clients must either hold or operate under a Financial Advice Provider licence and adhere to the new Code of Professional Conduct for Financial Advice Services.  Some financial product issuers such as MIS managers will also be providers of regulated financial advice, and so should already be integrated into the new system, but their duties, obligations and compliance requirements therein will be ongoing.

Investor and customer decision-making

1. KiwiSaver

KiwiSaver features in a forward-looking manner within this section of the Report, posing a double-edged problem for KiwiSaver scheme managers.  On the one hand, the FMA expresses concern that many younger KiwiSavers (aged 26-35) are still invested in default, conservative and lower risk funds, and fewer of them made an active decision about their fund than during the previous year.  On the other hand, the Report also discusses the FMA’s research into increased switching behaviour by KiwiSaver members, particularly a surge in this form of active decision making during Covid-19-induced sharemarket panic.  Once again, it was the 26-35 age bracket that stood out, in this case for getting the switch itch.  Thus it seems that some KiwiSavers are either making too many active decisions or alternatively not enough of them.

The challenge laid down for KiwiSaver scheme managers in the Report is to improve communications with their scheme members, particularly with those whose active decision making behaviour relating to funds leaves something to be desired.

2. Advertising

Advertising is another form of communication.  An item of note is the “spotlight” on the FMA’s June 2021 A guide to talking about money online, which the Report states was issued “following concerns some social media influencers and bloggers may be straying into regulated financial advice” (ibid. p. 21).  One notable tip conveyed in the online guide to the social media influencer and blogger community concerns advertising:

Influencers should approach paid, unpaid or gifted partnerships for financial services and products with caution.  Think carefully before promoting a financial product or service. There are rules and guidelines around advertising financial products and services, so work closely with the person or company paying you to ensure your content meets all legal requirements. 

(Online guide)

Whilst this topic might not leap off the page as of immediate concern to debt issuers and MIS managers, it does in fact dovetail in with the FMA’s updated Guidance note: Advertising offers of financial products under the FMC Act, issued in October 2021, should it happen that social media influencers and bloggers – whether or not they tripwire regulated financial advice concerns - are involved in advertising of financial products.  The Guidance is stated to apply as follows:

This guidance focuses on the application of the fair dealing provisions in Part 2 of the FMC Act to communications made for the purposes of advertising or promoting offers of financial products (advertising). This guidance note uses the term “financial products” to mean any of these products:

  • a debt security
  • an equity security
  • a managed investment product
  • a derivative.

This guidance also covers the application of the specific advertising provisions in Part 3 of the FMC Act for regulated offers of financial products.

(Guidance, p. 4)

The new Guidance quite expressly refers to advertising financial products within the context of “social media and professional networking sites, including associated mobile phone applications and posts made by social media influencers” (ibid.). 

Issuers of financial products that are promoted via social media and operatives therein will have vested interest in ensuring that they are not thereby implicated in violations of the FMC Act.

Trust and confidence in capital markets

Financial product advertising is discussed once more in this Report section, but within the context of integrated financial products (“IFP”).  In another “spotlight” the FMA reminds Report readers about its December 2020 guidance note Disclosure framework for integrated financial products that was published for the benefit of issuers of financial products that incorporate non-financial factors (“NFF”).  NFF can include the likes of natural, social and human capital interests for investors that go beyond straight-out financial return considerations. The potential problem with IFP is that their disclosures and advertising concerning NFF descriptions, features and benefits may create issues under the FMC Act, potentially triggering Part 2 fair dealing and Part 8 stop orders breaches.

The FMA is obviously taking IFP seriously as part of the financial marketplace to keep future watch on.  The Report quotes Sarah Vrede, FMA Director of Capital Markets:

“[T]he FMA’s support for the transition to an integrated financial system is aligned directly to its strategic priorities, in particular promoting trust and confidence in capital markets and supporting better investor and customer decision-making.

“Demand for integrated financial products is continuing to grow, and we want investors to have confidence that these products will deliver what they claim.”

(Report, p. 23)

Plainly the Disclosure framework for integrated financial products also sits alongside the Guidance note: Advertising offers of financial products under the FMC Act as required reading for investment product issuers who are of a mind to head off down the IFP track.


“The FMA’s Annual Report is an early year milestone for New Zealand’s financial markets and the regulator’s tenth anniversary issue for the 2020-21 financial year to 30 June is no exception,” said Matthew Band, General Manager of Corporate Trustee Services at Trustees Executors.

“Of necessity with a set of audited annual financial statements, there will be a majority of contents that have a rear vision mirror tendency.”

“Licensed Supervisors, debt issuers, MIS managers and KiwiSaver scheme managers should be looking out for Report items that are more akin to possums staring at headlights bearing down upon them”

“The Report refers to a number of forward-looking matters yet to be implemented, including annual value-for-money reviews of managed fund fees that will start in 2022, CoFI, and climate-related financial disclosures.”

“There are, however, also matters covered that already apply and need close attention paid to, such as good communications by KiwiSaver scheme managers with scheme members, the new financial advice regime, and FMC Act requirements concerning disclosures and advertising for financial products and services that readily encompass innovations such as social media promotions and the integrated financial system.”

“Licensed Supervisors will find the Report germane to their monitoring and oversight activities across 2022.”

“Debt issuers, MIS managers and KiwiSaver scheme managers should be considering their compliance priorities in light of what the Report is signalling as prospective issues for the year ahead.”

“For all financial markets participants there is the FMA’s overarching expectation for total and consistent adherence to good conduct to live up to.”

For comment or more information, or to be added to the free email subscriber list of “The Supervisor”, please contact Matt at [email protected].

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