A relative newcomer within the worldwide establishment of government bodies overseeing financial services companies, the New Zealand Financial Service Providers’ Register (New Zealand FSP) was established in the latter part of 2010, when it began accepting applications for registration. This opened up great possibilities for unregulated OTC brokers, as well as new start-ups with an interest in the Asia/Pacific (APAC) region to accrue customer confidence in a respected territory without the bureaucracy and timescale usually associated with applying for regulation within other Western countries.
New Zealand repealed its entire Banking Act in 1995 thereby facilitating free entry in to the business of banking and financial product provision. There are several laws regulating a financial business, but New Zealand is unique in the sense that a borderless international banking business or financial service provider can be established without capital requirements, qualification requirements or excessive supervisory requirements. Financial service providers offering services to non residents also operate outside the geographical scope of the Non-Bank Deposit Taker (NBDT) regulations as defined in the Reserve Bank of New Zealand Act 1989. The NBDT regime only applies to financial services providers offering financial services to the public in New Zealand. However, this still meant that until now it has been perfectly legal to be registered with the New Zealand FSP, and yet have no base in New Zealand itself – the law states that as long as products and services were offered to New Zealanders, that was sufficient. Although it is now compulsory for all companies offering financial products and services in New Zealand to be registered as a New Zealand Financial Service Provider, is worthy of note that the New Zealand FSP is purely a register of corporations offering financial services, and that the actual body responsible for regulating the financial sector within New Zealand is the FMA, whose requirements can be viewed on their site http://www.fma.govt.nz/.
New Zealand provides forex brokers many advantages: It is a country with a very good reputation for business ethic, it is also away from the troubled Eurozone, and it is in a perfect location for many companies in the APAC region who wish to gain the credibility of obtaining financial regulation. To become regulated, brokers must apply to the FMA, which is the official regulator of financial services companies in New Zealand. In doing so, forex companies are able to bolster the confidence of their investors and traders in the respect that New Zealand is considered very much part of the safe “new world” and has not suffered the economic turmoil and endless list of bank and financial institutions being prosecuted for misconduct that has turned traders away from European institutions, while also making use of the relative ease of becoming regulated.
Such circumstance has led to many brokers being able to register themselves as a financial services provider with the New Zealand FSP without actually being required to have a physical office in New Zealand. With so many Far Eastern brokerages finding this an attractive proposition, the New Zealand FSP has now implemented a new set of provisions requiring their applicants to comply with the following:
1) New Zealand FSP Registered companies must have a physical office in New Zealand.
2) Within the office, a Compliance Director must be employed.
3) All client record keeping, KYC and AML procedure must be handled from an office in New Zealand. This facilitates on-site compliance inspections.
4) The company must be a registered corporation and comply with the business law within the jurisdiction of New Zealand.
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The implementation of this will take place over the course of 2013, whereby initially the New Zealand FSP will issue a notice to all institutions and brokers will have to either establish an office in New Zealand, or face having their regulation terminated. Virtual offices will also fall under scrutiny and will not meet the forthcoming requirements. This requirement has already been stated on their website for new entities wishing to register.
It has been a popular business model in the region over recent months to establish a virtual office in New Zealand, become registered and then offer an ECN system with raw spread to a South East Asian client base. There are substantial benefits in this model. One significant advantage is that traders in South East Asia are continually looking for regulated companies who provide a raw spread, which matches their indicators therefore suiting the method in which their EA operates. EAs are a tool of choice in this region, especially in China and Japan, where automated trading accounts for over 30% of all transactions .To be able to provide this and make a successful foray into such a market, a broker needs to show its clients that the price feed on their platform matches the bank prices. Once the South East Asian traders see this, they will be very keen to sign up as a Master IB or local representative and bring long term, high volume business. A virtual office grants such a client exactly what they need in this respect.
Blackwell Global Forex, as an example, is registered as a financial services provider with the New Zealand FSP as well as CySEC in Cyprus, and the Financial Services Authority in Britain. They have a series of quality introducing brokers and local representatives based in China, who attract very good business from within China and the Asia Pacific region. The remainder of their business is channeled through the European entities and is subject to FSA or CySEC regulation.
Such clients are discerning and often the very first question they will ask an introducing broker or local representative is with regard to regulation. New Zealand, along with Australia (ASIC) are well respected in the APAC region. What Blackwell did was register themselves in as a financial services provider in New Zealand and developed a network of APAC local representatives concentrating on this region alone. They then channeled their European business through their CySEC and FSA regulated entities. This future-proofed their mode of operation in the APAC region as New Zealand’s authorities have now prohibited the promotion of business from Europe and North America (with the exception of Canada). A compliance inspection in future will involve a data check to ensure that a financial services provider registered with the New Zealand FSP is not advertising its services to clients in the United States of America or Europe.
This regionalizing of the requirement will potentially result in two outcomes; either New Zealand will become the Cyprus of the southern hemisphere, home to many head offices offering OTC products to the domestic market and APAC region, or it will alienate the larger players who will seek to license themselves within Australia’s better known ASIC regulation and consider that sufficient to attract enough APAC business, while looking to CySEC, FSA and NFA for other important territories.