NZ Financial Services Bulletin

This Bulletin highlights the many recent developments in the New Zealand financial services industry that may impact you.

Contents

• Kiwi Saver
• Taxation of investment income
• Proposed tax changes for general and limited partnerships
• Financial intermediaries
• Review of financial products and providers
• Business law reform Bill
• Securities Legislation Bill
• Trans-Tasman mutual recognition of securities
• Anti-money laundering
• Securities lending
• International financial reporting standards

As the default provider RFP date of 7th July 2006 has now closed, interest is now focussing on the selection process. Default providers are now awaiting selection of the shortlist which, under the published timetable, should be released by the end of July. The current timetable plans for the shortlisted candidates presenting in early August.

Following the presentations, due diligence, consultation and negotiation will occur. The successful candidates will be announced in October following the passing of the Bill. It has not been an easy task for the aspiring default providers, with key features of the KiwiSaver Bill and its design still uncertain. The Select Committee is due to report back on the Bill on 1 September 2006. By early September the design should be clearer as we will see the results of the Select Committee process.

In the meantime extensive work is being undertaken by providers, trustees of superannuation schemes and employers in deciding how they are going to best deal with their obligations under the KiwiSaver Bill. How well these parties cope with such obligations will depend greatly on what preparation they undertake and how well informed they are. If you require assistance in this area please contact us.

The Inland Revenue Department has recently convened an industry forum in each of Wellington and Auckland to clarify its role in providing the IT systems development and key interfaces required to deliver KiwiSaver from 1 April 2007, and to engage on KiwiSaver implementation matters. We will continue to keep you advised of further developments in this area.

The 7th of July saw a record number of 2,000 submissions lodged on the closing date for the May 2006 Tax Bill.

Phillips Fox’s submission especially focused on the implied trust provisions – the last page of the Bill. We were concerned that the trustees of superannuation schemes and group investment funds, as well as managers and trustees of unit trusts, need greater protection, clarification and certainty. We were particularly concerned about section 9 of the Superannuation Schemes Act.

The key changes in the Bill relate to:

• The taxation of collective investment vehicles.

• The taxation of foreign portfolio investments.

The second of these proposed changes has generated much comment and interest over recent months.

The Government recently released a discussion paper that proposes codifying the tax rules on general partnerships and introducing new rules on limited partnerships. The new limited partnership business vehicle, a preferred structure internationally for investment of venture capital, will replace the current special partnership structure. The changes are intended to create tax rules, particularly for limited partnerships, that will encourage venture capital investment in New Zealand by removing tax and regulatory barriers.

As the new rules will apply across a range of business activities and investment, the Government’s intention is to clarify and improve the tax rules for partnerships. For limited partnerships, the introduction of new rules will give this type of entity a separate legal personality, allowing partners to limit their liability to the amount of their investment while retaining partnership ‘flow-through’ treatment for tax purposes. The due date for submissions on the discussion paper is 11 August 2006. The Government intends to include the new rules in a tax bill in 2007 with application from the 2008/2009 income year.

The discussion document is available electronically at
www.taxpolicy.ird.govt.nz. Alternatively, please contact us and we can provide you with a copy.

The Ministry of Economic Development has released a discussion document regarding the Government’s review of the regulation of financial intermediaries. This follows Cabinet’s ‘in-principle’ approval to the introduction of a coregulatory framework under which ‘approved professional bodies’, the Securities Commission and Minister of Economic Development will work together to regulate financial intermediaries. The co-regulatory framework will be set down in legislation.

The discussion document outlines possible options and details of the coregulatory model, with government proposals, and seeks comment on the content of the proposed legislation including:

• The application of the legislation, in particular by reference to:

• the definitions of ‘financial intermediary’, ‘financial advice’ and ‘financial product’.

• the different classes of financial intermediaries and how these different classifications will work in practice.

• Legislative conduct standards for financial intermediaries.

• Disclosure obligations on financial intermediaries.

• The proposed co-regulatory model.

Submissions on the issues raised in the discussion document close on 1 September 2006.

Submissions to the discussion document will contribute to the preparation of a Cabinet paper in late 2006. The Cabinet paper will seek approval for the content of the financial intermediary legislation, proposed to be introduced in the first half of 2007 with implementing legislation proposed to be passed in 2007/2008.

The discussion document is available electronically at
http://www.med.govt.nz."

Interested in making a submission?

We are currently working through the discussion document in detail. We encourage you to call us to discuss any impact the proposed regulations may have on your business and about making a submission.

The objective of the Review of Financial Products and Providers (RFPP) is currently underway. The RFPP covers:

• Superannuation schemes.

• Insurance (health, life and general).

• Offerings of securities and collective investment schemes (unit trusts, group managed funds, participatory securities, contributory mortgages).

• Non-bank financial institutions (friendly societies, credit unions, building societies, industrial and provident societies, finance companies).

The purpose of the RFPP is to develop an effective and consistent framework for the regulation of non-bank financial institutions, financial intermediaries and financial products with a view to promoting confidence and participation in financial markets by investors and institutions. Another goal of the RFPP is to have a sound and efficient non-bank financial sector.

The RFPP is currently in phase two – the development of options for reform. Phase three will involve the release of a ‘consultation paper’ on the draft options for reform for wide public consultation. This document is due to be released during August 2006. Consultation meetings will then be held across New Zealand to discuss the paper as well as seek feedback and submissions. In phase four, using feedback obtained in consultation with the public, officials will develop policy proposals in conjunction with advisory groups with a view to sending proposals to Cabinet in November/December 2006, and with legislation planned for passage in 2008.

As noted, there will be a public consultation phase involved in phase three of the RFPP. We encourage you to call us to discuss any impact the options for reform may have on your business and about making a submission.

Further information about the RFPP is available at www.med.govt.nz.

The Business Law Reform Bill 2006 was tabled in Parliament at the end of June. The Bill is an omnibus Bill which aims to amend various business law statutes in an aim to make the law affecting the operation of business clear, efficient and effective. Included in the Bill are proposed amendments to the Companies Act 1993 and Financial Reporting Act 1993.

The amendments proposed to the Companies Act are to:

• Make it easier for reporting entities to report to shareholders, including providing annual reports in electronic form and/or providing concise reports (as detailed in regulations).

• Improve the efficiency and effectiveness of cross boarder enforcement of company law in particular in respect of persons disqualified from managing, promoting or being a director in overseas jurisdictions.

• Remove filing requirements with the same or similar information as filed in another jurisdiction.

• Give effect to some of the changes referred to in relation to the Financial Reporting Act.

The changes proposed to the Financial Reporting Act aim to improve the application, efficiency and effectiveness of the financial reporting system. The Bill aims to achieve this by:

• Removing unneeded or excessive preparation, audit and filing requirements (in particular the filing requirements of overseas companies).

• Establishing an exemption system to provide flexibility to exempt entities from unnecessary requirements.

• Widen the class of entities that will have reporting requirements under the Act.

• Strengthening enforcement provisions of the Act.

A helpful guide to the Bill can be found in the Parliamentary Library’s Bills Digest at
www.clerk.parliament.govt.nz/Content/BillsDigest/1396BusinessLaw.pdf

The Securities Legislation Bill (Bill) was introduced to Parliament in November 2004. Previous updates have commented on its detail.

In summary, when passed, the Bill will:

• Make significant changes to insider trading laws – applicable to ‘information insiders’ who have material information about issuers which is not generally available to the market and who know or ought to know it is both material and not generally available.

• Introduce new market manipulation laws – aimed at preventing practices which create a false impression of securities trading or price movement or the dissemination of false market information.

• Amend substantial security holder disclosure requirements – largely by restating current law.

• Introduce new laws for investment advisors and brokers – and repeal the existing Investment Advisors (Disclosure) Act, and enhance disclosure obligations.

• Amend the takeovers regime.

The Bill will also increase the enforcement powers of the Securities Commission to make various orders including prohibition and corrective orders, disclosure orders, and temporary banning orders for advisors or brokers; and for the High Court to injunct, order pecuniary penalties, or order compensation or civil remedies.

Timing for enactment of the Bill has been delayed while a Supplementary Order Paper (SOP) is introduced, intended to address ongoing concerns with the Bill including:

• Protecting professional advisors acting in a professional capacity (in relation to insider trading).

• Permitting some exemptions from disclosure (in relation to investment advisors).

We will update you once the SOP has been issued.

It is now expected that the new laws will not be passed before the end of July. The Ministry of Economic Development (MED) will also draft regulations under the new laws which will govern many of the obligations being introduced, the detail of which will be critical to the financial services industry. Phillips Fox 0

Regulations will cover the detail of:

• Investment advisor and broker disclosure.

• Substantial security holder disclosure.

• Exemptions to market manipulation and insider trading laws.

Responses to MED’s initial discussion paper on the regulations were received in April. It is expected that draft regulations will be available in September. Phillips Fox will inform you of the detail of these regulations upon their release. Copies of the Bill and the initial discussion paper are available at www.med.govt.nz.

The Australian and New Zealand governments signed a treaty in February that forms the basis of a regime to allow the mutual recognition of securities offerings. The regime will allow an issuer offering securities or managed investment scheme interests to the public to extend an offer that is being lawfully made in one country (the home jurisdiction) to investors in the other country (the host jurisdiction) using the same offer documents and offer structure (with some limited additional requirements).

The aim is to reduce red-tape and costs for issuers and allow for increased trans-Tasman investment and choice for investors. Currently, New Zealand and Australian issuers cannot use their home jurisdiction offer documents when making a trans-Tasman securities offer as they have to comply with the relevant fundraising requirements in both countries (unless operating under an exemption).

The regime could come into force later this year once the necessary details are implemented through each country’s legislation or regulations. We will keep you informed about further developments in this area.

In June, the associate Minister of Justice released a second discussion document on anti-money laundering and countering terrorism financing.

The document forms part of a series of discussion documents on proposed reforms to ensure New Zealand complies with the Financial Action Task Force’s (FATF) international standards for combating money laundering and terrorist financing.

The initial discussion document released in August 2005 sought feedback on potential reforms to the Financial Transactions Act 1996. The submissions received by the Ministry of Justice (Ministry) have been used to develop preliminary proposals for reform.

The current discussion document outlines those preliminary proposals and seeks comment from affected industry. The Ministry intends releasing a third discussion document later in 2006. That document will cover regulatory oversight, supervision and enforcement of the proposed regulatory regime.

The second discussion document responds to the key concerns raised in submissions on the first discussion document. It also sets out key FATF recommendations relevant to the proposed reform of New Zealand’s existing anti-money laundering and terrorist financing legislation, and:

• Identifies compliance gaps between current legislation and FATF Recommendations.

• Summarises stakeholder views on the recommendations from the first discussion document.

• Summaries the FATF Working Group response to those stakeholder view.

• Suggests measures to effect compliance.

The discussion document is available electronically at www.justice.govt.nz. Alternatively, please contact us and we can provide you with a copy. Submissions on the second discussion document close on 31 July 2006. We encourage you to call us to discuss any impact the proposed regulations may have on your business and about making a submission.

Securities lending

The Taxation (Depreciation, Payment Dates Alignment, FBT, and Miscellaneous Provisions) Act 2006 has amended the tax rules in respect of securities lending. These rules apply to security lending arrangements entered into on or after 1 July 2006.

Traditionally share lending transactions were taxed as a sale of shares rather than as a loan, meaning that entering into a securities lending transaction was a taxable event. The new rules tax ‘qualifying’ share lending transactions on the basis of economic substance rather than legal form. This means the ‘lender’ of the shares is treated as never disposing of the shares for the duration of the transaction, despite that the ‘borrower’ is in fact the legal owner during that time.

These changes will bring New Zealand in line with international treatment of securities lending transactions and potentially assist in the development of a securities lending market in New Zealand making long/short investments a more attractive strategy for New Zealand investors and fund managers.

The countdown to the implementation of New Zealand Equivalents to International Financial Reporting Standards (NZ IFRS) is nearly over. The effective date for adoption of NZ IFRS by reporting entities (for those that haven’t already adopted) commences for reporting periods beginning on or after 1 January 2007. This will be of concern to many reporting entities due to unresolved issues that arise out of some of the standards in NZ IFRS.

IAS 32 could possibly have a very significant effect on many entities. This standard dictates that when determining whether a financial instrument is a financial liability or an equity instrument actual substance overrides legal form. This can lead to the reclassification of equity as debt on implementation of NZ IFRS. Under current International Financial Reporting Standards, if the issuer cannot refuse demands by share and unit holders to redeem their holdings, then the instruments are classified as liabilities.

Where entities’ shareholdings are made up of redeemable shares (for example co-operatives, superannuation schemes, and unit trusts), these entities could have little or no equity under these new standards. This accounting standard could also have an effect on limited life entities, including partnerships where, as an example, there is a provision in the partnership agreement requiring liquidation of the partnership on exit or death of a partner.

The New Zealand Institute of Chartered Accountants have released a discussion paper on a proposal to treat such interests as equity, provided specified criteria are met. The International Accounting Standards Board has released an exposure draft containing this proposal, however it is unlikely that this will be considered by them until the late 1st quarter or early 2nd quarter of 2007. Also, it is not guaranteed that the exposure draft will be adopted. If the exposure draft is not adopted in time, certain entities, will need to take other measures in order to comply with their financial reporting obligations. For unit trusts and superannuation schemes this may entail trust deed amendments which would allow financial liabilities to unitholders/members to be classified as equity for financial reporting purposes.

This publication is intended as a first point of reference and should not be relied on as a substitute for professional advice. Specialist legal advice should always be sought in relation to any particular circumstances and no liability will be accepted for any losses incurred by those relying solely on this publication.