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Report on compliance by registered banks with the Securities Act 1978 [2005] NZSecCom 1 (1 March 2005)

Last Updated: 10 November 2014

Report on Compliance by Registered Banks with the
Securities Act 1978
Securities Commission
1 March 2005

1.

The Commission has reviewed compliance by registered banks with the requirement to provide an investor with an investment statement before the investor subscribes for securities.
2.

The Commission found that most banks were aware of the requirement and generally had adequate processes in place to ensure compliance.
3.

The Commission's objectives in undertaking the review were to assess compliance with this requirement across the banking industry, to ensure banks are aware of it, and to identify any material non-compliance. Where material non-compliance was identified the Commission has taken enforcement action as it considered appropriate in the circumstances.
4.

The review was carried out under section 10(c) of the Securities Act 1978 ("the Act"), which states that a function of the Commission is "To keep under review practices relating to securities, and to comment thereon to any appropriate body". Under section 28A of the Act the Commission may publish any report or comment made in the exercise of its functions.

Background
5.

Under section 37A(1)(a) of the Act an issuer cannot allot securities unless the subscriber has received an investment statement about the security before subscription. The investment statement contains important information for the "prudent but non-expert" potential investor.
6.

In mid 2004 it came to the Commission's attention that two registered banks had not complied with the investment statement requirement for term investments offered by the bank. Term investments are debt securities for the purposes of the Act. The banks had each used a coupon advertisement which enabled investors to subscribe for term investments by mail without first receiving an investment statement. The Commission accepted enforceable undertakings from each of the two banks. These are published on the Commission's website.
7.

In consultation with the Reserve Bank, the Commission subsequently wrote to other New Zealand banks and asked them to review their compliance with section 37A(1)(a) of the Act, and to report to the Commission. The Commission requested that this report include the following matters:

(a)

Whether the bank was aware of any non-compliance;

(b)

What steps the bank had taken to determine whether it had complied; and

(c)

A sworn statement that the review had been undertaken and that the report to the Commission was accurate.
8.

The Commission asked each bank to provide details of any non-compliance identified, and the steps that the bank proposed to take to resolve it.
9.

The Commission asked banks whether their reports covered any internet and telephone banking activities, and whether they covered both retail and business banking operations.
10.

The banks that the Commission wrote to are:

(a)

ANZ National Bank Limited (in respect of both its ANZ Bank and National Bank operations);

(b)

ASB Bank Limited;

(c)

Bank of New Zealand;

(d)

Citibank N.A.;

(e)

Kiwibank Limited;

(f)

Kookmin Bank;

(g)

Rabobank New Zealand Limited;

(h)

St George Bank New Zealand Limited (Superbank);

(i)

The Hong Kong and Shanghai Banking Corporation Limited;

(j)

TSB Bank Limited;

(k)

Westpac Banking Corporation.

Responses from banks
11.

Two banks advised that they do not offer debt securities to the public that require an investment statement. The Commission decided to take no further action in respect of these banks.
12.

Most banks advised that they were complying with the investment statement requirements, and explained the processes they had to ensure that they complied.
13.

Material non-compliance was identified in the case of one bank. The bank did not have any investment statement for the term investment products that it offered. The bank and its directors offered the Commission enforceable undertakings to comply with the Act in future. These undertakings were accepted by the Commission under section 69J of the Act and are published on the Commission's website.
14.

Some banks reported that they do not provide investment statements to certain business banking customers in reliance on the "habitual investor" exception in section 3(2) of the Act. The Commission made further inquiries of these banks about their reliance on the exceptions in section 3(2). Several of the banks advised that they intended to give all customers an investment statement so as to avoid any doubt about whether an exception applied.
15.

In some cases banks reported that they had processes to help ensure compliance, but human error or inadequate dissemination of the compliance information to bank staff meant that they could not be sure that investment statements had been provided to customers prior to subscription in all cases. In other cases, banks were unable to ascertain with certainty whether some investors had been sent an investment statement prior to opening a term investment but they may have received an investment statement when opening a bank account. The Commission understands that the banks that identified possible instances of non-compliance, or possible compliance gaps, are working to improve their processes and staff training.

Commission's comments
16.

A term investment is relatively easy for bank customers to establish and is offered by banks in the everyday course of their business. A large number of New Zealanders have a term investment at some time in their lives, and it may involve a substantial proportion of their savings. Despite their relative simplicity and familiarity, bank term investments still require an investment statement. Investors need to be informed about what they are investing in. An investment statement is the main tool under the Act for delivering that information. For term investments, the key information is likely to be the interest rate and whether that may change, the minimum term of the investment, and any penalties for early withdrawal.
17.

New Zealand registered banks (and other issuers) must comply fully with all applicable requirements of the securities laws (or an applicable exemption notice). The requirement for an investor to be provided with an investment statement prior to subscription is a key requirement of the Act. The Commission does not think that this requirement is particularly difficult for issuers to comply with.
18.

The Commission has already granted some relief to registered banks from the requirement to ensure actual receipt of an investment statement. This was in recognition of the volume of term investments that banks offer, and customers subscribe for, in the ordinary course of a bank's business. The Securities Act (Banks) Exemption Notice 2002 provides an exemption from section 37A(1)(a) of the Act to the extent that an investment statement can instead be sent to a subscriber at least three working days before subscription. Also, section 5(2D) of the Act includes a statutory exemption from section 37A(1)(a). This applies to a "call debt security" (as defined in the Securities Regulations 1983). This would cover most current accounts and may be relevant to some term investments.
19.

On the information available to it, the Commission is satisfied that the banks have reviewed and reported on their compliance to the Commission as requested, and drawn any compliance issues to the Commission's attention. The Commission is pleased that most banks were aware of their obligations under the securities laws and had processes in place to ensure that customers are provided with investment statements in accordance with the legislation.
20.

The Commission is concerned that some non-compliance has been identified but understands that the banks affected are now aware of their obligations and are taking steps to comply. The Commission expects banks to notify it of any material securities law issues that may arise in the course of the bank's business. If it should be necessary in the future, the Commission will take enforcement action against banks (as with other issuers) where material non-compliance is identified, as appropriate in the circumstances.
21.

The Commission notes that section 3(2) provides that offers of securities made to specified types of persons, (for example, persons who in the course of and for the purposes of their business habitually invest money) are not offers to the public, and therefore do not require an investment statement or prospectus. The Commission is of the view that the exceptions in section 3(2) are limited exceptions and that their application is likely to be fact specific and so will need to be considered on a case by case basis. The Commission also notes that, in order for these exceptions to apply, the securities in question must be offered only to the types of person described in section 3(2). These exceptions must be properly applied or else an investment statement would be required.
22.

The Commission notes that it may assist banks to comply with section 37A(1)(a) of the Act if a customer is provided with a copy of the investment statement when the customer first opens an account. The Commission understands that some banks already include the investment statement in the information pack provided to new savings or current account holders. If the customer then decides to open a term investment, they have already received the investment statement. If the investment statement is updated then all customers will need to have been provided with the updated investment statement before they open a term investment.
23.

The Commission considers that compliance with the investment statement requirements of the Act, and the securities laws more generally, are likely to be a matter that should be referred to a bank's audit committee for consideration on a regular basis.
24.

The Commission has consulted with the Reserve Bank in carrying out its review and in relation to the enforcement actions that have been taken. The Reserve Bank has expressed support for the Commission's actions and has confirmed that securities law compliance issues will be included in the Reserve Bank's regular consultation meetings with each registered bank.
25.

The Commission thanks banks for their cooperation with its review.