New Zealand’s Financial Market Authority (FMA), has announced the launch of Phase One in its initiation of new regulations in the country. Changes in the country’s financial regulation have been scheduled to take place for a number of months with an initial timeline published last September. The new guidelines are expected to lead to sweeping changes in the retail forex industry due to New Zealand becoming a home of many brokers due to an accommodating process for foreign firms to become registered in the country.
While the FMA provides guidelines for local financial firms doing business in the country, also existing was the ability for companies to register as foreign based Financial Service Providers (FSP). As opposed to local firms, foreign FSPs faced reduced requirements. As a result, many forex brokers registered their firms in the country, providing them with the appearance of regulatory licensing from a developed jurisdiction. However, as early as February of 2013, the FMA began to crack down on foreign firms, as it unregistered hundreds of providers who failed to meet minimum requirements, specifically in regards to the need for a local physical office and employed Compliance Director sitting in New Zealand.
With the new rules, FSPs, both foreign and local will fall under similar requirement guidelines, including compliance oversight and capital requirements. Ahead of the establishment of Phase One rules, an exodus of foreign based FSPs has already begun to take place. Among them, the first major broker to exit the country was Alpari RU, which created a new St. Vincent based entity in which existing clients were being migrated to in June 2013. According to the FMA, financial firms will have until December of this year to conform with requirements which are also being applied to foreign FSPs.
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Among the requirements for new FMA licensing applicants and existing registered firms:
- Minimum net tangible assets of the greater of $1,000,000 or 10% of average revenue
- Management team covering responsibilities including compliance, regulation, and risk management
- Appropriate standards for onboarding new clients
- Information on conflict of risk and dealing policies
- Standards for hedging internal risk and handling client margin levels
- Rules for segregation of client funds as well as proper record keeping of customer account information
Overall, rules are similar to standard requirements to receive licensing from financial regulators across the globe. In terms of specific rules, the minimum requirement of $1,000,000 is viewed as the most likely item to cause a strain on foreign FSPs that are registered in New Zealand. Among the attractiveness of registering in New Zealand for foreign firms has been the availability for smaller firms to become FSPs and launch their brokerage businesses with reduced capital requirements. Therefore, with these changes, it is expected that we will see many brokers that are currently FSP registered either adopt regulation from destinations known for being accommodative to off-shore businesses or become unregulated entities. Among possible destinations is Mauritius, which we have seen an increase of brokers turning to since 2012 for their licensing needs.
While many brokers are expected to exit from New Zealand due to the increased requirements, it could lead to an increase of firms seeking regulation in Malta and Cyprus. The two jurisdictions have benefitted from demand of foreign entities created brokerage businesses in their countries to take advantage of MiFID cross-border rules to market to the greater EU. Specifically Cyprus has gained a dominant place in the industry among Russian, Israeli, and Middle East entrepreneurs creating CySEC regulated forex and binary options brokerages. However, despite the advantages, being included in the EU comes with higher capital requirements, thus putting regulation beyond the means of smaller brokers. Due to the minimums, many brokers who would have preferred to be registered in Cyprus or Malta have landed in New Zealand instead. As a result, we may see larger foreign FSPs who have the means to comply with the $1,000,000 minimums elect to register in Cyprus or Malta where they will gain the additional benefit of being able to market (legally) to EU customers.