Revision - Core Flashcards
The liquidity of a market is affected by four factors
1 - width: the difference between the buy–sell spread prices
2 - depth: volume of buyers and sellers
3 - immediacy: how quickly trades can be done
4 -resiliency: how quickly prices respond to large order imbalance
(initiated by uninformed traders).
The three types of powers of attorney
1 - Ordinary power of attorney
2 - Enduring power of attorney for property
3 - Enduring power of attorney for personal care and welfare
The three types of powers of attorney
Enduring power of attorney for personal care and welfare
- Enduring power of attorney for personal care and welfare: this also provides the attorney with discretion regarding medical procedures, in particular the power to make a decision to remove medical treatment if deemed appropriate. It only comes into effect if the donor is unable to make decisions for themselves, that is, they have become incapacitated.
The three types of powers of attorney
Enduring power of attorney for property
Provides power to make financial decisions on behalf of the donor and continue to act beyond the incapacity of the donor.
The three types of powers of attorney
Ordinary power of attorney
Provides power only to act as long as the ‘donor’ (person issuing the power) has capacity. This type of power is limited and rarely used in New Zealand now
NEW ZEALAND TAXATION SYSTEM
The New Zealand taxation system is divided into three main taxation points
- personal taxes,
- company taxes and
- taxation on investment returns
NEW ZEALAND TAXATION SYSTEM
The New Zealand income taxation system is a ‘progressive’ tax system - meaning PAYE
it has a base rate of tax that increases as the individual’s income increases.
PAYE = Pay as you earn
NEW ZEALAND TAXATION SYSTEM
PAYE tax brackets
- 10.50%,
- 17.50%,
- 30%,
4.33% and
5.39%
NEW ZEALAND TAXATION SYSTEM
% of companies tax
Most companies in New Zealand pay taxes on their profits at a flat rate of 28%.
NEW ZEALAND TAXATION SYSTEM
Who pays withholding tax and on which income?
Withholding tax is paid by New Zealand residents on investment returns or on contract workers’ income.
The tax is withheld by the payer of the income and paid to the IRD.
NEW ZEALAND TAXATION SYSTEM
RWT - examples
‘Resident withholding tax
1. interest payments from a savings account or term deposit to an individual are taxed at a RWT rate that the recipient chooses, depending on their income. If you do not choose a rate, then the default rate of 33% applies.
2. dividends and unit trust distributions are all taxed at a RWT rate of 33%, while portfolio investment entities (PIEs) are taxed at different rates depending on the type of fund
3. interest payments are taxed at the non-declaration rate if you have not
given your IRD number to the interest payer — from 1 April 2020,
the non-declaration rate is 45%.
NEW ZEALAND TAXATION SYSTEM
interest payments from a savings account or term deposit to an individual
are taxed at a RWT rate that the recipient chooses, depending on their
income. If you do not choose a rate, then the default rate of 33% applies
NEW ZEALAND TAXATION SYSTEM
dividends and unit trust distributions tax
are all taxed at a RWT rate of 33%
NEW ZEALAND TAXATION SYSTEM
portfolio investment entities (PIEs) tax
(PIEs) are taxed at different rates depending on the type of fund.
A prescribed investor rate (PIR) is the tax rate applicable on income earned from a portfolio investment entity (PIE).
NEW ZEALAND TAXATION SYSTEM
What is it a portfolio investment entity (PIE)
A PIE is an entity that invests the contributions from its investors in different types of passive investments.
NEW ZEALAND TAXATION SYSTEM
prescribed investor rate (PIR)
is the tax rate applicable on income earned from a portfolio investment entity (PIE).
NEW ZEALAND TAXATION SYSTEM
Interest payments are taxed at the non-declaration rate
Interest payments are taxed at the non-declaration rate if you have not
given your IRD number to the interest payer — from 1 April 2020,
the non-declaration rate is 45%.
PROVISIONAL TAX
It is designated to help self-employed people manage their annual tax bill. It is a quarterly instalment payment if the annual tax is greater thab $5000
ACC EARNERS LEVY
It is payed by employees and self-employed to cover the cost of non-work accidents.
The amount paid is based on the income earned and charged at a rate set by the goverment.
business cycle 4 stages
- peak to contraction
- contraction to trough
- trough to expansion
- expansion to peak
business cycle
peak to contraction
X6
- growth peaks, then falls
- economic indicators reach a maximum level before declining
- industrial production falls
- capacity utilisation falls
- labour productivity declines (as production falls while employment lags)
- inflation peaks, then declines.
business cycle
Contraction to trough
- unemployment rises
- retail sales decline
- inflation falls
- balance of payments deficit falls (as imports decline)
- consumer sentiment decreases.
business cycle
Trough to expansion
X5
- inflation falls with a resulting increase in consumer real income
- interest rates fall
- housing activity starts to increase
- consumer sentiment improves
- consumer demand increases (e.g. car sales, consumer credit and retail sales).
business cycle
Expansion to peak
X6
- growth broadens to include manufacturing, resulting in an increase in industrial production and capacity utilisation (and higher costs for business)
- inflation bottoms and starts to increase
- production rises to peak
- the labour market is tight
- wage demands increase
- expectations that the ‘boom’ cannot last.
NATIONAL ACCOUNTS
NATIONAL ACCOUNTING
key elements
4
- Income: which sectors have received the income earned in production of goods and services, via wages, profits and taxes.
- Saving
- Assets - Production: what value/volume of goods has been produced
- Liabilities - expenditure: on what the income has been spent (consumption, investment or imports)
NATIONAL ACCOUNTS
NATIONAL ACCOUNTS
Concept
The NZ national accounts are a group of data that explains the progress of the economy in terms of:
1. household wealth
2. changes in goverment debts and assets
3. changes in goverment income and expenditure
4. industry production and expenditure
5. NZ GDP, which provides a “snapshot” of the performance of the economy.
NATIONAL ACCOUNTS
HOUSEHOLD SAVINGS RATIO
Is the proportion of household disposable income (income from all sources less income tax, other direct taxes, fees, fines, etc).
The household savings ratio had increased in New Zealand significantly since
COVID-19
NATIONAL ACCOUNTS
NATIONAL SAVINGS
It is an indicative of Nz’s ability to finance its own investrment.
National savings is composed of savings from both the private and public sectors.
NATIONAL ACCOUNTS
LIMITATIONS OF THE NATIONAL ACCOUNTS
- Lack of timeliness: there is a laf of 8 to 10 weeks between the end of a quarter and the publication of the national accounts for that quarter.
- Magnitude of revisions: these are often substantial, as intial estimates are based on preliminary and/or partial rather than complete and final surveys.
ECONOMIC FORECASTING
It plays a key role in the economic planninf process and on the investment asset allocation process.
It uses information about where the economy is now, how it got there and what occurred whenthe economy was in a similar situation in the past to predict what is expected to happen next. As the economy is constantky responding to unanticipated supply and demand shocks, forecasts typically cover only a period of a year or so.
ECONOMIC INDICATORS
Provide key information about the direction and health of the economy. they also provide guidance on the ourlook for the economic environment, both locally and internationally.
ECONOMIC INDICATORS
3 categories
**1. Partial indicators: **provide information on specific types of economic activity, such as retail trade, motor vehicle registrations, building approvals, employment and unemployment, and financial aggregates.
**2. Broad or comprehensive indicators: **provide an overview of aggregate aconomic activity, such as the national accounts (GDP and its components, suchga as consumption and investment spending), financial accounts (flow of funds) and the balance of payments (exports and imports)
**3. Forward-looking indicators: **attempt to provide some guide to future economic developments, either by surveying expectations or by relaying on pasr statistical relationships between certain indicators and subsequent behaviour of other aggregates.
FORWARD-LOOKING INDICATORS, which are the principal in NZ?
x5
- Employment and unemployment
- Sales
- GDP
- Short-term interest rates
- Consumer sentiment
Mortgage default rate
It’s the percentage of all outstanding loans that a lender has written off as unpaid after a prolonged period of missed payments.
It is an indicator of economic stress at homeowner level and can reflect rising unemployment and rising interest rates.
Widespread difficulty in meeting mortgage payments can precipitate or exacerbate financial inestability by causing borrowers to either default, sell their house or cut their compsumption sharply.
NZ is particularly vulnerable to a sharp rise in mortgage rates as the banking system funds a large portion of its mortgages credit from offshore wholesale markets. The cost of this funding can increase sharply if there is an unexpected increase in global interest rates or a change in investor risk appetite, and banks are likely to pass on the higher funding costs to customers through higher interest rates.
ECONOMICS AND INVESTMENT PLANNING
Key economic variables that will have an impact on the investment outcomes
7
- Monetary policy
- Fiscal policy
- Taxation
- Unemployment
- Interest rates
- Inflation
- Exchange rates
ECONOMICS AND INVESTMENT PLANNING
1 - MONETARY POLICY
It refers to the setting of money conditions to achieve a desired goal for price inflation. As such, it is concerned with the behaviour of the money suppply, interest rates and financial conditions generally and is an integral part of economic policy.
MONETARY POLICY
The RBNZ has a monetary policy mandate, published in 2020, and based on the dual purpose of:
- Low & stable inflation and full employment objectives
- Best contribution to economic wellbeing of NZers.
Controlling inflation preserves the value of money and encourages strong and sustainable growing in the economy over the longer term.
ECONOMICS AND INVESTMENT PLANNING
MONETARY POLICY
How it will affect investments?
The setting of short-term interest rates can potentially impact on all asset markets:
1. Equity market: higher interest rates will impact on those sectors more reliant on borrowing.
2. Fixed interest market: if short-term interest rates are increasing, the cost of issuing fixed interest securities will suffer.
3. Property sector: higher interest rates typically have a detrimental effect.
Central banks can slo have an influence on long-term interest rates through purchase programs (quatitative easing). Long-term rates are likely to have a much grater effect on asset markets.
MONETARY POLICY
RBNZ tools of monetary policy
X6
- OCR
- Large-scale Asset Purchase (LSAP) programme (also called quantitative easing or QE). Involves the RBNZ buying bonds from banks in exchange for electronically created money. This puches down interest rates on loans. This injects more money into the economy. In contrat, savers will experience lower returns.
- Funding for Lending Programme: allows eligible banks to borrow ar the OCR. This means they are less reliant on more expensive deposits and wholesale lending, which lowers their overall funding costs.
- Negative OCR: banks would have to pay interest on their deposits with the RBNZ. This reduce market interest rates.
- Foreing exchange intervention: by reducing the value of the NZ dollar, the RBNZ can stimulate the economy and increase inflation.
- Exchange settlement funds: to create more or less reduction of cash.
OCR (Official Cash Rate)
It is the main tool used by the RBNZ to implement its monetary policy. It is the interest rate that the RBNZ charges banks to borrow money. This, in turn, influences other interest rates, like mortgages, personal loans, commercial loans, and returns on savings and term deposits.
The goal is to promote price stability and support long-term growth by influencing the demand for money.
The higher the OCR, the more expensive it will be to borrow money, which helps to bring inflation down. Conversely, if the OCR is low, the RBNZ wants to boost spending and economic activity.
It helps measure a portfolio’s performance, as it is the return achieved by doing nothing with the funds but saving. It is the risk-free rate of return.
Components of an interest rate
x 4
- Real component: the compensation to the lender for deferring consumption.
- Inflation compensation: to compensate the lender for the expected loss of purchasing power over the term of the loan.
- Risk premium: compensates for the posibility that the borrower won’t be able to repay the loan, or that the currency might weaken.
- Monetary policy: reflecting the RBNZ decision about the difficulty or easiness of borrowing money.
ECONOMICS AND INVESTMENT PLANNING
2 - FISCAL POLICY
Use of the level and compostion of public sector spending, revenue raising and borrowing, to achieve certain macroeconomic objectives such as promoting full employment, containing inlationary pressures and achieving or manteininf balance of payments in equilibrium.
The annual budget outlines the governments revenue (ie collecting taxes) and spending (ie health, education). these activities influence the purchasing power of households and business which in turn impact the economy. ie if the gov increase taxes household have fewer surplus funds for spending leading to less demand for good and services and ultimately lower economic growth
ECONOMICS AND INVESTMENT PLANNING
FISCAL POLICY
How it will affect investments?
Fiscal policy is important indirectly, in that setting policy can have a bearing on the pace of economic growth, and potentially on the outlook for inflation.
- In equity markets: the main concer is the specific measures adopted, whether there are tax changes at either personal or company level, or new spending proposals.
- In the fixed interest marker: a factor for the price is the supply of securities, which is determined by the overall fiscal policy at both central and state levels.
- In the property markets: mainly concerned with taxation issues, although inflation can be important in the medium term.
ECONOMICS AND INVESTMENT PLANNING
3 - TAXATION
How it will affect investments?
Changes in taxation will impact on investment planning as will changes in an individual’s income due to the progressive nature of income tax in NZ.
Tax minimization, or the lire of tax rebates such as imputation credits, should not be the driving force of any wealth creation strategy.
ECONOMICS AND INVESTMENT PLANNING
4 - UNEMPLOYMENT
How it will affect investments?
Rising unemployment rates leads to stagnant income growth and a reduction in spending.
Property prices fall either through forced sales by mortgage holders or through lack of interest from buyers unwilling to make a significant financial commitment in times of uncertanty.
Companies sell less, even though their costs might be falling, and this impacts in profitability. It is difficult for a company to pay dividends when at the same time is laying off employees to remain in operation or profitable. This leads to falling expectations about future growth, which is the underlating driver of current share prices.
ECONOMICS AND INVESTMENT PLANNING
5 - INTEREST RATES
How it will affect investments?
The level of interest rates within an economy drives the cost of money within the economy. Chash rates are the “do nothing” option and become the benchmark from which all other investments returns within that economy are based.
High interest rates dampen consumption and entrepreneurial activities, sucha as property development.
Some changes might have little impact. However the trend of changes in interest rates and the forecast changes plays a big part in domestic economic confidence.
The change affects more to investing based on borrowed funds, that is, capital intensive investing or fund manager using a gearing strategy to leverage growth.
Rising interest rates reward savers.
Debt is tax deductible and directors determine wheter a dividen is paid to capital contributors. If there are insufficient proficts, they may choose to retain the dividends and withhold payment. Alternatively, they may choose to retain the dividends and use the funds for capital expansion.
ECONOMICS AND INVESTMENT PLANNING
6 - INFLATION
How it will affect investments?
Shares are considered a tool to hedge against inflation, as historically the rate of return of the share market has been greater than inflation.
Rising inflation can have a negative impact on the performance of both shares and bonds, as it will affect the real rate of return.
The price-to-earnings (PE) ratios of shares typically contract when inflation is high. It is particularly important for some investment valuation methods like the Discounted Cash Flow, where the discount rate is generally based on the cost of financing. If inflation is high and persistent over time, the cost of financing will also be high, and the cost of the investment will be higher than the projected return. Hence, investors might not buy shares or will wait for the price to come down.
Inflation generates a pessimistic view of the economy, leading companies to avoid expansion, hire new staff or pursuing more aggressive growth strategies, resulting generally in less growth. It is also an indicator of higher rates. This means that is more expensive for companies to operate and borrow money.
Higher inflation can positively affect some shares, such as those invested in commodities (like gold or oil).
Particularly with bonds, their price moves in the opposite direction to interest rates. In a context of high inflation, interest rates will go up, and bond prices will go down. For investors this results in the opportunity of buying bonds at a discount. If you buy a bond at a discount, the yield to maturity goes up.
ECONOMICS AND INVESTMENT PLANNING
7 - EXCHANGE RATES
How it will affect investments?
Changes in rates have a direct impact on the competitiviness of NZ’s goods and services compared to overseas equivalents, and an indirect impact on unemployment, inflation and the price of goods and services consumed by NZers.
A failling NZ dollar leads to more demand for exports as the foreing currency can buy more of the product ar a lower price. Imports cost more and can lead to increase prices and inflation.
High local interest rates attract international investors and speculators, therefore increasing the demand for NZ dollars and pushing the price up. But high interest rates increase the cost of production, which increases the prices and leads to inflation.
Types of financial products
X4
- Equity security
- Debt security
- Derivative
- Manged investment product
role of banks x5
1 - acts as a financial intermediary = efficent use of pooled resources
2 - facilitates the creation of money by expanding the supply of money through deposit and loan transactions
3 - creates financial products and services that benefit its customers
4 - develops mechanisms for transferring money and making payments
5 - contributes to the development of the economy
what is credit risk
the probability of loss due to a borrowers failure to make paymen of any debt
what is liquidity risk
- the risk that lenders will want their money back after it has been lent to a borrower
What is interest rate risk?
- the risk that movement in interes rates will have an adverse effect on the value of an investment
What is Market risk?
The risk of unexpected changes in the earnings and/or net worth of a financial institution
What is operational risk?
The risks financial institutions bear in carrying outtheir day-to-day business.
The sources of operational risk are many and varied and include internal processes, people’s actions, system failures or external events such as natural disasters.
DERIVATIVES MARKET
what is the derivatives markets
The derivatives market is a financial marketplace where investors buy and sell derivative contracts. These contracts, derive their value from an underlying asset or group of assets.
It provides a liquid and cost-effective hedge against adverse movements in market values.
DERIVATIVES MARKET
Which are the 2 derivatives markets in NZ?
1. NZX Equity Derivatives (NXCX): offer futures and options for Spark and Fletcher Buildings
2. SGX-NZX Dairy Derivatives (SGX-NZX): a cash-settled instrument for managing dairy price risk, which participants can use to mitigate the risks associated with movements in the price of dairy products.
In 2021, NZX and the Singapore Exchange (SGX) entered into a partnership where dairy derivatives contracts were delisted from the NZX Dairy Derivatives market and relisted on the SGX
DERIVATIVES MARKET
What is a future contract?
It is a transferable standardised agreement traded on regulated exchanges which obligates the seller to deliver and the purchaser to receive financial instruments in the future at a currently agreed upon price during a specified delivery period.
A futures contract is simply an agreement to trade in the future. Both the buyer and the seller pay a deposit, which is a fraction of the face value of the contract.
DERIVATIVES MARKET
What is an option?
A financial option is an agreement between two parties in which one party grants the other the right (but not the obligation) to buy or sell a security under specified conditions.
Options are a valuable risk management tool, notably because they are relatively inexpensive to buy and provide upside flexibility.
DERIVATIVES MARKET
What are swaps?
A swap is an agreement between two parties to exchange payments, based on a notional principal, over a certain period of time. In other words, the two parties agree to exchange obligations.
what are 2 examples of other financial providers (ie not banks) in NZ
building societies and credit unions
what is a building society
a mutual institution, which means that most people who have a savings account or mortage with thwm are members. each building society has a board of directors who run the society and are responsible for setting its strategy. Each member has voting rights on how the organisation is run
What are credit unions
like building societies are mutually owned institutions, providing basic, low cost deposit accounts, personal/housing loans and payments to service members. Members finance their personal borrowing from their owned combined resources. often member share a common bond ie live in the same area or work in the same industry
in terms of ownership structure whow do banks differ from building socities and credit uniosn
banks are companies that are usually listed on the stock market and owned by shareholder, whereas the other two are owned by and for the members
how does they way banks and credit unions and building socities differ in the way they supplement domestic funding.
baks can access large and specialised markets, wheres the others are limited by the proportion of funds that they can raise from the wholesale market.
what are six trends in the nz banking idustry
- emergence of fintech
- bitcoin
- blockchain
- AI
- robotics
- customer analystics and ‘big data’
what is microeconomics
the study of decisions that people and businesses make regarding the allocation of resources and prices of goods and services ie supply and demand
what is macroeconomics
focuses on issues that affect the economy as a whole ie unemployment rates, GDP, inflation and exports and imports
what is GDP
It is the total market value of goofs and services produced in NZ after deducting the cost of goods and services used in the process of production but before depreciation.
It is also known generically as “economic activity”.
GDP
The three ways of measuring GDP
These approaches provide production, income and expenditure measures of GDP.
1- GDP, the production approach: involves totalling the “value added” by each enterprise in the economy.
2 - GDP, the income approach: involves summing “factor incomes” (gross returns to labor and capital), depreciation and net indirect taxes.
3 - GDP, the expenditure approach: involves the total of “final domestic expenditures”, plus expenditures by foreing residents on NZ produced goods and services (exports) minus expenditures by NZ residents on foreing-produced goods and services (imports)
what are 5 roles of the goverment
1 - legal and policy frameworks
2 - a stable environment for business activities
3 - support to business and individuals (ie roading and infrastructure and education)
4 - fiscal policy
5 - monetary policy
What’s the role of regulators?
Regulators play a very important role in the financial system as they promote the smooth operation of the markets and protect the integrity of the financial system.
what is the Council of Financial Regulators (CoFR)
the CoFR contributes to NZ’s economic wellbeing through a coordinated and responsive financial system regulation, it is made up of 5 members.
1. Reserve Bank of NZ (RBNZ)
2. Financial Markets Authority (FMA)
3. Commerce comission
4. Ministry of Business, Innovation and Employment (MBIE)
5. The treasury
What does the Reserve bank of New Zealand do
admisters and enforces a range of legislative provisions primarily under the Reserve Bank of New Zealand Act 2021. it is responsible for the overall stability of the financial system, the national payments infrastructure as well as monetary policy, via the Monetary policy committee as defined in the Remit.
In its capacity as agent for the Commonwealth, the RBNZ handles the issue
of new government debt securities (short term and long term) and debt raising for New Zealand Local Government Funding Agency Limited.
RBNZ
The RBNZ is the prudencial regulator of ….
banks, non-bank deposit takers and insurers
RBNZ
What prudential regulation means?
It focuses in the financial soundness of institutions. It ensures that insurers can afford to pay claims and that the financial system is sound and efficient.
How is the PRESENT REGULATORY STRUCTURE of the financial system?
The review of the New Zealand financial products and providers in the mid-2000s resulted in the two-regulator ‘twin peaks’ model being adopted by the federal government. The split of regulators has allowed regulation to be implemented in two broad functions — conduct regulation and prudential regulation.
The primary financial system regulators that resulted are:
* FMA — established in 2011 and responsible for financial market conduct
* RBNZ — responsible for prudential regulation.
what is the FMA
The financial Markets authority is the financial markets regulator and operates under the powers of the financial markets conduct act 2013. its mission is to promote fair, efficient and transparent financial markets . the FMA is responsible for enforcing securities, financial reporting and company law as they apply to financial services and securities markets.
what are the 5 regulatory functions used by the FMA to regulate both the capital markets and the provisions of financial services
1.monitoring and supervision
2.investigations and enforcement
3.policy and guidance
4.licensing
5.education and information
DISCLOSURE REQUIREMENTS
Disclosure requirements under the FSLA Act
Any firm or individual who gives regulated financial advice to retail clients will need to disclose the following:
x 9
- Licensing: information about the licence held
- Duties: information about certain duties that the person giving advice is subject to.
- Services: information about the financial advice service that can be provided, including the financial advice products and product providers that can be advised on, and other limitations on the advice.
- Fees: information about the applicable fees and costs relating to the financial advice.
- Conflicts of interest: information relating to the commissions, incentives or other conflicts of interest that a client might perceive as having potential to materially influence the financial advice.
- Complaints handling
- Disciplinary history
- Convictions or other proceedings
- Bankruptcy proceedings
DISCLOSURE REQUIREMENTS
The disclosure requirements can be seen as documents required at various stages of the financial advice process:
x 5
1 - Initial stage: publicly available information about the FAP: links to web pages, fact sheets, brochures and, if applicable, PDSs. This assists a client in determining if the FAP is appropriate to meet the needs of the client.
2 - Information gathering stage: This information is about the individual adviser. This assists the client to determine if the adviser has the appropriate competency, background and skills to provide advice to the client. Examples: reliability history, fees and expenses, conflicts on interests and incentives.
3 - Advice stage: this is provided by the advisers and must include the disclosure requirements of Part 6 of the FMC Regulations. This assists the client to determine whether to follow the advice provided by the adviser, and includes:
– document of advice (if required)
– PDS (if products recommended)
– investment plans or DIMS plans.
4 - Post-advice stage: includes:
– any additional information provided to a client on request
– confirmation of transactions undertaken on behalf of a client
– advice of material changes and significant events to the client
– periodical statement of investment products.
5 - Complaints stage: includes details of internal complaints procedure and details of the external dispute resolution scheme.
Who is a Wholesale client under the Financial Markets Conduct Act 2013?
x 8
If the person:
1. is an investment business
2. meets an investment activity criteria (e.g. in the last two years has owned or traded in a portfolio of financial products with an aggregate value of at least $1 million)
3. meets the ‘large’ criteria (net assets of more than $5mll)
4. is a government agency
5. is an eligible investor — can self-certify that they are eligible investors
6. makes a $750,000 minimum investment
7. enters into an underwriting agreement of at least $750,000
8. invests in derivatives with a notional minimum value of $5 million
COMPLAINTS MANAGEMENT
approved disputes resolution schemes relating to the provisions of financial services
x 4
- The Banking Ombudsman Scheme (BOS): was set up in 1992 as a way for banks to deal with consumers’ complaints. BOS members include all of the main banks and their subsidiaries, along with several credit unions and building societies.
- The Insurance and Financial Services Ombudsman Scheme (IFSO): including insurance companies, superannuation schemes, financial advisers, credit providers and corporate and individual financial service providers.
- Financial Services Complaints Limited (FSCL): insurers, lenders, transactional service providers, insurance brokers, trustees, credit unions, card issuers and financial advisers.
- Financial Dispute Resolution Service (FDRS): including insurers, financial advisers and brokers, lenders or non-bank deposit takers and other financial service providers.
who are kiwisaver schemes regulated by
the financial markets authority (FMA)
what is underwriting
the process by which an insurer determines whether or not and on what basis they will accept a particular risk
What legislation aims to simplify advice, making it more accessible, whilst rasing standards across the financial services industry
FSLA Act 2019 - the Financial Services Legislation Amendment Act 2019
who can give financial advice
Anyone giving financial advice to retail clients will need to be engaged by a financial advice provider, and the provider must be licensed by the FMA. Financial advice providers will be able to give financial advice:
* directly (e.g. online)
* through financial advisers
* through nominated representatives (who will have less discretion than financial advisers) (FMA 2023b).
Ban on FALSE AND MISLEADING STATEMENTS
Where it applies and who is responsable?
The ban on false and misleading statements applies to documentation provided to clients (e.g. product disclosure statement (PDS)) and to the behaviours of the financial adviser. The Commerce Commission monitors misleading conduct by organisations.
Inducing clients to act can be seen as a misleading statement. Examples include putting arbitrary timelines onto actions required by the client, which may make the client feel pressured into making a decision. Denying the existence of cooling-off periods that may apply is also an example.
Leaving out information provided to the client that may impact their decision is considered misleading.
The requirement to not make false or misleading statements falls to the directors of the offeror or product issuer, who can be ordered to pay compensation should an investor lose money because of the false or
misleading statement.
CONSEQUENCES OF NON-COMPLIANCE
How the FMA can deal with non-compliance?
- Sometimes engagement through dialogue is sufficient.
- This might extend to formal feedback or monitoring reports
- A direction order: to direct a recipient to comply with the law and stipulate steps they must take by a given timeframe
- Stop order: It prohibits the issuer from continuing the relevant activity to protect investors and the integrity of the market
- More egregious breaches may result in the FMA taking court action: the courts have the discretion to issue civil liability orders.
CONSEQUENCES OF NON-COMPLIANCE
What is a Stop Order?
A stop order, which is required to be published, can be issued in some circumstances where the spread of information is likely to confuse investors on material matters — that is, matters which would influence a reasonable investor’s decision to invest in the financial product or obtain financial services. It prohibits the issuer from continuing the relevant activity to protect investors and the integrity of the market.
Examples to prevent or stop the issuer of a financial product from:
* distributing the PDS, other disclosure document or advertisement (including keeping its website up)
* continuing to offer the financial product
* accepting applications or deposits from customers for the financial product.
Failure to comply with a stop or any other order from the FMA can result in
a fine of up to $300,000.
CONSEQUENCES OF NON-COMPLIANCE
If found to be in breach of the FMC Act, the financial adviser may:
x 5
- be subject to a review by the Financial Advice Disciplinary Committee
- be fined up to $10,000
- be removed from the Financial Services Provider Register
- have conditions placed on their ability to provide advice on regulated financial products
- be de-registered
STANDARD CONDITIONS FOR ADVICE PROVIDER LICENCES
To use the term ‘financial advice provider’, the individual or organisation must be registered with….
The Financial Services Providers Register (FSPR)
STANDARD CONDITIONS FOR ADVICE PROVIDER LICENCES
Name the 7 standard conditions for all FAPs
1 - Record keeping: may be kept electronically but must be available for inspection or review by the FMA. The records must be kept for a period of at least 7 years
2- Internal complaints process
3 - Regulatory returns: The FAP or FA must provide the FMA with the information they need to monitor ongoing capability to effectively perform the financial advice service (updated information on the nature, size and complexity of the financial advice)
4-Outsourcing: the FA or the FAP must ensure that if a sercie is outsorced, it meets meet their market service licensee obligations at all times.
5 - Business continuity and technology systems
6- Ongoing capability: You must have and maintain a business continuity plan that is appropriate for the scale and scope of your financial advice service
7 - Notification of material changes: notify the FMA in writing within 10 working days of commencing to implement any material change to the nature of, or manner in which the FA or FAP provide the financial advice service.
What are the advantages of financial intermediation?
1 - Bearing of risk
2 - Economies of scale
3 - Specialist skills and knowledge
4 - Convenience
5 - Covering of mismatch: intermediaries match the imbalance between individual borrowers and lenders.
6 - Market facilitation
ANTI-MONEY LAUNDERING AND COUNTERING FINANCING OF TERRORISM ACT 2009
The Act identifies the obligations of reporting entities, which include:
1.carrying out an assessment of the money laundering and terrorism financing risk a reporting entity may reasonably expect to face
2. appointing an AML/CFT compliance officer
3. the design, implementation and maintenance of a compliance program (AML/CFT program) that sets out procedures, policies and internal controls
4. carrying out due diligence on customers
5. record keeping
6. undertaking ongoing customer due diligence and account monitoring
7. an annual report to the relevant AML/CFT supervisor
8. Suspicious Activity Reporting
AML/CFT ACT 2009
Which are the 2 types of prescribed transactions reporting?
- NZ$1000 or more for international wire transfer
- NZ$10000 or more for domestic physical cash transaction
INFLATION
INFLATION
Concept
Inflation is a generalised increase in prices from their previous level or, equivalently, a fall in the value of money.
It is important to note that inflation refers not to the price of any particular good or service, but rather to the general level of prices.
INFLATION
What are the adverse consequences?
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1 - Inflation may lead to arbitrary redistributions of income.
2 - Inflation may lead to an inefficient allocation of resources in that increased efforts are devoted to the acquisition of assets whose values are expected to rise faster than the general price level, at the expense of more ‘productive’ investments.
3 - Uncertainty associated with inflation may also lead to a ‘risk premium’ in interest rates.
4 - Inflation may discourage saving to the extent that households perceive the future purchasing power of savings will be eroded by persistent upward movements in the pricelevel.
5 - Inflation may reduce international competitiveness
6 - Inflation may adversely affect long-term economic growth
7 - social consequences — for instance, the perceived unfairness of the effects of inflation on income distribution or frustration at the loss of economic growth attributed to inflation.
DEFLATION
Concept
Deflation is defined as a generalised decrease in prices from their previous level.
It is often associated with a fall in economic activity and in asset prices, including house prices, which can reduce consumer spending and confidence.
A positive economic outcome will occur if productivity growth is high enough for prices to fall, while profits and incomes continue to grow.
The central bank plays an important role by lowering official interest rates in a timely manner to increase domestic demand.
Increasing real interest rates in a deflationary episode can result in existing borrowers defaulting on their loans.
MEASUREMENT OF INFLATION
CONSUMER PRICE INDEX (CPI)
Concept
The CPI measures the cost of purchasing a given ‘basket’ of goods and services that accounts for a high proportion of expenditure by metropolitan households. The CPI is calculated and published quarterly by Stats NZ.
The basket covers a wide range of goods and services, arranged in 11groups, like food, cloothing, health, transportation, education, etc.
The prices of the various items are obtained weekly, fortnightly, monthly or quarterly. Prices are noted in each of the eight cities and converted (where necessary) into quarterly averages.
These individual prices are expressed in index form. They are then combined in accordance with the predetermined weighting pattern to produce an ‘All Groups’ index for each geographical area. The resulting indices are
combined into a regional average, using weights reflecting the relative population of each of the major cities. It is this average which is most commonly referred to as the CPI.
THE NEW ZEALAND EXCHANGE LIMITED
What is it?
The NZX is a licensed market operator under the FMC Act.
The NZX is both responsible for the regulation of the traded markets and regulates the markets through the Listing Rules and the NZX Participant Rules.
NZX
The (NZX Limited) operates six markets:
1 - NZSX: the stock market Main Board.
2 - NZDX — the New Zealand-listed debt market
3 - NZX Equity Derivatives (NXCX)
4 - SGX-NZX Dairy Derivatives (SGX-NZX)
5 - Fonterra Shareholders Market (FSM)
6 - S&P/NZX Indices
NZX - markets
1 - NZSX
What is it?
What’s the market cap?
How many companies are listed?
How it works?
What other entities NZX owns?
The New Zealand Stock Exchange is itself a listed company on the NZX, along with 188 other companies. It has a market capitalisation of $182.6 billion. Buyers and sellers of shares place the price at which they want to trade through registered brokers or registered market participants. The NZX makes a fee per transaction, plus charges participants annual membership fees. NZX also owns Smartshares, SuperLife and Wealth Technologies.
NZX -Markets
2 - NZDX
What is it?
the New Zealand listed debt market — offers a range of debt-based investment securities (e.g. corporate and government bonds). It includes New Zealand and Asia Pacific corporate and government debt. Securities are traded by yield and by price.
NZX - Markets
3 - NZX Equity Derivatives (NXCX)
What it offers and for which companies?
offer futures and options to assist in the management of price risk for two companies — Spark and Fletcher Buildings.
NZX - Markets
4 - SGX-NZX Dairy Derivatives (SGX-NZX)
What is it and why it is used?
What happened in 2021?
A cash-settled instrument for managing dairy price risk, which participants can use to mitigate the risks associated with movements in the price of dairy products.
In 2021 NZX and the Singapore Exchange (SGX) entered into a partnership where dairy derivatives contracts were delisted from the NZX Derivatives market and relisted on the SGX
NZX - Markets
Fonterra Shareholders Market (FSM)
What is it?
— a private market for Fonterra and its shareholders, with one price maker.
NZX - markets
S&P/NZX Indices
What is it?
traded on the NZX, these are listed composited indices based on the largest sections of the New Zealand economy, for example, the top 20 companies listed on the NZX, energy sector, industrials, health care, real estate
WHAT IS A FINANCIAL MARKET?
A market is an arrangement by which people buy and sell products. Financial markets bring together the supply of savings and the demand for money to finance business and consumer spending.
It is a formal marketplace, although this may not be a physical marketplace.
FINANCIAL MARKET
For financial
markets to work efficiently, they must:
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- be freely available information about the product being offered
- provide opportunities to buy and sell at a ‘price’
- underpin reassurance that payment will be made once the deal istransacted
- hold the highest standards of honesty and integrity by its participants.
FINANCIAL MARKET
Name different financial markets that operate globaly and in NZ
x6
- Cash market/money market
- fixed interest market
- Equity market
- Foreign exchange market
- Commodity market
- Derivatives market
What are bonds?
Bonds are a promise by the borrower or issuer to repay debt, usually one year to 10 years, and in the interim, a fixed rate of income is paid to the purchaser (the investor).
It pays a fixed rate of interest, known as the ‘coupon’, and matures at a
fixed point in time.
Fixed interest securities can be traded on the secondary market before their maturity by holders, investors and traders who wish to take advantage of movements (or likely movements) in interest rates. The price of the security will adjust to take into account interest rate expectations.
Corporate bonds are traded on the NZDX and can be purchased by retail investors. Government bonds and local authority bonds are traded via the RBNZ, institutional investors and banks.
What are shares?
Investing in equity securities (shares) means that the investor takes an ownership position. For example, ordinary shares represent the ownership of the company (corporate) or the equity of shareholders. Equity securities provide companies with funds to set up a new business or expand an existing business. When companies issue shares, they are sourcing long-term funds for their operation.
Ordinary shares are publicly traded shares that are readily available to the public and which are bought and sold on the open market
What is Blockchain?
A blockchain is a digital record of transactions. Bockchains are used for recording transactions made with cryptocurrencies, such as Bitcoin, and have many other applications.
A key feature of a blockchain transaction is that settlement occurs whether the funds are available or not, that is, whether or not there are cleared funds to facilitate the transfer.
6 types of market participants
- Borrowers and lenders
- Capital raisers and investors
- Market institutions and self-regulatory bodies
- Financial intermediaries and brokers
- Service providers
- Industry and professional bodies
LICENSED SUPERVISORS
What they are and functions
a specialist group of trustee-type roles. Supervisors must
maintain professional standards and always have the best interests of their investors in mind when making decisions about the underlying investment which is typically a debt security, a registered scheme or a retirement village.
Regulated by the Financial Markets Supervisors Act 2011 (FMS Act). The purpose of the FMS Act is to protect the interests of product holders and of residents of retirement villages.
They needs a licence from the Financial Markets Authority (the FMA).
Trustees of restricted KiwiSaver schemes are not covered by the FMS Act.
What is a master trust?
A master trust is an umbrella organisation that includes managing the fund to
benefit the members, and other services such as collection of members’ contributions, making investments; collection and payment of taxation; and insurance (if it is offered).
The master trust operates with a single trustee that outsources many of the ancillaryprocesses of the superannuation fund, such as investment management or to a third-party insurance company.
What are GOVERNMENT EMPLOYER SUPERANNUATION FUNDS?
Other complying employer superannuation funds include government employee funds such as the Police Superannuation Scheme and the New Zealand Fire Service Superannuation Scheme (FireSuper). Members are employees within that particular sector, and depending on the employment status, receive a defined contribution from their employer.
Fees are usually lower than KiwiSaver and access can vary.
Employer contributions are usually higher than the standard KiwiSaver contributions
NZ SUPER FUND
What is it?
This is a universal government superannuation fund that pays a pension to New Zealanders once they turn age 65.
