New Zealand FMA Gains Regulatory Powers. AML Procedure Becomes Effective June 30

New Zealand’s financial regulator, the Financial Markets Authority (FMA) will have increased responsibility in its role as a regulatory supervisor as of June 30, 2013.

The regulator will begin to monitor the compliance of the firms it oversees with the Anti-Money Laundering and Countering Financing of Terrorism Act 2009 (AML/CFT Act), including assessment of the adequacy and effectiveness of reporting entities’ systems and controls, to detect and deter money laundering and terrorist financing, and to take action where these fall below the expected standard.

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Alignment With Other Western Regulators

New Zealand has over recent times become a very attractive region in which to establish an FX company due to its proximity to the Asia-Pacific region, including Japan, home to the world’s largest FX trading volumes, and other fast growing markets such as Singapore, Hong Kong and China. By establishing in New Zealand, other attractive factors have included very relaxed, almost non-existent regulatory structure and the combination of western business culture and availability of in-language support staff to service a Far-Eastern client base.

Previously, all that was required to establish a brokerage in New Zealand was straight-forward registration as a New Zealand Financial Services Provider (FSP), which although provided legitimacy via governmental recognition, was not an actual regulatory body per se.

This led to a number of virtual offices being established in New Zealand and registering as FSPs, when in fact they were overseas companies with no local affinity at all. In February this year, new rulings from the New Zealand FSP stipulated that in order to be registered, a physical office would be required in New Zealand, with its operational staff and compliance department based on site. A letter was sent to all FSPs and those which did not comply with this were unregistered.

With Australia’s regulator ASIC demonstrating its commitment to strengthening the rules recently, first contemplating increased capital adequacy requirements for FX firms, and then being the first FX regulator to adopt First Derivatives’ Delta Stream system which conducts deep surveillance with relation to the operational activities of firms, resulting so far in two enforceable undertakings being entered into in April.

The same month, ASIC produced draft regulation for trade reporting obligations, as well as carrying out an investigation which resulted in a firm being wound up by the regulator for making high pressure sales calls and defrauding clients.

As Australia has become a heavily regulated environment, New Zealand is now following suit. There is however a difference between the two jurisdictions insofar as New Zealand is predominantly a springboard to the Asia-Pacific region, as it has very few FX traders of its own.

New Zealand has now caught up and FX firms, along with all other financial services businesses must be not only registered as an FSP, but will also be regulated and have their compliance activities overseen by the FMA.

Organic Surveillance and Monitoring

Rather than going down the route of using surveillance systems, FMA’s intelligence and risk-based approach to monitoring and surveillance of firms’ activities enables the regulator to prioritize resources to those areas with the greatest risks of money laundering and financing of terrorism and identify new and emerging risks.

In considering risk, the FMA will make use of market intelligence and research to identify potential problems, assess the likelihood that poor practice or non-compliance may be occurring, and consider the impact on New Zealand’s reputation and the public’s confidence in the domestic financial systems.

The money laundering and terrorist financing environment is not static. Criminals adapt by adopting new methods of money laundering and terrorist financing, for example by utilizing new technologies. To assist FMA in targeting its monitoring approach, all relevant information provided by international counterparts, including typology reports issued by AUSTRAC and the Asia Pacific Group (APG) and statements from the Financial Action Task Force (FATF) will be taken into account.

In future, New Zealand will also be subject to mutual evaluations undertaken by FATF and the APG. These evaluations will consider the legal framework in place to detect and deter money laundering and terrorist financing, and the effectiveness of these regimes, including how monitoring is conducted.

Bearing in mind that the attractiveness of operating in New Zealand was mainly as a result of its low entry barriers, ease of establishment and proximity to the Far East, with the regulator stepping up its game, and the requirements of such regulations becoming similar to those elsewhere, it will be of interest to see if the country remains a favorable jurisdiction, or whether brokers become more inclined toward establishing in Hong Kong or Singapore instead.