Welcome to our fourth issue of Tirohanga: Financial Services Quarterly Outlook.
Globally, financial markets have faced a tough time since March. With the Russian invasion of Ukraine placing great strain on global oil and gas supplies, inflationary pressures caused by rising fuel prices have spurred central banks around the world to hike interest rates. In turn, these rate hikes have shaken global equity markets around the world, sending many into ‘bear’ territory for the first time since the Global Financial Crisis at the end of 2008 (aside from the short COVID-19 reaction that the markets experienced in March – April of 2020). For instance, as of the date of publication, the S&P/NZX 50 has declined 15.28% since the start of the year. The negative market sentiment is also reflected in general business performance, with many reporting a dip in revenue.
However, a contrasting theme is also fast emerging in the financial services space. Sustainability, and the importance of taking environmental, social and governance (ESG) factors into account when making business and investment decisions, is pushing its way to the forefront. In New Zealand, the introduction of mandatory climate-related financial disclosures is fast approaching, and businesses subject to the regime are starting to prepare now. Sustainable finance has also become a very hot topic, attracting the interest of many financial institutions and market participants.
In this issue, we explore the potential impact of these developments on the financial services sector, highlight other issues we see as coming to the fore in the industry, and recap some of the things we have been involved in over the past three months.
We also highlight another of one of our exceptional alumnae, Andrew Suggate, who was recently appointed as Executive Manager – Strategy & Execution in the Corporate & Institutional Banking Team at Bank of New Zealand, having previously been their Head of Legal – Partnership
We hope you enjoy this issue of Tirohanga, and if you have any suggestions or topics you would like us to cover or would like to join the mailing list for our regular short updates, please contact us. If you missed them, take a look back at our first, second and third issues.
Trends: What themes we see in the next three months
In many ways the trends we see in the next three months are a continuation, and in some areas an intensification, of the main themes we identified in our last issue. There are, however, new changes which we see as likely to spur on new trends.
Continued market volatility and the impact of rising interest rates
With no end in sight to the Russian invasion of Ukraine, the corresponding impact on oil and gas prices and the subsequent inflationary pressures created are likely to continue in the near future. Central banks around the world have already signalled that further interest rate hikes are very likely. Therefore, it seems likely that global equity markets around the world will continue to face pressures.
Greater focus on sustainability
With the External Reporting Board (XRB) set to release the exposure draft of the entire climate-related financial disclosures framework, the importance of sustainability will only continue to increase. We anticipate that there will be a greater focus on how financial institutions consider ESG factors when making business or investment decisions, and therefore these entities should familiarise themselves with these issues if they haven’t already yet. We also anticipate that regulators in this area will become more active in their policing of ‘greenwashing’ and may act against those whose conduct in respect of ESG matters does not reflect their advertising.
We anticipate that the current M&A surge in relation to financial services businesses will continue in New Zealand. With global equity markets likely to remain volatile, overseas investors are likely to seek the stability and predictability of return of good New Zealand financial services businesses.
What we've been up to
Over the second quarter of 2022, we’ve been busy helping our clients on some interesting and ground-breaking projects and hosting exciting and insightful seminars. Obviously much of our work remains confidential, but we have highlighted some examples which are now public (we can only include transactions which have been announced, or which the client has consented to us referencing). These include:
MinterEllisonRuddWatts Presentations on the Central Bank Digital Currency and sanctions
In early May, Jeremy Muir (Partner) delivered a session to clients looking into the Reserve Bank’s (RBNZ) proposal to introduce a Central Bank Digital Currency (CBDC).
In the session, Jeremy explained what a CBDC is, what cryptocurrencies and stablecoins are, what the RBNZ is proposing to do with the introduction of a CBDC, and what is happening internationally in this space.
In September 2021, the RBNZ published a consultation on the ‘Future of Money’, which included questions relating to how the RBNZ should assess whether to offer central bank money in a digital form alongside cash. In the RBNZ’s view, the declining use, acceptance and availability of cash in New Zealand, and emerging innovations in private money, namely stablecoins, make this an opportune time to consider broadening central bank money to include a widely available digital form; a CBDC.
The consultation period closed in December 2021, and the RBNZ has published a summary of submissions received.
In mid-June, Sarah Salmond (Partner) delivered a session to clients looking into the topic of sanctions.
In the session, Sarah explained how sanctions work, the Russia sanctions regime (both in New Zealand and around the world), and the compliance issues these sanctions pose for banks and financial institutions.
Sarah and Lloyd Kavanagh (Partner) have been working closely together on the impact of the Russia Sanctions Act 2022 and the Russia Sanctions Regulations 2022 on financial institutions. The nature of the restrictions imposed by them are broad. In particular, the specific references to shares and securities in the asset-dealing restriction are highly relevant to banks and fund managers. The RBNZ, Financial Markets Authority and the Department of Internal Affairs, being the AML/CFT supervisors, have also released joint guidance on the Regulations – which have particular obligations for reporting entities, and participants in the financial services sector need to be aware of their expectations as they move forward.
Participation in Consensus 2022
In June, Jeremy attended the Consensus Blockchain conference in Austin, Texas. Together with Associate Amanda Khoo from MinterEllison in Australia, it was an opportunity to talk up our trans-Tasman cryptocurrency, blockchain and digital assets practice to the world.
While the global media was full of stories of collapsing asset prices and issues with algorithmic stablecoins, 20,000 international delegates listened to speakers ranging from US senators, to Kimball Musk, to (Facebook whistle-blower) Frances Haugen, to Big Boi.
The overall impression was that while there are some leaner times ahead for the crypto industry in the short term (tracking in some respects the wider markets, particularly in the tech sector), the good businesses continue to build and thrive. For those with long memories (in crypto years at least), this feels a little like 2018.
And, yes, Austin is a fun city with some fine BBQ and live music (the Continental Club recommended).
MinterEllisonRuddWatts Banking and Financial Services Harbourside drinks
In June, we hosted our annual Banking and Financial Services Harbourside drinks. While this is normally scheduled to occur in February each year, New Zealand being at Red on the Traffic Light Framework meant that we had to delay the occasion. Despite the cold weather in June, the annual event proved as popular as ever, with a great turnout, giving people a chance to catch up with clients and old friends face-to-face.
Wave of Financial Services M&A continuing
The team, especially Lloyd, Alistair Robertson (Special Counsel) and Maria Collett-Bevan (Senior Associate), are continuing to work on a wave of M&A transactions in the financial services sector. These deals are not yet public – but we hope to be able to share more details with you in the next edition of Tirohanga in October. The common theme seems to be international investors, particularly from Asia, being attracted by strong, predictable yield and a stable economic and political environment, at a time when the rest of the world is in turmoil.
Generate new retail funds
We acted for Generate Investment Management Limited in setting up new retail funds for both its KiwiSaver and Unit Trust Scheme. This involved redrafting their disclosure documents to reflect their new product offering. A member of the Financial Services Team was seconded to Generate in support of this workstream.
Debut crypto investment platform
We act for a fintech start-up, Debut, which has a goal to help people save and grow their money using decentralised finance technology. They have developed an application which assists users to invest money into one of three options (each option based on different targeted annual growth rates and minimum deposits), and earn yield from coins and tokens held by Debut for the user. For more information, see their website.
GD1 crypto fund
Jeremy and Bryan Ventura (Senior Associate) are currently assisting GD1 with the establishment of a New Zealand venture capital fund which plans to invest in traditional venture capital, as well as digital assets and blockchain based investment opportunities. We hope to see more venture capital investment pour into digital assets and blockchain based investments.
Dimensional Fund Advisors retail fund
Our financial services, tax, sanctions and privacy teams assisted Dimensional Fund Advisors with the establishment of its first retail fund in New Zealand. Managed by Implemented Investment Solutions, the retail fund will invest in overseas funds managed by Dimensional Fund Advisors. As part of this project, we advised Dimensional on its New Zealand regulatory obligations.
We are currently acting for Futureverse on the development of its own digital token which, once created, will be used in an open metaverse environment and power a number of Web3 businesses. In particular, Jeremy and Bryan advised Futureverse on how this token might be regulated under New Zealand financial services regulation. Projects such as this are indicative of the growing opportunities in the Web3 space.
Climate-Related Disclosure: XRB to release formal Exposure Draft of NZ CS 1 on 28 July 2022
New Zealand’s climate-related disclosures regime was enacted into law in October last year. The main provisions are in new Part 7A of the FMCA and will require mandatory climate-related disclosures for NZX listed entities with a market capitalisation of more than $60 million; and large financial institutions, i.e., licensed insurers, registered banks, credit unions, building societies, and managers of regulated investment schemes with more than $1 billion in assets. These climate-reporting entities (CREs) will be required to prepare and lodge climate statements in accordance with climate standards to be issued by the XRB. The requirements are expected to apply to CREs’ accounting periods beginning on or after 1 January 2023, so time is short.
The XRB has been consulting on the climate standards over the last 12 months and expects to release a formal exposure draft of the full climate standards by 28 July 2022, with the aim of issuing them formally in December 2022.
For more information about the XRB’s role in developing the climate standards, please click here.
Target date for Class 1 and 2 FAP Licence applications
Applications for Class 1 and 2 Financial Advice Provider Licences, which cover sole advisers and authorised bodies who engage financial advisers respectively, should be filed by the FMA’s target application date of Friday, 30 September.
This will be of significance to anyone that currently holds a FAP Transitional Licence, or anyone who is expecting to give financial advice in the future, and is looking to apply for a Class 1 or 2 FAP Full Licence. The FMA has been clear, that in contrast to the granting of the Transitional Licences, Full Licence applications are likely to receive more scrutiny. So FAP Licence holders who have not started their preparations already, would be well advised to start now.
For more information about the process for obtaining a FAP Licence, please click here.
If you would like to know more about obtaining a Full FAP Licence or would like assistance in doing so, please contact one of our experts.
Sustainable Finance is a hot topic that everyone is talking about. Please join Allison Hancock (Senior Associate) for an insightful seminar on Sustainable Finance on Monday, 8 August from 1-2pm. We will break down what Sustainable Finance actually means, cover some of the more recent developments, and look forward as to what might be coming next.
If you would like to receive an invitation to any of our seminars, please contact Milly Jeffries: [email protected].
Release of the AML/CFT Statutory Review Report expected in Q3 of 2022
On 30 June 2022, the Ministry of Justice (MoJ) presented to the Minister of Justice its report on the Statutory Review of the Anti-Money and Countering Financing of Terrorism Act 2009 (AML/CFT Act). The Minister is required under the AML/CFT Act to present a copy of the report to Parliament as soon as practicable after receiving it and decide whether changes to the regime are appropriate.
The review started in Q4 of 2021 and promised to involve a root and branch reassessment of a key regime which has had a major impact across the financial services sector since it came into force in 2013. This followed the release by the Financial Action Task Force (FATF) of their Mutual Evaluation of New Zealand in April 2021, which noted that some improvements to the New Zealand AML/CFT regime were necessary to bring them up to the high FATF standards.
Our own Lloyd Kavanagh is a member of the MoJ’s Industry Advisory Group. MinterEllisonRuddWatts filed a submission which made key recommendations as to how New Zealand’s AML/CFT regime could be made more fit for purpose. Our submission is available here.
For more information about the statutory review process, please click here.
If you would like to know more about the statutory review of the AML/CFT Act and how it may affect your business, please contact Lloyd Kavanagh or one of our other experts.
Next steps for the CoFI Act
The Financial Markets (Conduct of Institutions) Amendment Bill has been enacted into law (CoFI Act), having received Royal Assent on 29 June 2022. The FMA will now work with financial institutions to ensure they are prepared for the new regime, and licensing applications are expected to open in mid-2023.
The CoFI Act is intended to cover registered banks, licensed insurers, and licensed non-bank deposit takers, and to apply broadly to relevant services and associated products provided by those specified financial institutions (including financial businesses and intermediaries who deal with them). At its heart, the concept is to introduce conduct licensing by the FMA in relation to retail banking (deposit taking and lending) and insurance.
If you would like to know more about the CoFI Act and what it potentially means for your organisation, please contact one of our experts.
Likely introduction of the Deposit Takers Bill in Q3 of 2022
The Deposit Takers Bill is expected to be introduced into Parliament in July/August 2022, and come into force as law after receiving Royal Assent in mid-to late 2023. After the Act comes into force, there will be a transition period to allow both the Reserve Bank and regulated entities time to adapt to the new regime.
The Deposit Takers Bill, which plans to make some of the most profound changes to banking regulation in a generation, creating a new regime for the prudential regulation of all deposit takers. The Bill will repeal the Banking (Prudential Supervision) Act 1989 (the new name for the prudential supervision related parts of the Reserve Bank of New Zealand Act 1989) and the Non-bank Deposit Takers Act 2013. The Bill also makes changes to the ‘regulatory perimeter’ and may capture entities that provide call accounts for wholesale investors. It allows the RBNZ to declare certain persons to be deposit takers within the scope of the regime. There is also an ability to impose standards related to lending by non-deposit taking lenders.
If you would like to know more about the Deposit Takers Bill and what it means for your business, please contact Alistair Robertson or one of our other experts.
Alumni Spotlight – Andrew Suggate
In this issue of Tirohanga: Financial Services Quarterly Outlook, we shine a light on our alum Andrew Suggate.
Andrew is an experienced financial services professional with a background working in regulatory, governance and legal roles in stock exchanges, banks and private practice.
Andrew was a Senior Associate in the Banking and Financial Services Team between January 2014 and June 2019. In June 2019, he joined Bank of New Zealand as a Senior Corporate Lawyer in the Banking, Products and Markets, and in October 2020 he became Head of Legal – Partnership Banking. In May 2022, looking for a move that would bring him closer to the bank’s commercial decisions, Andrew moved to the role of Executive Manager – Strategy & Execution, in the Corporate & Institutional Banking Team.
Andrew lives in Auckland with his wife Rachel and their three young children. When he gets a break from wrangling his kids, Andrew enjoys football, golf, running, reading and getting out into nature.
In case you missed it
We are continually publishing financial services updates on industry developments that we think our clients might be interested in. If you’ve missed some of our updates, below is a list of what we’ve published in the last quarter.
- Reserve Bank strengthening enforcement
- FMA censures CTRL Investments for breaching client suitability and outsourcing requirements
- High Court upholds Reserve Bank’s approach to money remitters
- Du Val fails in High Court appeal
- Release of SOP to CoFi
- CoFI Bill passes third reading
- Retail Payment System Bill receives royal assent
- Financial Advertising Code effective for all ads from 1 June 2022
- Reserve Bank presents summary of responses to the Future of Money consultation
This issue was co-authored by Scott Yang, a Solicitor in our Financial Services team.
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