FMA Censures Firma NZ For Breaches To Derivatives Issuer Licence Obligations

The Financial Markets Authority (FMA) - Te Mana Tātai Hokohoko – has censured Firma Foreign Exchange Corporation (NZ) Limited after finding it had materially contravened a number of its obligations as a licensed derivatives issuer (DI).

Through its ongoing monitoring of the DI sector, the FMA was satisfied that Firma NZ materially contravened its licence obligations because it:

• Failed to conduct product suitability tests for clients
• Repeatedly failed to meet net tangible asset requirements (DI’s must have net tangible assets of at least $1 million)
• Did not regularly provide statements to derivative investors regarding their investments (i.e. a list of a customer’s derivatives, their value, the amount of investor money held, and any amount allocated to margins)
• Failed to have adequate and effective systems, policies, procedures and controls

James Greig, FMA Director of Supervision, said: “Firma’s breaches are highly concerning because clients were not assessed to see if they were suitable to trade derivatives and then, because they did not receive regular statements, had little visibility of their performance or portfolio.”

Mr Greig said Firma’s contraventions were persistent and systemic, so a censure was the appropriate and proportionate response. “Firma is publicly held to account and must provide us an action plan to remedy the issues and ensure future compliance,” he said.

“It’s critical that derivatives issuers meet the conditions of their licence because these are high-risk financial products and trading them isn’t suitable for most retail investors. We have previously flagged the sector as high risk, with client suitability tests as key area of focus.”

Licensed derivatives issuers must ask retail investors to provide information about their knowledge, experience and level of understanding of the relevant type of derivative to enable the DI to assess whether the derivative is suitable for the individual.

Auckland-based Firma NZ provides foreign currency exchange forward contracts to retail clients in New Zealand. It has been licensed as a DI since 2015 and is a fully owned subsidiary of Firma Foreign Exchange Corporation, based in Canada.

The censure was issued under section 414(2) of the Financial Markets Conduct Act, which allows the FMA to censure a licensed firm and require an action plan if the FMA is satisfied a business has materially contravened its obligations.

Derivatives monitoring review

Mr Greig said the FMA was in the process of conducting an in-depth monitoring review of the DI industry, following a sector risk assessment last year. Preliminary findings suggest DI’s have inadequate product suitability assessments, while their customer bases have expanded significantly since COVID-19.

Mr Greig said while the review was ongoing, the FMA wouldn’t hesitate to use its regulatory powers to address any breaches found.

The results of the review will be collated for consideration of future industry guidance and/or standard condition review. The review has been deferred due to COVID-19 Alert Level changes, however the FMA expects to conclude the review before the end of 2021.

Recent enforcement action by the FMA in the DI sector includes:

• Directing Rockfort Markets to remove misleading advertising
• Imposing conditions on CLSAP NZ’s licence, preventing it from making an offer to, or receiving further funds from, retail investors, except in certain limited circumstances
• Bringing High Court proceedings against CLSAP NZ for AML/CFT breaches, which resulted in a pecuniary penalty of $770,000

© Scoop Media