Yesterday, the Government released a cabinet paper agreeing to two proposals to improve market governance for the New Zealand Emissions Trading Scheme (NZ ETS). One of these proposals will impact the regulatory approach to trading New Zealand Units (NZUs), as we discuss below.
The Ministry for the Environment (MfE) announcement and the cabinet paper can be found here and here.
Our previous update on the MfE consultation in November 2022 is available here.
Who should read this? Why?
Participants in the NZ ETS, particularly those who trade or advise on the trade of NZUs, should be aware of the proposals.
The proposals follow the MfE’s consultation in late 2022 in relation to the development of a governance framework for the NZ ETS, which many NZ ETS participants will have contributed to.
Currently the NZU marketplace is not regulated like other secondary markets under the existing financial services law regime. Although the proposals will not have as greater regulatory consequences as once proposed during the consultation stage, they still have relevance for participants.
What does it cover?
The Government has agreed to the following proposals to improve market governance of the NZ ETS:
- Enabling the Financial Markets Authority (FMA) through the fair dealing provisions in Part 2 of the Financial Markets Conduct Act 2013 (FMCA), to respond to risks relating to advice, trading and misconduct in the marketplace for NZUs.
- Allowing the Environmental Protection Authority to collect information about trades made by participants. This includes the price, the transactor’s primary reason for holding an account, and whether trades are happening between non-related accounts.
The Government has also directed officials to begin a Request for Proposal process, to procure a centrally cleared, optional-to-use exchange and associated market infrastructure for the secondary market.
Our view
It makes sense to have the FMA’s regulatory oversight of the NZU market – as stated in the cabinet paper, proposal 1 allows the FMA “to use its extensive regulatory toolkit in response to misconduct relating to NZUs” and “build capability in NZU markets”.
In effect, proposal 1 shifts the regulation of misleading and deceptive behaviour in relation to the trading of NZUs from the Commerce Commission (ComCom) to the FMA.
Part 2 of the FMCA prohibits misleading or deceptive conduct, false or misleading representations, unsubstantiated representations and offers of financial products in course of unsolicited meetings. Currently, any unfair dealing behaviour related to NZU trading is covered by the comparable provisions in the Fair Trading Act 1986 (FTA) and enforced by the ComCom.
This raises the question as to how the FMA will apply Part 2 of the FMCA in relation to offering, trading and advising on NZUs – essentially, what does fair dealing look like in the NZU marketplace?
In 2022, the FMA undertook a thematic review of wholesale offers of financial products and provided guidance that applies to the advertising of wholesale offers (regulated by Part 2 of the FMCA).
The following points raised by the FMA in that context would also apply to dealings in NZUs:
- when using mainstream advertising channels, take extra care to ensure the audience is not misled;
- ensure any qualifications to headline representations are proximate, prominent, and effective so that the representation does not mislead or deceive, especially where promotional materials are advertised through mainstream channels;
- not undertake any advertising practice that could lead an investor to draw comparisons between dissimilar financial products, especially if influencing potential investors to do so appears to be the intention of the practice.
In addition, Part 2 of the FMCA will cover, in the words of climate change minister James Shaw, insider trading and market manipulation “to the extent it involves using false or misleading representations to induce a transaction”. The FMA has previously said in a guidance note (available here) that there are similar anti-manipulation provisions under Part 2 of the FMCA in relation to products that are not listed on any licensed market.
We also recommend reading the FMA’s guidance note on advertising offers of financial products under the FMCA, available here.
While proposal 1 recognises NZUs as financial products for this limited purpose, bringing greater alignment with overseas jurisdictions, it does not go as far as direct regulation of the NZU market in terms of insider trading, market manipulation or licensing requirements.
Finally, we also wait to see how the proposed new optional-to-use exchange will integrate or compete with existing structures, systems and markets used for over-the-counter trading in NZUs currently.
What next?
The proposals will likely come into force in 2025. Until then, the NZ ETS and trade of NZUs will continue to be regulated by the ComCom under the FTA fair dealing provisions.
If you have any questions about the proposals, or about governance of the NZ ETS generally, please contact one of our experts.
This article was co-authored by Hannah Cross, a Law Clerk in our Banking and Financial Services team.
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