Submission to the Ministry of Economic Development. Review of Securities Law Discussion Paper June 2010

Transcription

1 Submission to the Ministry of Economic Development Review of Securities Law Discussion Paper June 2010 Kiwibank Limited 27 August

2 1 Introduction This submission has been prepared by Kiwibank Limited ( Kiwibank ) in response to the Review of Securities Law Discussion Paper issued by the Ministry of Economic Development (the Ministry ) for public consultation in June 2010 (the Discussion Paper ). 2 About Kiwibank 2.1 The Government, as the shareholder of New Zealand Post Limited ( NZ Post ), granted approval for the establishment of a publicly-funded bank in Kiwibank was subsequently established and opened for business in early Kiwibank s ultimate parent company is NZ Post. 2.2 Kiwibank was established as a New Zealand-owned bank, for New Zealanders. At that time, it was intended that Kiwibank: (a) (b) (c) would have lower fees; would benefit customers of other banks by keeping them honest, producing lower fees and interest rates at all banks; would have more branches than any other bank. 2.3 Today, Kiwibank has the largest branch network in the country, with around 300 branches nationwide situated at PostShops around New Zealand. Through a shared cost and host business model, Kiwibank has branches in places that would not otherwise be economically viable. Kiwibank has made local banking accessible to people in areas that would otherwise miss out. 2.4 NZ Post is the agent of Kiwibank. Kiwibank pays NZ Post a transaction fee for every transaction undertaken at a PostShop. Where a Kiwibank transaction is undertaken at a franchise, the franchisee is paid by NZ Post. Approximately 150 PostShops are franchises; the remainder are owned and operated by NZ Post. Customer money is not directed through separate NZ Post or franchise accounts, but is deposited directly with Kiwibank. Kiwibank guarantees and retains responsibility at all times for the transactions and services provided by NZ Post and its franchisees on behalf of Kiwibank. In addition, the payment obligations of Kiwibank are guaranteed by NZ Post. 2.5 Kiwibank provides a full range of domestic banking services (retail and business), KiwiSaver and international banking services and investment management services to institutional clients. Kiwibank also provides investment products through AMP Capital Investors, and life insurance through Kiwi Insurance Limited 2

3 and by way of contractual arrangements with CIGNA Life Insurance New Zealand Limited and TOWER Life respectively. 2.6 Kiwibank maintains a robust customer dispute resolution process for all disputes related to the Kiwibank brand irrespective of where they arise. Kiwibank is also a member of the Banking Ombudsman s Dispute Resolution Scheme which provides bank customers with an independent avenue of recourse should a dispute prove irresolvable through Kiwibank s internal dispute resolution process. 3 Exemptions Existing statutory exemptions that may be carried forward Chapter 1, Question 23: Which of the current section 5 full exemptions for land etc should be carried forward to the new Act? What are the costs and benefits of these exemptions? 3.1 We submit that the existing exemption in section 5(2C) of the Securities Act 1978 (the Securities Act ) (debt securities issued by registered banks) should be retained; and the existing exemption in section 5(2D) of the Securities Act (call debt securities) should be extended to include term debt securities issued by registered banks. (a) The existing exemption in section 5(2C) is warranted because, under the Reserve Bank of New Zealand Act 1989 (the Reserve Bank Act ), registered banks are already subject to extensive disclosure requirements, capital adequacy and liquidity requirements, and to supervision by the Reserve Bank. It would therefore be an unnecessary and unwarranted duplication for the Securities Act to also subject registered banks to prospectus, trust deed, and trustee requirements in respect of debt securities. (b) The existing exemption in section 5(2D) of the Securities Act is also warranted on the basis that call debt securities are extremely simple and well understood products, for which product disclosure via an investment statement is not required to inform investors. The exemption helps issuers of call debt securities keep costs down, and encourages concise, accessible product information. The exemption also promotes competition and innovation. (c) Kiwibank submits that registered bank term deposits are also simple well understood products that should not require product disclosure via an investment statement (or otherwise). We would emphasise that we believe the situation is different for banks and non-banks, because registered banks are subject to closer supervision and more stringent capital adequacy and 3

4 liquidity requirements under the Reserve Bank Act. That makes registered bank term deposits less complex than non-bank term deposits because investors know that certain minimum standards have been met by registered banks. (d) Kiwibank agrees with the Ministry that, in economic terms, the differences between a term deposit and a traditional call debt security issued by a registered bank are minor, with the main difference being that the term deposit will incur a break fee and potential foregone interest for early redemption. 1 However, again we would emphasise that in economic terms the differences are greater for non banks, because the risks are different. (e) The costs of preparing an investment statement for term deposits issued by a registered bank are significant and in our view not justified because the product is simple and well understood. An exemption for term debt securities issued by a registered bank would help save costs and streamline processes to encourage saving. Existing statutory exemptions that may be carried forward Chapter 1, Question 27: Should any other class exemptions be reflected in legislation (that are not otherwise incorporated into the proposals in this discussion paper)? What impacts would this have? 3.2 The Securities Act (Cash and Term Portfolio Investment Entities) Exemption Notice 2009 (the PIE Exemption Notice ) contains conditional exemptions in respect of call and term units issued by certain issuers in portfolio tax rate entities. The exemptions contained in the PIE Exemption Notice were granted because PIE funds offered by subsidiaries of registered banks are designed to provide investors with the key features of traditional call and term debt securities, but with the tax advantages associated with PIEs. The products are very similar in operation and the PIE Exemption Notice ensures they are treated similarly for certain regulatory purposes. 3.3 We submit that the exemptions for certain PIEs contained in the PIE Exemption Notice should be reflected in legislation. This would align well with other exemptions for registered banks, for example in relation to debt securities. 3.4 We also submit that the Ministry could use this opportunity to clarify the definition of PIE call fund units in the Exemption Notice to remove uncertainty. In our view, units in some cash PIEs issued by registered banks would probably not 1 Chapter 1, page 36, paragraph 83. 4

5 satisfy the definition of PIE call fund units in the Exemption Notice. This is because: (a) a PIE call fund is defined as a "specified PIE" which satisfies certain criteria. Some PIE call funds are not separate PIEs they are a single fund which forms part of a unit trust which is a single PIE. The unit trust as a whole may not satisfy the relevant criteria as it may include separate call and term funds. (b) One of the criteria for being a PIE call fund is that a security holder has a right to withdraw the "unit price of the units" in full at any time. This contemplates a "normal" unit trust in which investors hold multiple units, of an equal value that applies to both new investments and exits (a "unit price"). This isn t always the case with a cash PIE. In some cash PIEs each unit can be redeemed for an amount equal to its "unit value", which differs between units - it could be argued that the "unit value" for a unit is the "unit price" referred to in the definition, however it would be helpful if this uncertainty could be addressed. 3.5 We submit that the following amendments should be made to the definition of PIE call fund units in the Exemption Notice if the concept is to be incorporated into the new Securities Act. PIE call fund unit means a specified unit PIE in respect of which the unit holder, (a) under the terms of the offer of the specified units, a security holder has a right to withdraw the unit price or value of the any units in full at any time, subject only to the following rights and requirements to the extent that they are described in the investment statement for the PIE call fund units: (i) (ii) (iii) (iv) the right of the specified issuer to suspend withdrawals if the withdrawal would prejudice the interests of unit holders in the PIE call fund as a whole or would threaten the PIE call fund's eligibility as a portfolio tax rate entity as defined in section YA 1 of the Income Tax Act 2007: the right of the specified issuer to use some or all of the unit price or value to meet any amounts that are owing by the unit holder to the specified bank: the right of the specified issuer, on a demand for withdrawal of the unit price or value, to pay less than the unit price or value in full because of any default or impairment of debt securities of the specified bank in which the specified PIE invests: a requirement to maintain a minimum account balance: 5

6 (v) (vi) the right of the specified issuer to withhold payment if the consideration for the unit or units has not been received or cleared: a requirement to withdraw a minimum amount; and (b) is not liable to pay any fee or other amount is payable as a result of the unit price or value not having been held by the specified issuer for a particular period of time. 4 Point of sale disclosure proposals Product disclosure statement Chapter 3, Question 7: Do you agree that the Product Disclosure Statement concept, with prescribed documents for individual products, is sensible? 4.1 We agree with the Taskforce that product disclosure in its present form does not work well, and support in principle the Ministry s preferred option of one document, with additional disclosures available on a register. We do, however, need to understand the detail in order to understand whether sufficient information can be disclosed in a PDS. This could be difficult if the prescribed number of pages is small relative to the number of fund options or risk characteristics. Risk disclosure in the key information summary Chapter 3, Question 12: Do you have views on the three proposed options for risk disclosure and their application to different securities? 4.2 In our view, risk disclosure should be relevant, proportionate and succinct, with the aim of providing investors with sufficient information to enable them to make informed investment decisions. We support the Ministry s aim of improving presentation of risk in the PDS, however we are unable to completely support any of the three options proposed for risk disclosure in respect of collective investment schemes ( CISs ). (a) Option A Self assessment and summary: We are concerned that a requirement to identify the top three to five risks would require issuers to summarise risk to the point that it becomes meaningless. In practice, we would expect any such summary to rely heavily on cross-references to a fuller set of risks set out in the body of the PDS, which is not subject to size restrictions. We would also note difficulties associated with master trust and umbrella structures, with several funds established within one unit trust or superannuation scheme each fund may have different risk factors and its 6

7 own top three to five. It would be dangerous to place a word limit on summary risk disclosure in these circumstances. We are also concerned that the requirement to identify the top three to five risks reflects a basic misunderstanding of the nature of risk and has the potential to be either wrong or misleading. Low risk events do occur and high risk products may be the best investment for a particular customer in specific circumstances. In the light of the global financial crisis, anything is possible and as such the top three to five risks are only truly certain with the benefit of hindsight. Markets can act unpredictably and in unprecedented ways, and potential investors should understand the key risks of the investment, not just the top three to five. (b) Option B Risk ratings: A risk-meter by its nature reflects the issuer s assessment of risk, which may be very different to the assessment made by a potential investor taking into account their appetite for risk and personal circumstances. We are also concerned that potential investors could place too much reliance on a traffic light system, without considering and evaluating the risks outlined in the PDS in the light of their own personal circumstances. The dangers of providing an assessment of risk at a glance were demonstrated in a sense during the global financial crisis, where credit ratings were shown to be an inadequate measure of the strength of issuers and particular issues of securities. (c) Option C Third party assessment: In our view an independent expert s report would add unnecessary cost without commensurate benefit. As noted above, the inadequacies of third party assessments of risk were illustrated during the global financial crisis, and in practice can provide unjustified comfort for investors. In our view the issuer itself is best placed to understand the risks associated with the securities it issues, and is and should be liable accordingly if that risk is understated. 7

8 5 Ongoing disclosure Chapter 3, Question 28: Do you agree that collective investment schemes should be required to publish quarterly information? Should any schemes be exempted from the requirements? 5.1 Kiwibank agrees that some additional ongoing reporting for unlisted securities is necessary. 2 In our view, however, six-monthly or even annual reporting may be more appropriate for some CISs or where information is readily available on the internet. For example: (a) KiwiSaver is designed to help New Zealanders save for their retirement and should be regarded as a long-term investment. While we are happy to report quarterly, in our view the requirement should be to make this information publicly available, rather than to send it to investors. We would note the Cabinet Paper Creating a Financial Markets Authority and Enhancing KiwiSaver Governance and Reporting, 3 which states that quarterly reports would probably not be sent to investors, on the basis that [i]investors are likely to be satisfied with annual personalised statements, supplemented by the ability to access the public quarterly information, and a right to receive further personalised information on request. Given the investing timeframe for KiwiSaver and the lock-in feature of the product, we agree. (b) Call and term PIEs issued by registered banks are generally structured as unit trusts, and would be considered CISs under the new regime. These are simple products, with the key features of call and term debt securities but with the tax advantages associated with PIE securities. In our view formal quarterly reporting is not appropriate for these products given that, in substance, they are more akin to traditional bank accounts and term deposits than CISs. We refer to our comments at paragraphs 3.2 and 3.3 with regards to the operational similarities between these products. 2 Chapter 3, page 94, paragraph Available here: %20Cabinet%20paper%20on%20Financial%20Markets%20Authority%20and%20Kiwisaver%20Improvements.pdf. 8

9 6 Advertising Pre-prospectus publicity Chapter 3, Question 42: Do you agree that restrictions on the content of preprospectus advertising should be removed? If not, why not? 6.1 Kiwibank agrees that content restrictions on pre-prospectus publicity should be removed. We agree with the Taskforce that these restrictions prevent issuers from fully testing the demand for their securities, and tailoring their offer to suit this demand. These restrictions can also prevent issuers from making an intelligent, natural response to market speculation, or providing a meaningful overflow for ad hoc enquiries in the form of a register your interest facility. In our view, there are sufficient measures available to the regulator in the form of the power to ban, and liability for untrue statements such that content restrictions are not required. 7 Insurance Chapter 1, Question 21: What are the costs and benefits of regulating insurance as a collective investment scheme where investment is a component of the product? 7.1 In our view, insurance contracts with an investment component can be split into two types: (a) Those where a material feature of the offer is the expectation of earning a positive return from the investment (referred to in this submission as investment-linked contracts, as defined at paragraph 7.7 below). These are policies that the customer would identify at point of sale as having an investment component, and which are purchased in the expectation of receiving an investment return. Such policies are intended to provide the customer with the benefits of investment management and risk diversification. (b) Those where the policyholder will not identify a return from the investment. The customer would identify the contract as pure risk, and would purchase the product in the expectation of transferring the risk of a future event to a third party. Such policies can have an investment component (of which the customer may be completely unaware) in that the insurer itself invests the premium received and investment returns are an integral part of meeting any claims on the policy for example, level premium term life insurance. In general insurance vehicle insurance premiums for example are invested until they are required to pay claims. 9

10 7.2 In our view the policies described at paragraph 7.1(b) above do not earn a return for the customer and should not be regulated by the Securities Act. The customer does not subscribe for such a product in order to obtain the benefits of investment management and risk diversification rather the investment component is designed to provide the insurer, rather than the customer, with the benefits of investment management. In this regard the customer s interests are more aligned with policyholders in insurance than investors in CISs. 7.3 We would note that the policies described at paragraph 7.1(a) will not fall into a regulatory vacuum if they are not covered by the Securities Act. Such policies will be firmly and appropriately regulated as pure risk in accordance with the regime established by the Insurance (Prudential Supervision) Bill. 7.4 The Ministry proposes that offering of insurance contracts would be defined and regulated under the Securities Act as CISs if investment is a material feature of the contract. 4 We submit that: (a) Regulating investment-linked contracts as CISs is generally inappropriate, primarily due to the regime established by the Insurance (Prudential Supervision) Bill. The key exceptions are some of the product specific disclosure requirements under the Securities Act, to the extent that there are no equivalent requirements in the Insurance (Prudential Supervision) Bill or other regulations. (b) Further, we submit that material feature of the contract is too broad a formulation because, as discussed above, it would capture more than just investment-linked contracts. 7.5 In the light of the regime set out in the Insurance (Prudential Supervision) Bill, the application of key elements of the proposed CIS regime to investment-linked contracts could lead to over-regulation, unnecessary duplication and cost that will ultimately be passed on to policyholders. For example: (a) The Insurance (Prudential Supervision) Bill establishes the Reserve Bank as the prudential regulator of licensed insurers. Its functions include prudential supervision and taking appropriate action in respect of licensed insurers that have failed, are failing, or are likely to fail to comply with the Insurance (Prudential Supervision) Bill or are otherwise in financial or other difficulties. The Reserve Bank will be given significant powers to set licence conditions, ban certain persons from participating in insurance business, make 4 Chapter 1, page 34, paragraph

11 applications for statutory management of insurers in financial distress, carry out investigations, and give directions to insurers and associated persons. If investment-linked contracts are CISs, they would also subject to the FMA as the regulator of CISs. We understand that the functions of the FMA will include facilitating financial markets, monitoring financial service providers and carrying out inquiries. We also expect that the FMA will have broad powers to issue guidance, obtain undertakings, prevent allotment, ban directors, recommend a company be placed under statutory management, give directions to trustees in certain circumstances, take enforcement action and bring proceedings for the benefit of investors. In our view, unless the boundaries are clearly defined, there is clear potential for functional overlap and conflicting roles between these two regulators leading to duplication and the potential for over-regulation. (b) The proposed CIS regime would require all CISs to have a supervisor licensed under the Securities Trustees and Statutory Supervisors Bill. In our view this is unnecessary in respect of investment-linked contracts issued by a licensed insurer subject to the prudential supervision of the Reserve Bank. The requirement for an additional CIS supervisor would impose an additional layer of supervision that is superfluous in this context. In the same way as the exemption in section 5(2C) of the Securities Act recognises that a trustee is superfluous in the case of debt securities issued by a registered bank subject to the prudential supervision of the Reserve Bank, so should the new regime recognise that a supervisor is superfluous in the case of an investment-linked contract issued by a licensed insurer subject to the prudential supervision of the Reserve Bank. Chapter 1, Question 22: Would a more tailored definition of investment be preferred for insurance products, and if so, what might this be, and what impacts would this have? 7.6 The definition of collective investment scheme itself suggests that it is an awkward fit for investment-linked insurance contracts. For example: (a) An investment-linked contract may have a lock in feature that does not allow the investor to withdraw their investment on demand (we note that products such as KiwiSaver and other superannuation schemes could also fail to qualify as CISs if this requirement forms part of the definition). (b) Some insurance policies may have investment management benefits which are not relevant to the customer are not material from their perspective. 11

12 7.7 In our view the preferred solution is a separate, more tailored definition of investment-linked contract to describe insurance with (or without) an investment component from the customer s perspective; together with specific product disclosure requirements for those products. We submit that this term should be defined by reference to a new definition of pure risk insurance policy as follows: Investment-linked contract means a contract of insurance that is not a pure risk insurance policy. Pure risk insurance policy means a contract of insurance for the payment of money on the happening of a contingent event or events that does not and never will have a value on its cancellation or surrender that is greater than the value of any unexpired premium relating to a period after the date of cancellation or surrender. 7.8 The effect of this would be to: (a) Include in the Securities Act disclosure regime, through the definition of investment-linked contract, policies that the customer would identify at point of sale as having an investment component, and which are purchased in the expectation of receiving an investment return see paragraph 7.1(a) above. These policies would be included regardless of whether they have a lock in feature or not. (b) Exclude from the Securities Act disclosure regime contracts where investment is only a material feature of the contract to the extent that the insurer relies on investing the premiums as part of a pure risk insurance policy. These are policies that the customer would identify at point of sale as pure risk, and which are purchased in the expectation of transferring the risk of a future event to a third party see paragraph 7.1(b) above. 7.9 We have used the term investment-linked contract in this submission to be consistent with the Financial Advisers Act We note, however, that for Securities Act (and Financial Advisers Act 2008) purposes this term should be distinct from investment-linked contract as it is defined in the Insurance (Prudential Supervision) Bill (i.e. there should be a different definition under the Securities Act, along the lines of what we suggest above, which in our view more accurately captures what is intended to be covered by the Securities Act). Chapter 4, Question 40: Do you see any practical problems with regulating insurance policies as if they were two separate contracts one for insurance and one for investment? 7.10 In our view, regulating investment-linked contracts as two separate contracts one for insurance and one for investment is generally inappropriate, except perhaps with regards to disclosure requirements. For the reasons set out at 12

13 paragraph 7.5 above, the proposed approach could result in over-regulation, unnecessary duplication and cost that will ultimately be passed on to policyholders We do, however, agree with the Ministry that investment-linked contracts should be subject to some of the disclosure requirements applicable to CISs. 5 A material feature of an investment-linked contract is the possibility of earning a positive financial return from the investment in our view it makes sense for such contracts to comply with certain disclosure obligations to ensure the customer has sufficient information to make an informed investment decision and information that is consistent with other investment product disclosure requirements The specific disclosure requirements applicable to investment-linked contracts should recognise that there are some disclosure requirements prescribed in the Insurance (Prudential Supervision) Bill, for example the requirement for some insurers to disclose their current financial strength rating. 6 We expect that the Reserve Bank may also prescribe disclosure obligations in respect of information relating to the financial condition or solvency of the insurer. 7 In this regard, a partial exemption for investment-linked contracts may be appropriate where information is disclosed elsewhere (i.e. along the lines of what is already in place for registered banks under section 5(2C) of the Securities Act). Chapter 4, Question 41: What are the likely costs and benefits of this proposal and any alternative that you consider preferable? 7.13 In our view the costs of issuing and regulating investment-linked contracts as two separate contracts would be excessive, and could act as a disincentive to the development of any future insurance policies with an investment component. (a) Issuers of investment-linked contracts would incur significant additional expense associated with engaging an independent supervisor, preparing constitutional documents that comply with the requirements for CISs, registering the policy as a CIS, and, potentially, engaging an external administrator and custodian. As noted above, these requirements are in our view unnecessary given the regime to be established by the Insurance (Prudential Supervision) Bill. 5 Chapter 4, page 152, paragraph Section 64 of the Insurance (Prudential Supervision) Bill. 7 Section 56(ea) of the Insurance (Prudential Supervision) Bill. 13

14 (b) The taxpayer would incur unnecessary cost given the functional overlap between the Reserve Bank and the FMA in relation to the regulation of investment-linked contracts. In our view these costs are not justified given the supervision of the Reserve Bank and the regime to be established by the Insurance (Prudential Supervision) Bill We would also note that the Government Statement on Regulation: Better Regulation, Less Regulation 8 states that the Government will require there to be a particularly strong case made for any regulatory proposals that are likely to impose additional costs on business during the current economic recession. We submit that this high threshold cannot be met in relation to the proposal to impose the CIS supervisory regime on investment-linked contracts of insurance subject to the supervision of the Reserve Bank In our view investment-linked contracts should be regulated as one contract, subject to the supervision of the Reserve Bank (and the regulatory requirements for insurance) and some of the disclosure requirements for CISs to be set out in the new Securities Act. 8 Access to securities registers Chapter 5, Question 8: What are the pros and cons of issuers being entitled to refuse access to securities registers? If so, on what grounds, and what process should be followed? 8.1 We do not think it is appropriate for an investor or third party to effectively have the right to a copy of a register kept under section 51(a) to (d) of the Securities Act if the information contained therein is to be used for an improper or frivolous purpose. (a) Many investors will be unaware that sensitive personal information such as the amount and due date of their security can be disclosed in this way. This arguably runs contrary to common law privacy principles and confidentiality. (b) Given the privacy issues involved, in our view the Ministry should not require evidence of a problem before considering restrictions on access. We submit that one problem, for example if a charity were to use the register for a direct marketing campaign to solicit donations, would be one too many. We should consider Australian-style improper purpose protections now, before any misuse of personal information occurs

15 (c) We have received a request in the past for access to a register of unitholders. In our view, the request was made to highlight a perceived gap in the law and the potential mischief associated with it. While an issuer does have the ability to impose a small charge per page, 9 in our case the exercise was a costly diversion of resources and management time. 8.2 We appreciate the need for investors to have access to the contact details of other investors in order to get sufficient support to reach the threshold to call a meeting. We do, however, query whether it is appropriate for access to extend to the amount or due date of the security, particularly where voting is conducted by way of a show of hands rather than number of securities held. In our view the name and address of the holder is sufficient to enable one investor to make contact with another, and preserves the investor s right to withhold additional information if desired. If you would like to discuss any aspect of this submission, please contact: Tracey Berry General Manager Wealth Kiwibank Limited tracey.berry@kiwibank.co.nz Emma Bassett Head of Advocacy Kiwibank Limited emma.bassett@kiwibank.co.nz David Chamberlain Head of Bancassurance Kiwibank Limited david.chamberlain@kiwibank.co.nz Peter Nielsen Manager Financial Adviser Regulation Kiwibank Limited peter.nielsen@kiwibank.co.nz 9 Securities (Fees) Regulations