Contents:
November/December 2009
Contents:
The July 2009 decision of the Court of Appeal in SB Properties Limited (in liq) v Holdgate (2009) 24 NZBLC 102,697 considered the effect of section 11 of the Contractual Remedies Act 1979 on unsuspecting assignees.
JR Construction Limited assigned to Mr Holdgate "all of its rights and title and interest" in a contract to perform site works for SB Properties Limited. SB Properties was not given notice of the assignment.
SB Properties claimed that JR Construction had refused to complete the works and gave notice purporting to terminate the contract. SB Properties then engaged another contractor to complete the contract and perform remedial works, at a cost $130,195 greater than JR Construction's price.
SB Properties claimed the $130,195 from JR Construction as damages. When SB Properties learnt of the assignment, it also sought to recover the $130,195 from Holdgate, claiming that section 11 of the Contractual Remedies Act 1979 entitled it to sue Holdgate, as assignee of JR Construction.
At common law, the non-assigning party does not automatically have a right to sue the assignee for damages in relation to a breach of contract by the assignor. However, section 11(1) provides "if a contract…is assigned, the remedies of damages and cancellation shall, except to the extent that it is otherwise provided in the assigned contract, be enforceable by or against the assignee."
The issue for the court was whether section 11(1) imposed a new liability on Holdgate (the assignee) to SB Properties (the non-assigning party) in damages for breach of contract by JR Construction (the assignor). The Court of Appeal held that it did. Section 11(1) improved SB Properties' position by granting it an independent cause of action against Holdgate.
Subsection (2) limits the amount of damages that can be claimed from an assignee to a sum not exceeding "the value of the performance of the assigned contract to which he is entitled by virtue of the assignment". The Court held that the value of the performance of the assigned contract is the amount by which the assignee is enriched by the non-assigning party's performance of the contract (ie the net increase in the assignee's assets following the assignment). In the present case, Holdgate did not derive any value from the assignment as all payments during the course of the contract were paid to JR Construction. Therefore no damages were payable by Mr Holdgate.
The decision in NZ Associated Refrigerated Food Distributors Limited v Donley & Ors HC Auckland CIV-2008-404-001978, 30 October 2009arose out of the failure of a food distribution business, Fresh and Frozen Food Distributors Limited (in liquidation and receivership) ("FFFD") which was a member of the plaintiff food distribution co-operative ("NZARFD"). Mr and Mrs Donley were directors of FFFD and had guaranteed FFFD's debts to NZARFD. NZARFD's claim also related to an amount paid by FFFD to R&L Donley Properties Limited ("RLDP") (a related company of FFFD of which Mr Donley was also a director) the night before FFFD was put into liquidation.
The guarantee set-off claim
Following Mr Donley putting FFFD into liquidation, NZARFD put FFFD into receivership. NZARFD then sought summary judgment against the Donleys pursuant to their guarantees. The Donleys did not dispute their liability under the guarantees but claimed NZARFD was unable to prove any outstanding debt owing to it and in addition, NZARFD owed FFFD money under a discount scheme, which should be set off to reduce the balance owing.
NZARFD submitted that the Donleys could not claim a set-off as NZARFD's obligation to pay the credit accrued to FFFD in the discount account had not crystallised, and thus was not a debt "due" for payment at the time of FFFD's liquidation for the purposes of s310 of the Companies Act 1993. The Donleys countered that NZARFD had an obligation to pay the sum credited to FFFD in the discount account from the time the funds were allocated to the account, and accordingly it was a debt that existed before the liquidation.
The Court held that the effect of treating the credits as an enforceable obligation at the time of liquidation, even though they were not payable for another three years and potentially would never be, would give a benefit to a member of the co-operative going into liquidation which was not available to those who did not. The Court held that such an interpretation would be inconsistent with the policy set out in section 55 of the Companies Act that all members are to be treated equally, and ordered summary judgment in favour of NZFARD without deduction for the amount of FFFD's discount account.
The knowing receipt claim
NZARFD's claim against RLDP was that RLDP had knowingly received money in breach of fiduciary duties arising out of the security interests which FFFD had granted to NZARFD and in breach of the trust arising out of the terms of trade. The Court held that the money transferred comprised proceeds of sale by FFFD of stock that was subject to NZARFD's security interests and accepted NZARFD's claim that the security interest in the proceeds was not extinguished by the transfer of the money from FFFD to RLDP as RLDP received the money with knowledge of the security interests by reason of the common directorship of Mr Donley of both companies. However, the alleged breach of fiduciary duties raised complex issues unsuited for determination by summary judgment so the Court dismissed the application.
In Viacom Global (Netherlands) BV v Scene 1 Entertainment Limited (in rec) and Anor [2009] NZCA 457, the Court of Appeal dismissed Viacom's application to restrain the receivers of Scene 1 from selling its stock pending appeal.
Viacom is a subsidiary of Paramount Pictures Corporation Group and the exclusive licensee of all copyrights owned by Paramount in New Zealand. It entered into a licence agreement with Scene 1 whereby the latter had exclusive distribution rights in New Zealand for Paramount DVDs. The licence agreement contained a retention of title clause which specified that all intellectual property rights, DVDs, and other recordings remained Viacom's sole and exclusive property. However, it was not registered under the Personal Property Securities Act 1999. Subsequently, ASB Bank Limited, who had a registered security interest, placed Scene 1 into receivership. Viacom then terminated the licence agreement. However, a large amount of DVDs were undistributed, and formed part of the secured property that the receivers were entitled to deal with. The receivers distributed some of the remaining DVDs to retailers, who sold them at a substantial discount from the normal retail price.
As Viacom had not registered its security interest and, therefore, did not have priority over the DVDs, it sought to restrain the receivers from "dumping" the remaining dividends. Viacom argued that the receivers were obliged to perform and comply with the terms of the licence agreement so far as the DVDs were concerned, notwithstanding its termination. Otherwise, the sale would be an infringement of copyright and the DVDs would be infringing copies under the Copyright Act 1994.
Justice Andrews denied Viacom's application at first instance. ASB Bank's registered security interest was enforceable against the DVDs with priority ahead of Viacom's retention of title. The claimed copyright infringement, as distinct from the retention of title, of the DVDs made no difference. Furthermore, Andrews J concluded that a stay was not appropriate.
Viacom applied for a stay of execution of the High Court's judgment pending appeal. While the issue of the relationship between the Copyright Act and PPSA will be further examined by the appeal, the Court found that the receivers' obligation to realise the secured stock in a timely fashion meant that the balance of convenience weighed against Viacom and the receivers should not be restrained from selling the DVDs before the appeal is heard. The receivers' undertaking to hold the sale proceeds of the DVDs undisbursed was also cited as a decisive factor.
In Re Sigma Finance Corporation (in administrative receivership) and In Re The Insolvency Act 1986 (Conjoined Appeals) [2009] UKSC 2 regarded the interpretation of a clause in a Security Trust Deed, which would determine how the remaining assets of Sigma Finance Corporation were to be distributed in Sigma's receivership.
Under the Security Trust Deed, the occurrence of an enforcement event started a 60 day "Realisation Period" during which the security trustee was required to establish separate asset pools for creditors with short-term and long-term liabilities. By clause 7.6 of the Security Trust Deed, during the Realisation Period the security trustee was required to "so far as possible discharge on the due dates therefor any short term liabilities falling due for payment during such period, using cash or other realisable or maturing assets of the Issuer".
The Court of Appeal (UK) held that clause 7.6 had a clear and natural meaning and there was nothing in its language to affect the operation of that meaning in the circumstances which arose. The security trustee's obligation during the Realisation Period was to continue to discharge Sigma's debts as and when they fell due, so long and so far as such payment was possible using cash or other realisable or maturing assets. Hence, Sigma's assets were required to first be distributed to certain creditors holding notes that matured within the Realisation Period in priority to other secured creditors.
In the United Kingdom Supreme Court, Lord Mance held that the Court of Appeal attached too much weight to the natural meaning of the words and too little weight to the context in which clause 7.6 appeared and to the scheme of the Security Trust Deed as a whole. Interpretation is the ascertainment of the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract. In this case, the Security Trust Deed was a long and carefully drafted document and if the initial interpretation is inconsistent with business commonsense, that interpretation should yield to business commonsense.
Accordingly, the majority held that the receivers were not obliged to pay short term liabilities falling due for payment during the Realisation Period in the order in which they fell due. Looking at the Security Trust Deed as a whole, clause 7.6 is only relevant where the underlying assumption that all secured liabilities can be covered, is true, and, thus, no issue of priority would arise. This is because the relevant clauses of the Security Trust Deed were drafted on the assumption that Sigma had enough assets to at least cover its liabilities to secured creditors. Hence, the first maturing short term liabilities did not have priority and were to be treated in the same way as all other secured short term liabilities. This conclusion is consistent with the wording of the clause in the context of the Security Trust Deed as a whole and with the commercial purpose of the instrument.
In Re Octaviar Ltd (No 8) (2009) 73 ACSR 139, the Queensland Supreme Court set aside two deeds of company arrangement ("DOCA") because they were not in the best interests of the company's creditors and because misleading and incomplete information had been provided to the creditors at the time of the vote to approve the deeds.
A DOCA formalises a proposal made by directors during a voluntary administration and if adopted is legally binding between the creditors, administrators and the company. In the present case the deeds related to Octaviar Ltd ("OL") and Octaviar Administration Pty Ltd ("OA"). Fortress Credit Corporation (Australia) II Pty Ltd, a secured creditor of OL, proposed a DOCA be entered into for each company. The administrators recommended that OL's creditors vote in favour of the OL DOCA, but that OA's creditors put OA into liquidation instead. Nevertheless, creditors voted for both companies to enter a DOCA.
Subsequently the Public Trustee of Queensland, a creditor of OL, brought an application to set the DOCAs aside under section 445D of the Corporations Act 2001 (Cth) ("Act") on the basis liquidation would provide a better outcome for all the creditors, avoid unfairness to some creditors and be in the public interest.
Justice McMurdo set aside the OA DOCA on the grounds that it was contrary to the interests of OA as a whole and was merely intended to facilitate the OL DOCA, meaning creditors of OA that were not also creditors of OL would be prejudiced.
In relation to the OL DOCA the Court found:
- it was contrary to the interests of the creditors as a whole and the administrators were wrong to advise voting in favour of the OL DOCA as there were a range of recoveries available to a liquidator not available under a DOCA;
- the misleading information that had been provided to creditors and omissions of material information meant that creditors were not able to compare the outcome of the DOCA with the liquidation of OL and it was immaterial that a large group of creditors still supported the DOCA at the hearing; and
- it was in the best interests of the public to set aside the DOCA: while the terms of the OL DOCA were not offensive to public policy generally, the size of the company and the impact of its insolvency on many institutions and investors should be subject to examination by a liquidator.
Accordingly, the OL DOCA was also terminated.
The Insolvency Amendment Act 2009 amends certain aspects of the Insolvency Act 2006, including:
- the cancellation of debts on discharge from the no asset procedure does not apply to fraudulent debts;
- the claw-back provisions in relation to insolvent gifts have been strengthened;
- clarification that a debtor's discharge from the no asset procedure does not release the debtor's partners and others;
- requiring details of persons discharged from the no asset procedure to be kept on the Insolvency Register for four years from the date of discharge or, in the case of persons who have been subject to several specified insolvency proceedings, indefinitely; and
- the period of a no asset procedure can be extended by up to 25 working days by the Official Assignee in order to properly consider whether the debtor's participation in the no asset procedure should be terminated.
Other than the first change noted above (which applies retrospectively from 10 March 2009), these changes came into force on 17 November 2009.
The Reserve Bank of New Zealand Amendment Act 2009 came into force on 24 November 2009. The Amendment Act was one of four enactments to result from the Settlement Systems, Futures, and Emissions Units Bill.
The Amendment Act replaces Part 5C of the Reserve Bank of New Zealand Act 1989, and sets out the regulatory regime for the approval and oversight of designated settlement systems (including designated payment systems which were previously the subject of Part 5C). The key amendments contained in the new Part 5C are set out below.
- The Reserve Bank and the Securities Commission are now joint regulators of designated settlement systems under Part 5C (although the Reserve Bank is the sole regulator of designated settlement systems that are declared pure payment systems). Their responsibilities include assessing applications for designation.
- The benefit of designation is that a settlement effected in accordance with the rules of a designated settlement system cannot be reversed, repaid, recovered, or set aside despite any enactment or rule of law to the contrary (subject to certain insolvency event limitations). This now applies to settlements under all settlement systems (previously only payment systems could be designated).
- If a settlement is effected within 24 hours of an insolvency event, the settlement finality protection still applies. Under the previous corresponding section, the 24 hour post insolvency finality protection applied only if the contact person (ie, the person to whom notices relating to the settlement system must be given) could demonstrate that it did not have notice of the commencement of the insolvency at the time the settlement was effected.
- A new section 103A is inserted in the Personal Property Securities Act 1999. If the designation provides that section 103A applies, the interest of an operator of a designated settlement system in personal property will have priority over any security interest (including a purchase money security interest) in the same personal property if a participant has:
- granted a security interest in that personal property in favour of the operator; or
- transferred that personal property (or the interest in that personal property) to the operator.
On 27 November 2009, the Securities Act (Transition to Securities Regulations 2009) Exemption Notice 2009 came into force. The Exemption Notice provides for existing exemptions from the provisions of the Securities Regulations 1983 to be extended to the equivalent provisions of the Securities Regulations 2009.
On 8 December 2009, the Financial Service Providers (Pre-Implementation Adjustments) Bill (2009) was introduced. The Bill proposes a number of technical amendments to the Financial Service Providers (Registration and Dispute Resolution) Act 2008 and the Financial Advisers Act 2008.
The main amendments to the Financial Advisers Act relate to the regulation of qualifying financial entities ("QFEs"). For example:
- a QFE will be able to nominate individuals (called "nominated representatives") to perform financial adviser services in respect of the QFE. Nominated representatives will be in the same position as QFE employees in that they will be able to, in the course of the relevant QFE's business, give financial advice or make an investment transaction in relation to category 2 products and, in the circumstances referred to below, category 1 products; and
- QFE employees and nominated representatives will be able to give financial advice or make an investment transaction in relation to not only category 1 products of which the QFE is the issuer (as is the current case for employees), but also in relation to such products of which the QFE is the promoter.
The key amendments to the Financial Service Providers Act include that:
- an employer providing financial services to enable employees to join a registered superannuation scheme or Kiwisaver scheme will be exempt from the Act; and
- the territorial scope of the Act will be amended so that "licensed providers" (eg, registered banks) and persons who are required to be registered or licensed under the Financial Advisers Act will be subject to the Financial Service Providers Act, whether the person is in New Zealand or outside New Zealand.
The Securities (Moratorium) Regulations 2009 relate to moratorium proposals that vary the terms or conditions of an existing debt security by extending the time for payment of the principal amount or any other returns due, or to become due, under that security, or of reducing or cancelling those amounts or returns.
The principal effects of the Regulations are to:
- prescribe additional material that must be included in a prospectus for a moratorium proposal;
- prescribe the content of an investment statement for a moratorium proposal. (The Securities Act (Renewals and Variations) Exemption Notice 2002 provided exemptions, in the case of variations of securities that extend the time for repayment, from section 37A(1)(a) of the Securities Act 1978, which is the investment statement requirement. As a companion measure to the Regulations, on 18 December, the Securities Commission removed that exemption in so far as it relates to moratorium proposals);
- imply certain terms into trust deeds if a moratorium proposal is made in respect of any debt securities. These confer (among other things) rights to hold meetings and to appoint a receiver; and
- require periodic disclosure of certain information to security holders of issuers that are in moratorium.
The Regulations will come into force on 31 January 2010.
On 15 December 2009, the Securities (Trustees and Statutory Supervisors) Bill was introduced. The Bill aims to improve the accountability of trustees and statutory supervisors to protect investors' interests and to enhance market confidence. The new regime will apply to trustees of debt securities, unit trusts and certain statutory supervisors of collective investment schemes and retirement villages.
The Bill proposes to remove the existing automatic approval for certain corporations to act as trustees or supervisors. All potential trustees or supervisors will be required to obtain a license for their respective roles. The Securities Commission will have the power to grant the licenses, taking into account matters such as the experience, skills and qualifications of the applicant, the financial or other resources available to the applicant and the applicant's independence from issuers of securities covered by the licence. It will be an offence to act as a trustee or statutory supervisor without a valid licence.
The Bill also proposes that licence holders will be required to submit 6-monthly reports to the Securities Commission, which must include information about the licence holder's compliance with the terms of the licence and the deeds they have entered into with the issuers they supervise. Licence holders must also report to the Securities Commission any actual or potential breaches of their obligations. The Securities Commission will have the power to require information from licence holders and order them to act in emergency situations.
Non-compliance with the new law or the Commission's directions will be an offence punishable by maximum penalties of $100,000 to $200,000.
The Bill is expected to receive its first reading early 2010.
The July/August issue of Butterworths Journal of International Banking and Financial Law contains the article Do market disruption clauses work? by Fiona Evans. This article addresses the effectiveness of the market disruption clause as currently drafted.
A market disruption event will typically occur if: LIBOR is not available; LIBOR does not reflect the cost of funds; or funds in the required currency are unavailable.
Two different approaches to the clause can be seen in the Loan Market Association ("LMA") and Asia Pacific Loan Market Association ("APLMA") standard form documents. Under the LMA document, the lenders recovers its cost of funds from the borrower. Under the APLMA document the lender can recover the higher of either its cost of funds or LIBOR. Because some lenders are still able to fund below LIBOR they would suffer reduced returns if forced to move from LIBOR to their lower cost of funds. Therefore, APLMA protects these lenders' positions.
Market disruption clauses are usually incompatible with hedging arrangements. Upon a market disruption event occurring the interest rate under the facility could be determined by reference to the lender's cost of funds and not LIBOR. Hedging documents do not provide for market disruption and therefore the borrower would continue to receive a floating rate based on LIBOR, creating a mismatch.
The article notes the difficulty in establishing the lender's cost of funds where the lender has sub-participated. The sub-participant is not a party to the facility agreement and cannot declare a market disruption event. If the market disruption clause is invoked, it may not be possible to establish the cost of funds without revealing the sub-participation to the borrower, which may not be desired.
The United States House Financial Services Committee has approved legislation that, for the first time, requires comprehensive regulation of the over-the-counter ("OTC") derivatives marketplace and is a key part of the effort to modernise America’s financial regulatory system in response to the financial crisis. OTC derivatives include swaps, which are contracts that call for an exchange of cash between two counterparties based on an underlying rate, index, credit event or the performance of an asset.
All standardized swap transactions (as defined in the legislation) between dealers and anyone that maintains a substantial net position in swaps, exclusive of hedging for commercial risk, or whose positions creates such significant exposure to others that it requires monitoring (“major swap participants”) would have to be cleared and must be traded on an exchange or electronic platform.
The legislation also sets out parallel regulatory frameworks for the regulation of swap markets, dealers, and major swap participants. Dealers and major swap participants must be registered and meet capital requirements while swap markets must also be registered and conform to various principles relating to enforcement, anti-manipulation, monitoring, information collection and conflicts of interest, among others.
Rule making authority is held jointly by the Commodity Futures Trading Commission ("CFTC"), which has jurisdiction over swaps, and the Securities and Exchange Commission ("SEC"), which has jurisdiction over security-based swaps. The Treasury Department is given the authority to issue final rules if the CFTC and SEC cannot decide on a joint approach within 180 days. Subsequent interpretations of rules must be agreed to jointly by the two Commissions.
The Group of Central Bank Governors and Heads of Supervision (the oversight body of the Basel Committee on Banking Supervision) met on 6 September 2009 to agree a set of measures aimed at strengthening the regulation, supervision and risk management of the banking sector and reducing the probability and severity of economic and financial stress. The measures include:
- raising the quality, consistency and transparency of the Tier 1 capital base so the predominant form of Tier 1 capital is common shares and retained earnings;
- introducing a leverage ratio as a supplementary measure to the Basel II risk-based framework;
- introducing a minimum global standard for funding liquidity that includes a stressed liquidity coverage ratio requirement, underpinned by a longer-term structural liquidity ratio;
- introducing a framework for countercyclical capital buffers above the minimum requirement, including constraints on capital distributions; and
- issuing recommendations to reduce the systemic risk associated with cross-border banks.
The Basel Committee will issue concrete proposals on these measures by the end of 2009, with final calibration of the new requirements to be completed by the end of 2010.
The Group of Central Bank Governors and Heads of Supervision also endorsed three principles to guide supervisors in the transition to a higher level and quality of capital in the banking system:
- requiring banks to strengthen their capital base by limiting excessive dividend payments and share buybacks;
- aligning compensation with prudent risk-taking and long-term, sustainable performance;
- promoting stability of national banking systems and the broader economy;
The United Kingdom's Financial Services Authority ("FSA") began regulating banks' and building societies' day-to-day contact with their customers on 1 November 2009. The FSA's remit covers direct debits, payments, instant access, savings accounts, unauthorised transactions and notifications of interest rate changes. Other areas of retail banking, such as overdrafts and credit card lending, continue to be regulated by the UK's Office of Fair Trading, under the Consumer Credit Act 2006 (UK). The new framework delivers benefits for consumers, including:
- banks having to provide prospective customers with full information up front on the service or product that interests them;
- banks refunding a customer who claims that an unauthorised transaction has taken place, unless the bank can show good reason why they need to investigate the claim;
- consumers receiving interest for money transferred into current and instant access accounts from the moment the bank receives the funds; and
- banks refunding debits to a customer's credit or debit card where the debit is more than could reasonably be expected, unless the bank provides evidence to justify refusing the refund within 10 days.
The FSA also now regulates money remitters.
The International Monetary Fund (IMF), the Bank for International Settlements (BIS) and the Financial Stability Board (FSB) have issued the report “Guidance to Assess the Systemic Importance of Financial Institutions, Markets and Instruments: Initial Considerations”.
The report was prepared in response to a request by the leaders of the G-20 to develop guidance for national authorities to assess the systemic importance of financial institutions, markets and instruments. It outlines conceptual and analytical approaches to the assessment of systemic importance and the criteria that are helpful in identifying systemic importance (size, substitutability, interconnectedness).
The report identifies the policy issues where an assessment of systemic importance would be useful (moral hazard; information gaps; macroeconomic consequences) and suggests addressing those issues through the adoption of guidelines based on high level principles developed by the IMF, BIS and FSB.
The Financial Stability Board ("FSB") has released a note for G20 ministers on their planned exits from extraordinary financial sector support measures including wholesale debt guarantees, deposit guarantees, asset purchase schemes, capital injections to financial institutions, special lending facilities and extraordinary central bank liquidity facilities.
In the wake of the Lehman Brothers collapse, most developed countries introduced measures to address the bank liquidity shortages. Although the usage of financial support measures has declined since the peak of the financial crisis, the removal of these policy measures requires a considerable amount of judgement. Given the wide range of measures that have been employed and the different challenges that authorities face, there will be differences in criteria and plans for exit from these measures. The FSB provides some broad guidance on the approach to be taken.
Exit policies should be pre-announced, flexible, transparent and credible, with the objective of enhancing stability. As far as possible, pricing and other conditions of support measures should support a market-based exit, i.e. that market participants are incentivised to draw less on support measures as markets normalise. Because the withdrawal of support measures in one country may have spill-over effects on other countries, the FSB suggests co-ordination between regulators is desirable.
The note provides an overview of the extraordinary measures in various jurisdictions and a brief survey of both the take-up of those measures by financial institutions and plans for unwinding guarantees and depositor protection.
The Financial Services Authority ("FSA"), the regulator of the UK financial services industry, has released a discussion paper setting out proposals for a major reform of the UK mortgage market, aiming to ensure that it works better for consumers and is sustainable for all market participants.
The discussion paper reviews the position of the mortgage market as a significant part of the financial system and notes deficiencies in current regulation highlighted by the financial crisis. The paper goes on to list the proposals for reform which reflect the FSA’s changed approach to a more intrusive and interventionist style of regulation. One result of this is that there is less reliance on disclosure with the FSA acknowledging that consumers are not always able to protect their own interests. The paper recognises that irresponsible lending practices seen in the market are expected to be curtailed by the FSA's separate work on capital and liquidity.
The review’s key proposals are:
- imposing affordability tests for all mortgages and making lenders ultimately responsible for assessing a consumer’s ability to pay;
- banning ‘self-cert’ mortgages through required verification of borrowers’ income;
- banning the sale of products which contain certain ‘toxic combinations’ of characteristics that put borrowers at risk, for example prohibiting loans to credit-impaired borrowers that are also at high loan-to-income ratios;
- banning arrears charges when a borrower is already repaying and ensuring firms do not profit from people in arrears;
- requiring all mortgage advisers to be personally accountable to the FSA; and
- calling for the FSA’s scope to cover buy-to-let and all lending secured on a home.
The FSA has not ruled out further changes if these initial proposals do not have sufficient effect, including caps on loan-to-value, loan-to-income or debt-to-income ratios.
The discussion paper is out for discussion until 30 January 2010 and the FSA is seeking views from consumer groups and industry. A feedback statement will be published in March 2010 with consultation papers for specific points possible. The timeframe for implementation is still to be considered, with the FSA intending to move quickly, particularly on proposals that have found broad support.
Financial service providers and financial advisers - Ministry of Economic Development discussion document
The Ministry of Economic Development issued a discussion document in October on the implementation of the Financial Service Providers (Registration and Dispute Resolution) Act 2008 and the Financial Advisers Act 2008. The discussion document builds on feedback received from members of the financial sector and sets out the basis for the proposed fees for regulation as a financial service provider or financial adviser. It is expected that regulations in respect of fees, charges and costs will be in place by 1 May 2010.
The Financial Service Providers (Registration and Dispute Resolution) Act 2008 reforms the law relating to financial service providers and establishes the Register of Financial Service Providers. The Act requires registered financial service providers to file an annual confirmation with the Companies Office. It also establishes a comprehensive, industry-based dispute resolution system.
The Financial Advisers Act 2008 specifies who may perform a financial adviser service and the financial products and services on which they may advise. It provides for registration, authorisation and licensing depending on the complexity and risk of the product advised on. The Securities Commission's proposed fees are being determined as part of an independent fees review.
The Companies Office, Ministry of Consumer Affairs and Securities Commission will each provide services under the new legislation with the costs to be recovered from the users and beneficiaries of such services. The Companies Office has agreed to be the collection point for all fees.
The Government has released a discussion document, "GST: Accounting for land and other high-value assets" ("Discussion Document") on a range of proposed changes to the GST rules. One proposal is to expand the circumstances in which a GST liability incurred on the sale of secured property (both real and personal) is shifted from a borrower to the person exercising the power of sale (i.e. the lender in a mortgagee sale).
Section 5(2) of the Goods and Services Tax Act 1985 applies where property is sold under a power exercisable by a lender in or towards the satisfaction of a debt owed by a borrower. It shifts the obligation to account for GST on the sale from the borrower to the person exercising the power of sale, and the GST is paid out in priority to the secured debt as an expense of the sale (the defaulting borrower typically has insufficient means to meet a GST obligation). This occurs for example where a mortgagee exercises its power of sale under a mortgage.
Inland Revenue has expressed concern about a rise in "de facto mortgagee sales" under which a sale is presented as being conducted by the borrower, notwithstanding the sale having been arranged by the lender. In particular it is concerned about mortgagee sales where the mortgagee never formally becomes a mortgagee in possession. However, a mortgagee sale and a mortgagee in possession are distinct concepts; separate GST rules govern a mortgagee in possession. A mortgagee can sell property (and be subject to section 5(2)) without being a mortgagee in possession.
Inland Revenue has proposed to widen the ambit of section 5(2) to cover situations in which a lender has initiated and/or controlled a sale. The indicators of such a sale would include one or more of the following:
- a mortgagee taking control of, or inducing the sale of, the property by exercising a power under a contract with a mortgagor;
- a mortgagee signing the sale and purchase agreement (this may include under a power of attorney), or requesting the mortgagor to sign the sale and purchase agreement as already negotiated by the mortgagee;
- a mortgagee organising services related to selling the property, such as building, conveyancing, auctioning or advertising services;
- a mortgagee paying directly for the services related to selling the property;
- a mortgagor’s solicitor also being the mortgagee’s solicitor;
- a purchaser being associated with the mortgagee.
The present distinction between a sale falling within (or outside) the section 5(2) regime is easy to draw, and should remain that way. The proposed criteria would give rise to considerable uncertainty.
Lenders should be able to encourage borrowers to sell property without being concerned - or unsure - about where a resulting GST obligation will fall. The proposed changes may dissuade lenders from intervening and offering their skill and expertise to assist distressed borrowers in managing their loans and property. In addition, it is common in smaller conveyancing transactions for a mortgagor's solicitor to also act for the mortgagee. Arbitrary rules that encourage or effectively require the appointment of independent solicitors will impose further transaction costs in a situation where there is often little (or no) equity remaining in the property.
Although the Discussion Document states that by these changes "the government does not seek to assert a priority in the distribution of the assets of the mortgagor", that is precisely their effect. The changes improve the Commissioner's priority in an insolvency, at the expense of other creditors. They entirely circumvent the priority rules and give Inland Revenue practically as good a position as a secured creditor. The proposal requires significantly more thought and consultation. Draft legislation has not yet been prepared.
The Australia-New Zealand Shadow Financial Regulatory Committee ("ANZSFRC") released statement number 6 on 22 September 2009, entitled Is a Credible Exit from Government Debt and Deposit Guarantee Programmes Possible?
In the statement ANZSFRC discusses how policy makers should exit from government debt and deposit guarantees initiated in reaction to the recent disruption in financial markets, and makes the following points:
- Governments should generally avoid providing guarantees. ANZSFRC acknowledges, however, that in some circumstances a continuing government guarantee may be unavoidable.
- Where a guarantee is unavoidable, it should be priced to reflect its underlying value.
- While the Wholesale Funding Guarantees introduced in Australia and New Zealand in 2008 may have achieved their short-term objective, there are clear adverse implications for banking sector risk and competition.
- ANZSFRC recommends that Wholesale Funding Guarantees should be withdrawn immediately once conditions have normalised and no new guarantees should then be offered.
- Despite the adverse effects of deposit guarantees, ANZSFRC believes that a return to the pre-crisis situation (where no deposit guarantee or insurance applied) would not be possible as Australian and New Zealand investors are unlikely to view any withdrawal of the schemes as credible.
- ANZSFRC recommends that Australian and New Zealand governments replace the current deposit guarantee schemes with versions that promote competition and discourage excessive risk taking.
This publication is included in Russell McVeagh's website on the Internet: www.russellmcveagh.com
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Guy Lethbridge | WELLINGTON |
John Powell, Ross Pennington or Geoff Busch | AUCKLAND |
WELLINGTON |
AUCKLAND |