Financial Conduct Reforms May Impact Mergers and Civil Liberties

Highlights:

• FMA Approval for Changes in Control: New proposal requires financial firms to obtain FMA approval before changing control, potentially complicating business sales and M&A processes.
• Warrantless Inspection Powers: Proposed warrantless on-site inspection powers for the FMA raise concerns about civil liberties and the necessity of such intrusive measures.
• Potential Industry-Wide Impact: Despite being framed as niche, the reforms could significantly affect the broader financial market, prompting feedback from major industry groups like Boutique Investment Group.

New Regulatory Proposals

The government’s recent consultation on financial services conduct regulation, largely overlooked, contains significant proposals that could affect the entire market, according to Simon Haines, Chair of Boutique Investment Group (BIG). One key proposal mandates Financial Markets Authority (FMA) approval for changes in control of licensed firms. Another introduces warrantless on-site inspection powers for the FMA.

Implications for Financial Advisers and Civil Liberties

Haines highlighted the potential impact on financial advisers, who would need FMA permission to sell their businesses. He also raised concerns about the FMA’s proposed warrantless entry powers, which could erode civil liberties and are unnecessary from an enforcement perspective. “This power would be quite intrusive and could set a concerning precedent,” Haines stated.

Consultation Details

The Ministry of Business, Innovation and Employment (MBIE) sought feedback on changes to the Financial Markets Conduct Act and the Financial Markets (Conduct of Financial Institutions) Amendment (CoFI) Act 2022. BIG’s submission, focused on the second part, addressed issues like consolidating market services licences and the need for FMA approval for changes of control.

Setting a Precedent

Haines criticized the consultation’s presentation, suggesting it misled non-COFI or CCFA businesses into thinking it was irrelevant to them. He argued that the warrantless entry power, though rarely needed, would erode public welfare. “There should be a balance between business freedom and the ability to investigate,” Haines said.

Impact on Mergers and Acquisitions

The proposed FMA control over changes would complicate mergers and acquisitions (M&A). BIG’s submission described this as “sand in the gears” of M&A processes, adding unnecessary cost and complexity. “Imagine the backlog if everyone needs FMA permission to sell their businesses,” Haines pointed out.

FMA’s Existing Powers

Haines suggested the consultation should have evaluated if current FMA powers are excessive, particularly the authority to demand information from employees without informing their employers. He emphasized the need to maintain a balance between business freedom and investigative powers, warning against setting a precedent that could extend to other sectors.

Feedback and Future Steps

While the consultation period has closed, Haines believes there’s still scope for feedback. Any changes would require new legislation, providing further opportunities for stakeholders to raise concerns.

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