In New Zealand’s quest for recognition as a region which can align its business environment with that of other Western jurisdictions is continuing, following the regulatory structure of the Antipodean nation’s transformation from a simple entry on a register to full regulatory structure within the space of a year and a half.
Today, the New Zealand Financial Markets Authority has issued a consultation paper with regard to how derivatives are issued to retail customers, showing that the national regulator is intent on ensuring customer wellbeing in a nation whose relatively undeveloped financial markets structure was proliferated with overseas firms with virtual offices and ambiguous product offerings.
In issuing a consultancy paper, the New Zealand Financial Markets Authority seeks to ascertain a method by which suitability of products for clients can be ascertained.
In November 2013 the Financial Markets Authority consulted on the minimum standards and conditions for derivatives issuers wishing to be licensed under the Financial Markets Conduct Act 2013 (the Act).
As part of that consultation we sought responses on a condition relating to the assessment of suitability of products for clients. Two options were provided, one being disclosure based and the other an assessment by the issuer.
Submitters noted this standard should focus on assessing suitability for retail investors. They noted the potential for overlap with other regulatory requirements and sought greater clarification on what the requirement would be.
The New Zealand Financial Markets Authority has reviewed this feedback and developed a draft suitability condition based on an assessment by the issuer. Because processes may need to be put in place by some issuers, the regulator proposes that this standard condition will come into effect on 1 December 2015.
This paper outlines the proposed suitability standard condition, and market participant are invited to review this and share feedback with the regulator.
If, based on the information received from the retail investor, market participants consider that a certain derivative product is not suitable for them, brokers and derivative issuers will be duty bound to warn the potential client that they do not think it is suitable for the client to enter into the derivative. The warning must note that, if they do enter into the derivative, they risk exposing themselves to risks that fall outside their knowledge and experience and that they may not have the knowledge or experience properly to assess and/or mitigate the effects of the derivative. The warning must be in writing and be prominently displayed in any other written information which a broker provides.
If the retail investor elects not to provide the information to enable a firm to assess suitability, or if they provide insufficient information, it is the broker’s responsibility to warn them that the broker is required to obtain information from them in order to assess whether the derivative is suitable for them.
The warning, which must be in writing and prominently displayed, must note that without such information there is a strong risk that the brokerage will not be able to assess whether they have the necessary knowledge and experience to understand the risks involved.
Consequently, market participants must strongly advise future investors to provide them with any requested information that is necessary to enable firms to assess suitability. If a retail investor asks a firm to go ahead with entering into a derivative, despite being given a warning, brokers may consider whether to do so having regard to all the circumstances.
The approach to the suitability assessment may be graduated according to the complexity of the derivative. For example, where a derivative is more straightforward (for example it has no contingent liability), the intensity of the suitability assessment may be less – unless the nature of the investor dictates otherwise.
Submissions on this standard condition close on Monday 29 September 2014, and can be made by visiting the New Zealand Financial Markets Authority website.