Chapter 10 - Regulation of trust service providers

Current regulation

New Zealand already has regulatory regimes applying to professional groups providing trust administration and advisory services. Lawyers, chartered accountants and financial advisers are all regulated. Trustee companies are also subject to regulation. However, the existing regimes do not extend to cover everyone providing services in this sector.

Lawyers

New Zealand lawyers are regulated by the New Zealand Law Society under the Lawyers and Conveyancers Act 2006. All lawyers must meet certain educational and professional standards before they can be registered and are able to practice law. Once registered, they are required to act in accordance with rules of conduct and client care that have been made by the New Zealand Law Society, and approved by the Minister of Justice.493 These rules are binding and provide guidance around the boundaries within which a lawyer may practise.

The rules, based on the fundamental obligations of lawyers, include being independent in providing regulated services to clients, acting in accordance with fiduciary duties and duties of care, and protecting the interests of clients.494 Lawyers who fail to meet these standards can be disciplined and ultimately can be removed (struck off) from the register and excluded from practising law.

Chartered accountants

Accountants are not regulated per se. In fact, anyone can call themselves an accountant and offer services as such. However, to be a chartered accountant a person must be a member of the New Zealand Institute of Chartered Accountants and be subject to the Institute's regulatory standards. Chartered accountants are a self-regulated professional group. Members are required to undertake mandatory professional development training, are bound by the Institute’s code of ethics and are required to adhere to professional standards adopted by the Institute. They are also subject to disciplinary procedures and a client complaint system.

This self-regulating model leaves it to the public to choose between accountants who are registered chartered accountants and those who are not.

 

Trustee Companies

Trustee companies are those companies listed in section 2 of the Trustee Companies Act 1967 as trustee companies for the purposes of the Trustee Companies Act 1967, the Trustee Companies Management Act 1975 and the Trustee Companies Management Amendment Act 1978.495 Trustee companies act as the trustees of private trusts and also carry on business as trustees for holders of debt securities, statutory supervisors as regards participatory securities, trustees of unit trusts and superannuation schemes, and statutory supervisors for retirement villages.

Each trustee company is incorporated under the Companies Act and has the powers and responsibilities conferred by that Act, and by its private enabling Act and its constitution.496 The conduct of business by trustee companies is regulated. For example, restrictions are imposed on the remuneration that may be charged for different services and trustee companies are required to disclose the administrative charges imposed in respect of group investment funds.

A review of the legislation governing trustee companies will be undertaken by the Commission during stage three of this project. Issues and problems with the legislation governing trustee companies will be considered at that stage.497

Financial advisers

Financial advisers and financial service providers are regulated by the Financial Advisers Act 2008 and the Financial Service Providers (Registration and Dispute Resolution) Act 2008. The regime mainly covers individuals and companies who provide core financial services such as financial advice, banking, credit, financial guarantees and securities. However, the regime also encompasses some functions undertaken by trustee companies and others providing advice to trusts.

All financial advisers and financial service providers must be registered on a public register called the Financial Service Providers Register. Only registered advisers can proffer the financial services covered by the regime. The regime requires all financial advisers to exercise the level of care, diligence and skill of a reasonable financial adviser when providing financial adviser services. An obligation not to engage in misleading or deceptive conduct and to comply with disclosure obligations when providing personal retail services also apply to all advisers and entities registered under the regime. Stricter, more tailored obligations are imposed on advisers and financial service providers who wish to provide certain types of financial products.

Financial advisers must meet a higher standard to be licensed as authorised financial advisers or (in the case of corporate bodies) qualifying financial entities before they can lawfully advise on certain financial products. In addition to the requirements outlined above they must comply with the terms and conditions imposed on their licence and their code of professional conduct.

Lawyers and chartered accountants who provide financial advice do not have to be on the register or meet authorisation requirements if they do this as part of their normal business as a lawyer or accountant. They are covered by the regulatory regimes already discussed. Trustee companies are exempt when providing any services otherwise covered by the regime in the ordinary course of providing legal or financial services relating to the preparation or drafting of wills and estate management and administration. However, in practice these companies all provide these services in other contexts as well, so all of them are registered under the regime anyway.

The Financial Markets Authority (FMA) is the regulator for the regime. It registers financial advisers and imposes terms and conditions on the licenses for authorised financial advisers and qualifying financial entities. The FMA is also responsible for monitoring compliance with the regime and, when necessary, taking enforcement action.

Other relevant legislation

Two other Acts are also relevant to an overview of existing regulation.

Securities Trustees and Statutory Supervisors Act 2011

All trustees and statutory supervisors of publicly issued equity, debt and participatory securities, all trustees of unit trusts and Kiwisaver schemes, and all statutory supervisors of retirement villages are required to comply with and become licensed under the Securities Trustees and Statutory Supervisors Act 2011.498 The regime came into force on 1 October 2011.

The Act introduced a licensing regime for these trustees and statutory supervisors. They will be required to file regular reports with the FMA. The Act also gives the FMA powers to oversee the performance of trustees and statutory supervisors.

Anti-Money Laundering and Countering Financing of Terrorism Act 2009

From 30 June 2013 trust service providers and trust companies will be required to maintain records and report against anti-money laundering measures contained in the Anti-Money Laundering and Countering Financing of Terrorism Act 2009. The Act applies to all “reporting entities”. A reporting entity is partially defined in the Act but also includes a person or class of persons declared by regulations to be a reporting entity.499 Regulations have now been made declaring certain financial advisers and trust and company service providers to be reporting entities.500

Providers of trust services and trustee companies come within the ambit of the definition of “trust service providers” under these regulations, so will be required to comply with the regime as reporting entities from 30 June 2013. Authorised financial advisers and qualifying financial entities are also reporting entities under regulation.501 Lawyers and chartered accountants are excluded from the definition if they carry out the relevant trustee services in the course of their business as lawyers or accountants.502

The objective of the regime is to detect and deter money laundering and terrorism financing and bring New Zealand into line with the international standards for anti-money laundering and countering the financing of terrorism. It is also intended to contribute to public confidence in New Zealand’s financial system.

Briefly the Act requires all reporting entities to:

(a)undertake an assessment of the money laundering and terrorism financing risks facing their business;

(b)appoint a compliance officer;

(c)design and implement procedures and controls for vetting and training staff, undertaking due diligence and account monitoring of clients and record keeping; and

(d)report suspicious transactions.

Reporting entities will be under an obligation to verify the identity of all their clients and to establish the identity of the beneficial owner of any assets. They must also review and monitor their client information. The FMA will monitor reporting entities and enforce the Act for financial advisers and trustee companies and service providers.

The regime is not intended to regulate the general quality of services. However, the record-keeping and reporting requirements, together with the oversight of the FMA, may indirectly have a positive influence on the quality of services.

Coverage is incomplete

To summarise, regulatory regimes apply to lawyers, chartered accountants, financial advisors and trustee corporations. The Securities Trustees and Statutory Supervisors Act introduced a licensing regime for trustees and statutory supervisors of unit trusts and retirement villages. In addition, from 30 June 2013 the Anti-Money Laundering and Countering Financing of Terrorism Act 2009 will impose anti-money laundering reporting requirements on trust service providers and trustee companies and corporations.

This leaves a group of trust service providers who are not regulated.

There are companies in the market providing administrative and advisory services to trusts and trustees in competition with lawyers, accountants, trustee corporations and registered financial advisers that are not regulated trustee corporations. They may also not be caught by the financial advisers’ regime. There are also individuals who are not covered by the existing regimes who are acting as advisers.

These unregulated advisers provide their services as an alternative and in competition with trustee corporations and regulated professional advisers. Given they are claiming similar specialist skills and expertise, should they also be similarly regulated to protect the consumers of such services?

It should be noted that most of these companies and individuals will come within the definition of trust service providers used in regulations made under the Anti-Money Laundering and Countering Financing of Terrorism Act. They will consequently be reporting entities for the purposes of that Act when it comes into force and will be required to comply with the anti-money laundering reporting requirements. The only area that is not therefore covered by regulation in respect of this group concerns the quality of services. There is no requirement at present for this group to be registered or licenced in order to provide services. There is no requirement that services meet certain standards as there are for other groups. They are also not required to be a party to a binding dispute resolution scheme.

Professional or paid trustees

Paid trustees who are not lawyers, chartered accountants, or financial advisers also fall outside the current regulatory regimes discussed above. There are clear differences between individuals who act as trustees for reward and other trustees who act in that capacity privately as a result of a personal relationship with a settlor. Professional trustees provide their services because they are paid to do so. Where trustees act as such in the course of business for reward they hold themselves out as having special skills and expertise. They are also in a position to obtain indemnity insurance. In The Duties, Office and Powers of a Trustee the Commission discussed, in some detail, the differences between the standard of care applied to professional and lay trustees.503

Whether paid trustees should also be considered to be trust service providers in the same way as advisers is less clear. As discussed in the earlier paper, the office of trustee carries with it specific duties and liabilities. Trustees are already subject to standards of care and personal liability for their actions. Where trustees breach their duties, beneficiaries have remedies, although as was discussed in Parts 1 and 2 of this paper, those remedies are probably inadequate and need to be supplemented. However, whether people who claim to have specialist skills and expertise and seek appointment as paid trustees should also be regulated as trust service providers to protect consumers establishing trusts should also be considered.

Lawyers and Conveyancers Act (Lawyers: Conduct and Client Care) Rules 2008.

Lawyers and Conveyancers Act 2006, s 4.

Trustee Companies come within the definition of a “trustee corporation” for the purposes of the Trustee Act and may be appointed as sole trustee under that Act. The companies currently listed are Trustees Executors Limited, AMP Perpetual Trustee Company NZ Limited, PGG Trust Limited, New Zealand Permanent Trustees Limited, and The New Zealand Guardian Trust Company Limited. 

Laws of New Zealand Trusts (online ed) at [718].

An outline of the Commission’s review programme for trusts is contained in Law Commission Review of Trust Law in New Zealand: Introductory Issues Paper (NZLC IP19, 2010) at [1.7]. 

The Securities Act 1978 requires all public issuers of debt and equity securities to appoint a trustee and the issues of other participatory securities to appoint statutory supervisors. The Unit Trusts Act 1960 similarly requires that a trustee be appointed in respect of a unit trust, and the Retirement Villages Act 2003 requires retirement villages to appoint a statutory supervisor.

Anti-Money Laundering and Countering Financing of Terrorism Act 2009, s 5. 

Anti-Money Laundering and Countering Financing of Terrorism (Definitions) Regulations 2011.

Ibid, r 16.

Ibid, r 20.

Law Commission The Duties, Office and Powers of a Trustee - Review of the Law of Trusts Fourth Issues Paper (NZLC IP26, 2011) at [3.13].