New Zealand issues enforcement report – FX regulation goes from non-existent to fully aligned in one year

New Zealand was, not so long ago, regarded as a region in which FX firms could establish themselves very easily, without so much as a physical presence within the Antipodean nation, in order to tap into the Asia Pacific market with very few constraints or regulatory parameters.

Until just over a year ago, a plethora of FX companies, many of which were very small entities, were registered as a New Zealand Financial Services Provider, with their names on a register held by the New Zealand government, in a nation devoid of any regulatory requirements but well positioned in close proximity to a willing Asian potential client base and home to an English-speaking population.

As firms in Australia became recognized for well organized business ethics, as well as the subject of stringent regulation from the Australian Securities and Investments Commission (ASIC), New Zealand began to gain the somewhat unflattering reputation as home to second rate FX companies. Those days, however, are long gone.

Since the establishment of the New Zealand Financial Markets Authority (FMA), New Zealand has embarked on a campaign of aligning itself with regions such as Australia and other regions in the Asia Pacific region such as Hong Kong and Singapore, under the steerage of the FMA’s first CEO, Sean Hughes.

Mr. Hughes departed from his position last year, however he can be accredited with having taken tremendous steps to transform the the entire landscape of electronic trading industry in New Zealand.

As a nation without a developed financial markets economy, unlike neighboring Australia whose stock market was founded on the exchange of commodities such as mineral resources,

New Zealand’s newly established FMA quickly realized that firms were predominantly selecting New Zealand as a suitable place to establish their businesses due to its scant regulatory requirements and close relationship with China, Malaysia and Singapore, especially when bearing in mind ASIC’s high capital adequacy requirements and leverage restrictions.

For this reason, one of the first courses of action which the FMA took was to unregister several hundred companies which were registered on the Financial Services Provider list without having compliance facilities and a physical presence in New Zealand. Many of these were Chinese entities with dubious intentions.

Faced with the challenge of being recognized among other more established regulatory authorities, the FMA has taken a step toward making its activities publicly available in the form of periodical enforcement reports, in a similar form to that taken by ASIC.

Last week, the FMA released its Enforcement Report for the period between January 1, 2014 and June 30, 2014, along with commentary focusing on the FMA’s focus in terms of industry sectors which it considers areas to concentrate on.

One such example is that the FMA has maintained a focus on secondary markets issues and have investigated reports of suspicious trading, as received from the frontline regulator, NZX, or from other sources. In the course of this work the regulator has initiated the first market manipulation case.

More interestingly, the FMA detailed the case surrounding its commitment to perimeter issues, including forex operators and offers outside New Zealand, as well as the FMA’s action against Phoenix Forex.

Due to the FMA having continued to received complaints regarding the promotion and sale of margin for foreign exchange products, the regulator issued a public warning on its site against Phoenix
Forex Limited, in order to ensure that investors were aware of the concerns that the regulator had regarding the company’s product and sales approach. Phoenix Forex Limited provided access to a foreign exchange trading system, under which an investor opens an account with a third-party broker and an algorithmic trading software is used to carry out the investor’s trades. Following inquiry, the FMA considered that Phoenix Forex Limited had claimed the level of returns made by its trading system were between 50% and 65% per annum, which it could not substantiate.

Additionally, the FMA was satisfied that Phoenix Forex misrepresented the profitability of, and risks associated with, its trading system and did not disclose that investments of this nature carry a high risk of loss of some or all of an investor’s capital, and that such losses can often exceed the amount of the original investment.

Phoenix Forex is now in liquidation, and whilst the regulator did not issue draconian sanctions against the firm as would perhaps be commonplace in nations with established financial markets economies such as Britain or the United States, it is a clear move in this direction.

The FMA advocates the settlement of cases prior to court cases, a method which has become commonplace in Britain, as well the acceptance of voluntary responses by market participants to rectify breaches, similar to ASIC’s enforceable undertakings.

For the full report, click here.

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