Longer arm of the law

By Lloyd Kavanagh

Securities law change will put directors' responsibilities under the microscope, writes Lloyd Kavanagh

It is now clear that the FMCB is approaching its final form. Photo / Getty Images
It is now clear that the FMCB is approaching its final form. Photo / Getty Images

With the game-changing Financial Markets Conduct Bill (FMCB) expected to come into effect during 2014, directors of public issuers need to be aware of the significant changes that will increase their responsibilities and potential liability.

Not only will these changes affect directors, but they will also reshape the financial services industry's competitive environment. Directors who leave a response until then do so at their peril.

There are two main work streams directors need to address now in order to be prepared for these "once in a generation" changes:

1. Review the strategic impact of the FMCB upon your business

2. Ensure that management is ready to implement the necessary changes

Once in a generation change

The FMCB has been a while in the making. It is the culmination of a reform effort started in 2008 by the Capital Markets Development Taskforce (CMDTF).

The CMDTF aimed to improve investor confidence and participation in New Zealand's capital markets. These were lofty but important goals, which government and the financial sector needed time to work through.

It is now clear that the FMCB is approaching its final form. With a few alterations proposed last week, the Commerce Minister Craig Foss announced that a line needs to be drawn and the bill enacted. The latest changes, introduced in a lengthy supplementary order paper, are significant.

Some appear to respond to the Ross Asset Management collapse, others to detailed submissions made to the select committee.

The essence of the bill is that directors of companies that issue financial products or provide advisory services should expect to make significant changes to the way that they and their competitors do business.

This is not just an issue of the detail of internal management processes, but will also involve consideration of the strategic impact of profound regulatory change - designed to change the playing field for all involved.

This should not be a surprise, given that the reforms were announced in 2011 by the then Minister Simon Power as being a "once in a generation" change with the intention of repealing or replacing the Securities Act, Securities Markets Act, Unit Trusts Act, Superannuation Schemes Act and a number of other acts. But the journey has been so long, and the focus so much upon the detail, that it has been easy to lose sight of the beast as a whole.

The effect of this new legislation may be to create winners and losers among financial services businesses.

More detail to come

The industry is still awaiting important parts of the detail of the regime in the form of regulations which will determine, for example:

• What the new Product Disclosure Statement (PDS) will look like and how approval processes will change. One major shift makes the "clear, concise and effective" standard recommended under the Financial Markets Authority Disclosure Guidance mandatory.

• What the new Securities Register will contain and how it will function to supplement the disclosure in the PDS - and how directors will be required to confirm that the register contains all material information.

• How the new governance requirements for managed investment schemes will work and the flow on effect to existing trust deeds.

• What shape the licensing processes for fund managers will take, and what requirements will be imposed on directors of those entities.

• What impact the stringent requirements for DIMS will have and how will that tilt the playing field for or against them in their competition with managed investment schemes for investors.

Public consultation on the bill closed on March 1 and the Ministry of Business, Innovation and Employment is expected to release the Exposure Draft of the Regulations in the third quarter of this year.

Directors' Liabilities

For directors, an area of even greater personal interest will be the changes to the liability regime. These differ significantly from the existing securities law framework. The regulations seek to incentivise directors to embrace their responsibilities and restore investor confidence while not chilling legitimate risk taking which is vital for commercial success. Features of the regime include:

• A graduated scale of sanctions from infringement notices, to civil penalties, to criminal sanctions (including up to 10 years prison - increased from up to five years in the Securities Act, and a fine of up to $1 million per offence for an individual).

• Strict civil penalty liability (i.e. no guilty intention required) for directors of issuers that breach core offer document disclosure requirements - with a defence for directors who prove they made all reasonable inquiries and believed on reasonable grounds that the disclosure requirements had been satisfied.

• Criminal penalties for directors who have knowledge or are reckless in relation to a contravention.

With such major change coming, directors of public issuers should anticipate investing significant time and resources over the next 12 months to prepare both themselves and their organisations for the new regime. As recent high-profile cases have shown, this is not simply a matter that can be left to internal and external lawyers.

Lloyd Kavanagh is a partner at Minter Ellison Rudd Watts, specialising in financial services and securities law.

- NZ Herald

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