1. Compliance
  2. DIMS
  3. FAQs

FAQs

 

Click on any of the topics below to find answers about DIMS. If you can't find the answers you're looking for please contact us.

 

Topics 

General

Licensing

Investor matters

Disclosure and ongoing client reporting

Financial reporting

Governance

Custodial requirements

Related-party benefit transactions and certificates

Specific information for Authorised Financial Advisers

 

General


How do you distinguish between personalised and class DIMS?

There is no bright line test as to what is, and what is not, personalised and class DIMS.  The provider of the DIMS needs to evaluate whether the investment strategy is bespoke, and the person exercising discretion under the authority needs to evaluate whether the decision they are making is bespoke to the investor.

When managers of managed funds exercise discretion, is this DIMS?

DIMS applies when decisions are made to enter into a managed fund. In this situation, only the party exercising the discretion to enter into a managed fund needs to be licensed or authorised to provide DIMS. In contrast, the manager of the managed fund is making investment decisions for the fund rather than for the individual investors. The individual investors own an interest in the fund, not the underlying assets.

Can lawyers still provide DIMS?

Lawyers can only provide DIMS if they are acting under an enduring power of attorney of a mentally incapable client.

The exemption for lawyers and others in the FA Act (s14) does not apply to the regulations (389(2)(b)).  Lawyers exempted under s14 of the FA Act still need a licence (under the FMC Act) to provide DIMS.

Lawyers do not generally provide DIMS for their clients’ funds, trust accounts, and related interest-bearing deposit accounts. That is because the client will, generally, not be placing funds as an investor with the lawyer. The lawyer will be dealing with those funds under the Lawyers and Conveyancers Act 2006, and the Trust Account Regulations, rather than an authority granted by the client.

In the example below, is the custodian required to have an FMC Act DIMS licence where it has received retail investors’ money from an intermediary and uses its discretion to place that money into term deposits with a bank?

Scenario
A financial service provider receives deposits from retail investors. The financial service provider then places the funds with a custodian. The custodian – who acts for the financial service provider – places those funds, together with other clients’ funds, into a trust account.

The custodian (with the consent of its clients and their retail investors) uses its discretion to place some or all of those funds on term deposit with a registered bank. Does the custodian need a DIMS licence in this case?

No. In our view, the custodian is not providing a DIMS to retail investors in this scenario. The custodian is providing a service to its clients (ie the financial service providers) who are wholesale investors. Because these are wholesale arrangements, no DIMS licence is required. This is the case whether the retail investor has given consent to placement of their money to term deposit directly to the custodian or through the financial service provider.

Our approach to complex commercial arrangements sitting behind DIMS is to look at the contracts and investment authority to find out:

  • who is the principal party responsible for the investor
  • whether there are any entities acting as an agent for the principal
  • whether the entities are acting in their own right, and not as a counterparty to the arrangements in place with the investor. 

In this case, while the retail customer should be told the custodian is obtaining this income, their agreement to the arrangement is not properly considered an ‘authority’ (under s392 of the FMC Act) from the retail customer to the custodian, even if that consent is a direct one between the custodian and the retail customer.

What does ‘incidental advice’ in the FMC Act mean?

The definition of DIMS in s392 of the FMC Act includes providing ‘financial advice in the ordinary course of, and incidentally to, providing a discretionary investment management service’. This incidental financial advice is included so that licensees do not need to consider the separate requirements of the FA Act when providing the DIMS.

An example of providing incidental financial advice is, a licensee recommending that the investor widen the scope of his or her investment authority to allow the purchase of shares in a company, where the existing investment strategy being implemented involved investing in companies similar to that company.

Our view is, advice on whether an investor enters into a DIMS is not incidental advice and is subject to the FA Act.

 

Licensing 


Do wrap platforms have to be licensed for DIMS?

This will depend on the scope of authorisation and contractual relationships, particularly the terms of the authority granted. Each wrap platform provider, and each DIMS provider, will need to review their documentation and determine who has the authority to exercise investment discretion. Providers exercising investment discretion are likely to be providing a DIMS.

 

Investor matters


What happens if a wholesale investor is actually a retail investor?

If a DIMS provider becomes aware that an investor they have been treating as a ‘wholesale investor’ is in fact a retail investor, they must stop providing the wholesale DIMS to the investor and let the investor know.

If the DIMS provider has a DIMS licence for a retail service, they can transfer the investor to their retail offering if the investor agrees, and complete the relevant documentation. Until then, the DIMS provider must not provide any discretionary services to the investor. 

If the DIMS provider does not have a DIMS licence for a retail service, or the investor does not agree to a transfer, the provider may continue to provide an execution-only service to the investor. They, however, must stop the discretionary aspect of the service. 

We also expect the DIMS provider to review their processes to determine whether the investors are wholesale or retail investors. Some out-of-cycle stress testing would also be expected. 

If the DIMS provider is a licensee, consider whether they have breached their licensee obligations, and let the FMA know (s412 of the FMC Act).

Can a licensee treat everyone as retail investors?

If there is a single retail investor in the service, then it is a retail service.  If a licensee wishes to treat all investors as retail investors, and therefore treat all services as retail services, the FMA has no objection to this.

Can an investment authority be ‘granted’ without being signed (refer to s437 of the FMC Act)? 

Our view is the investor’s signature is the best way to convey he has given his investment authority. In the absence of a signature, there needs to be evidence to confirm the investor has granted the authority. This could be done by the investor filling out a form, or a clear email reply from the investor.

An investor cannot grant an authority by silence or inaction.

It is important to note that the provider needs to be confident the person who grants the authority is the correct investor.

In a client agreement dealing with investment authority change, does the agreement have to set out the process that must be followed to change the authority?

Under terms implied into client agreements, the regulations (225) ²3 say ‘the investment authority may be changed only by written agreement between the investor and the licensee or authorised body.’

In our view the client agreement can set out the process for how a party to the investment authority can ask to vary the investment authority. The client agreement must still make it clear that the investment authority can only be varied when the investor and licensee, or authorised body, agree.

 

Disclosure and ongoing client reporting


Are percentage-based charges reported in dollar or percentage values?

Our view is that percentage-based charges reported in the quarterly reports should be a dollar value. Some licence applicants have told us that reporting these charges as a dollar value will be problematic until IT system changes can be made. We are currently consulting with some licence applicants and licensees on a class exemption to provide temporary relief from this requirement.

Are externally-managed funds included in the definition of percentage-based charges?

No.  However, note that all licensees must meet the requirement of cl38 of schedule 21 of the regulations to inform clients that external funds may charge fees.

We do not object if a licensee, with an associated managed fund, wants to separate the fee charged to show which part of the fee relates to the DIMS, and which part relates to the fund.

If licensees are receiving a benefit from investing in a managed fund, we expect this to be disclosed to meet the regulations (cl14, schedule 21).

Please refer to s12 of the FMC Act for the definition of an ‘associated person’ where percentage-based charges apply.

How do you distinguish between individual action fees and percentage-based charges?

The distinction is more about the individual action fees and regular service charges, and less about the individual action fees and percentage-based charges. It is possible for regular service charges as well as individual action fees to be percentage-based fees.

Under cl39(1) of schedule 21 of the regulations, an investment proposal must state what the portion of percentage-based fee is, as a percentage of the investor’s portfolio. This can only be meaningfully disclosed by separately disclosing the total percentage-based charges that are regular service charges, and the individual action fees (if any).

To meet cl39(1) schedule 21 of the regulations on reporting one-off individual fees, it sufficient to state the information under any heading related to percentage-based charges, and refer to there being one-off individual action fees on top of the regular service fees.

The regulations require percentage-based charges to be calculated as a percentage of the whole portfolio. This is different to the individual action fee charged as a percentage of a particular transaction’s value.

What are the FMA’s views on the disclosure of percentage-based charges when those charges are based on a sliding scale?

Cl39(4) of schedule 21 of the regulations permits, rather than requires, further information to be provided. The same part of the regulations allow disclosures to include fees for two or more scenarios.  A simple range of fees is unlikely to be sufficient without specifying the levels at which the particular fees apply, and an overall average for different-sized portfolios.

The fundamental requirement of cl39 of schedule 21 of the regulations is that the fees must be stated as a percentage of the investor’s portfolio.

The following demonstrates how important it is to ensure the investor properly understands the impact of the fee structure. It is illustrative and does not reflect an expected level of granularity.

The following disclosure (on its own) would not meet this requirement:

1% on the first $100,000 of funds under management

0.5% on that portion of funds under management in excess of $100,000

The following would meet this requirement (preferably in addition to the above):

  • 1% for funds under management up to $100,000, and on a sliding scale from 1% for funds under management of more than $100,000 as follows:
  • 0.9% for funds under management of $125,000
  • 0.83% for funds under management of $150,000
  • 0.79% for funds under management of $175,000
  • 0.75% for funds under management of $200,000
  • 0.67% for funds under management of $300,000
  • 0.625% for funds under management of $400,000
  • 0.6% for funds under management of $500,000
  • 0.55% for funds under management of $1 million
  • 0.525% for funds under management of $2 million

The above fees are a percentage of an investor’s total portfolio.

When do licensees have to provide five-year performance averages and yearly averages by bar graph?

Licensees do not have to provide the five-year performance average until they have collected five years’ worth of data. We do not expect incremental average reporting in the interim (except the required 12-month average report). We expect the first five-year performance average to be reported after five years of disclosures have been completed.

The bar graph information must be provided as soon as the first disclosure year is completed. The disclosure needs to continue for:

  • each disclosure year the licensee has investors in the portfolio
  • each disclosure year the licensee uses that model portfolio of assets for investment strategies. 

For the regulations’ definition of ‘disclosure year’, refer to cl6 and 6(5). Reporting requirements start when the disclosure year begins.  The regulations do not say when the first disclosure year for a new licensee must start. Our view is that as soon as a licence is effective, a licensee must be in an active disclosure year. This means the licensee must, for the first disclosure year, pick a disclosure year start date of either:

  • the date the licence takes effect
  • any date in 2015 which precedes the date the licence takes effect or
  • 1 April 2015 (if no active decision is made by the licensee this will be the default date).

Should fees be disclosed in the Service Disclosure Statement (SDS)? If so, what level of detail should be provided?

Section 3 of the SDS only needs to contain a high level, but brief, description of the fees. The dollar amount need not be specified. A reference in the IP on where to find details of the fees is acceptable.

Duplication in the SDS and IP should be minimised and avoided.

What are the FMA’s expectations regarding reporting GST on fees?

Our expectations for reporting GST on fees are as follows:

  • if the fees being reported are actual fees the investor has paid (therefore in ongoing or annual reporting) these should be GST inclusive
  • if the fees being reported are future fees the investor will pay for the service (therefore in the SDS and IP) these could be GST inclusive or GST exclusive 
  • it must be clear to the investor that the fee reported includes or excludes GST. An example is: ‘fee is GST inclusive’ or the ‘fee is GST exclusive but GST payable if applicable’.

Please also refer to the Goods and Services Tax Act 1985 to help decide whether fees need to include GST.

Where should general (not material) risks be disclosed in an SDS and an IP?

You only need to disclose risks required by cl44(2)(b) of schedule 21 of the regulations. Our view is that licensees need to be careful not to swamp the investor with risk information. Risks should only be provided when they are useful and meaningful to the investor. This is consistent with our expectations of risk disclosure for product disclosure statements (Effective Disclosure Guidance Note).

To meet cl44(2)(b) of schedule 21 of the regulations, some ‘market risks’ can be listed in the SDS. If risks affect the volatility of the portfolio, that is the subject of the IP. 

‘Some’ and ‘not all’ of what impacts volatility need to be disclosed under cl44(2)(b) schedule 21 of the regulations. You need to have a summary of the factors. The list of risks added here is quite limited. The focus should be on the significant volatility factors.

Risks that are not ‘material information’ should be treated as ‘additional information’. Place these at end of the SDS or IP (to meet the regulations (209) and (34) so they do not detract from the required risk disclosures. 

Risks that are not required can be incorporated by reference, according to the regulations (33) and (209).

Can documentation under the FA Act and the FMC Act be streamlined?

Yes, refer to s426(1) of the FMC Act.  We expect you to explain what the documents are, and for the information to be clear, concise and understandable. If multiple parties (for example the licensee and the custodian) are providing the information, be clear who is providing what.

Can a provider report to each investor at a higher level than investor level under regulation 210 of the FMC Regulations (provided the reporting is accurate and not misleading)?

No.  Reporting under regulation 210 must be investor specific. With DIMS, each investment must be beneficially owned by the investor. One of the purposes of ongoing reporting is to tell the investor what they beneficially own.

In the SDS, what information should be included in the summary of the ‘significant features’ of the DIMS?

The summary of how the service works and the ‘significant features’ of the DIMS should not duplicate information that is found elsewhere in the SDS or the IP. Specific information is required to be included elsewhere but need not be repeated in the summary. Significant features should set out what’s unique and different in the service. Prior to joining the DIMS, specific information is already provided in the SDS so it does not need to be repeated in the summary of significant features. It could, however, be outlined in the summary with a reference on where to find details. This approach is consistent with our view that duplication in the SDS or the IP should be minimised and avoided where possible, and our expectation that disclosure documents should be clear, concise and effective (refer also to the Effective Disclosure Guidance Note).

How can a DIMS provider re-create hypothetical returns as required in clause 32 of schedule 21 of the FMC Regulations if the model portfolio consists of some assets that were not in existence over those periods?

This is not a requirement under cl36(3) of schedule 21 of the regulations when there is no model portfolio of assets for the previous five disclosure years.

When financial statements are lodged with the Registrar under s461H FMC Act, are they publicly available?

Once an FMC reporting entity lodges their financial statements with the Registrar, the financial statements will be uploaded onto the Companies Office’s website where the public can view it.

If an FMC reporting entity is required to make their accounts ‘publicly available’, lodging their accounts with the Registrar will not meet the regulations’ definition of what is ‘publicly available’.

What are my reporting obligations to retail clients who leave the DIMS during the quarter?

Every retail investor using DIMS must be provided with the prescribed information (see FMC regulations clauses 210 and 211) about what transactions have been done in the portfolio for the investor.

This applies to every retail investor who used the DIMS during the quarter (see regulation 210 of the FMC regulations and reg 7 of the FA (Personalised DIMS) regulations).

It is a requirement that ALL retail clients receive a quarterly report regardless of whether they leave the service or not.

Our view is the only exception to the above is if a client who left the service during the quarter, or the year, was provided an exit/final report which contains all the information required under the relevant regulations, they do not need another report at the end of the quarter/year.

When do the reporting requirements start? 

Refer to the definition of ‘disclosure year’ in the regulations (reg5(1) and 5(5)).  Reporting requirements start when the disclosure year begins. There is nothing in the regulations on when the first disclosure year must start for a new licensee. Our view is that as soon as a licence is effective, the disclosure year starts. This means the licensee must for the first disclosure year elect a disclosure year start date of either:

  • the date the licence takes effect
  • any date in 2015 which precedes the date the licence takes effect
  • or 1 April 2015 (if no active decision is made by the licensee this will be the default date).

Can an SDS providing disclosure on the scope of investment authority prepared to meet what’s required by clause 6(3) of schedule 1 of the FMC Regulations, also satisfy the requirement to provide written notice under clause 6(7) of schedule 1 of the regulations?

Our view is that written notice of the scope of the investment authority must be expressly given to the investor, together with the other matters set out in cl6(7)(b) of schedule 1 of the regulations, if applicable. We do not consider that sending the SDS, or informing the investor where to obtain a copy of the SDS under cl 6(3) of schedule 1 of the regulations (even if the SDS discloses the scope of the investment authority), meets the notice requirements of cl6(7) of schedule 1 of the regulations. However, we see no issue with only one notice being sent to the investor incorporating information required by  cl6(3) and cl6(7) of schedule 1 of the regulations, together with a copy of the SDS or a statement on how the investor may obtain an electronic copy.  

 

Financial reporting


 

If I treat my wholesale clients as retail investors, would this impact my ability to be considered for lower financial reporting requirements if I’m a smaller DIMS licensee?

Small DIMS licensees are exempt from certain financial reporting requirements – see FMC (Financial Reporting – DIMS Licensees) Exemption Notice 2015.

We define a ‘small DIMS licensee’ based on the value of the retail investors’ portfolios you manage.

As the exemption does not define who ‘retail investors’ are, the FMC Act definition applies. So, if your clients meet the wholesale investor definition they will be regarded as wholesale investors (for the purpose of the funds under management calculation under the exemption).This means they will still be classed as wholesale investors even if you treat them as retail investors in terms of on-boarding, disclosure and reporting.

If you rely on the exemption to meet your financial reporting obligations under the FMC Act, you need to ensure you have a robust process and system to identify and record how you classify your clients and for what purpose.

 

Governance


How can you tell from the licence issued by the FMA (or otherwise) that a contracted adviser is covered by the licence?

The licensee’s systems and processes need to be sufficient to ensure that only those authorised to perform the DIMS for the licensee are doing that. This is a matter of good governance for the licensee. We would expect the board of the licensee to ensure that appropriate controls and oversight are in place.  There is nothing to stop a licensee from designating certain employees or agents as being covered by the licence.  However, the more widely delegated the DIMS discretions, the more controls and systems will be needed to ensure that the licensee’s DIMS obligations are being met.

Our strategic priorities include a focus on governance and culture.  We, therefore, expect appropriate governance systems and processes to underpin a culture conducive to fair, efficient, and transparent financial markets.

What are the FMA’s expectations regarding the extent of oversight directors of the licensee should have over the licensee’s compliance with their licence?  What can be delegated to management?  What is the directors’ liability in this regard?

The licensee should have sufficient systems and processes to carry out their role as a provider, and to meet their obligations under the FMC Act. This is a matter of good governance for the licensee and we expect the board of the licensee to ensure that appropriate controls and oversight are in place. The board is best placed to manage those matters, hence the potential liability for directors.

Our expectations of the board and individual directors’ role in making sure the licensee meets their obligations depend on the size and complexity of the overall business, and the specific expertise of individual directors. 

For larger businesses, this may mean the board’s involvement is in overseeing and approving the delegations, compliance, and reporting framework in relation to DIMS without necessarily, for example, directly reviewing and approving the detail of investment portfolio selection, standard form IPs, and SDSs.

Licensees are required to report insolvency of key personnel of the authorised body, but not the licensee. Is there a requirement for licensees to report insolvency of key personnel of the licensee as well?

Our view is that key personnel is a sub-set of directors and senior managers according to the regulations (188) and when read together with the FMC Act’s (s6) definition of senior manager. A licensee must report any insolvent director or any senior manager, or a likely insolvency. For an authorised body, the licensee only needs to report it if an executive director or senior manager who performs duties related to providing the DIMS is, or likely, to become insolvent. 

 

Custodial requirements


How will the FMA align the breach of custodian requirements outcomes under the FA Act and the FMC Act?

Licensees can be found liable for failure to comply with the broking or custodial requirements under both the FA Act and the FMC Act.

Custodians can be found liable for failure to comply with the broking or custodial requirements under the FMC Act.

Under the FA Act, penalties are limited to fines ($5,000 for individuals and $25,000 for entities).

Under the FMC Act, penalties can include pecuniary penalty or compensatory orders, for amounts greater than those under the FA Act.

In deciding what action, if any, to take, the FMA may consider:

  • the nature of the breach
  • the level of harm caused to investors and the market as a whole
  • the circumstances leading to the breach
  • the response to the breach by the custodian and licensee (ie willing compliance)
  • our strategic priorities.

Does a DIMS licensee (or lead custodian) need to require a sub custodian to report directly to the retail investors?

The FA Custodian regulations do not require sub custodians to report directly to investors. However, when reg 4(4) of the FA Custodian regulations applies, a sub custodian can provide reports to an investor to help the lead custodian meet their FA Custodian regulations obligations (reg5).

We expect the lead custodian to ensure that investors do not receive reports on the same transactions from different parties.

 

Related-party benefit transactions and certificates 


 

What information should a licensee include in its related-party benefit certificates?

Related-party benefit transactions must not be undertaken unless it’s in the investor’s best interest or permitted because you are relying upon one of the following:
The transaction is:

  • at arm’s length
  • an acquisition or disposal of an interest in a NZ or Australian registered scheme 
  • an investment in permitted registered bank products
  • an acquisition or disposal of a public security in the ordinary course of business. 

Certificates must explain why they are given and the basis for relying on them and, if necessary, be accompanied with supporting evidence.

Importantly, they must clearly state the nature and monetary value, or nature and extent of the benefit(s). 

It helps if the certificate names the related-party although this is not mandatory.

IMPORTANT: All DIMS licensees must provide a quarterly report to the FMA which discloses if any certificates have been given in the previous calendar quarter and, if so, include a copy of those certificates as supporting evidence. If no certificates have been given during that quarter, you must still disclose this in your quarterly report. Email the report to compliance@fma.govt.nz with the subject title ‘Notification of related-party benefit transaction certificates'.

Certificates covering a class of future related-party benefit transactions

A certificate can cover a class of future transactions (for example all transactions between you and a specific related-party) so it’s important to note:

  • you don’t need to duplicate a certificate if the circumstances and related-party remain unchanged 
  • if a monetary value cannot be quantified, the certificate needs to state the nature and extent of the monetary benefit
  • we expect you to have a robust process which enables you to identify and match each transaction to the associated certificate. 

You should be able to identify each transaction as one of the following:

  • not providing a related-party benefit
  • a related-party benefit transaction which is in the investors’ best interest 
  • a related-party benefit transaction which is permitted as explained above.

During monitoring visits, we may look at what your process is for identifying related-party benefit transactions, and the checks you put in place to ensure they comply with their associated certificate.

 

Specific information for Authorised Financial Advisers


Can an AFA ‘use’ the DIMS licence of another party?

  • AFAs may act as agents for a licensee who has been authorised to provide DIMS to investors.  
  • A licensee cannot sublicense or otherwise allow an AFA to use their licence to act as a principal in the DIMS offer. To be a principal, an AFA needs to get their own licence (if the AFA needs to use other parties’ resources to do this, those arrangements are assessed as outsourcing and custody arrangements under the FMA’s assessment process).

If an AFA is connected to an FMC Act DIMS licensee, what AFA (FA Act) disclosure documents do they need for  personalised DIMS?

For AFAs who are not a principal personalised DIMS provider (ie, they are providing DIMS under another party’s licence); are not providing personalised DIMS; and have no DIMS authorisation under the FA Act:

  • neither the primary DS or secondary DS under the FA Act need to mention personalised DIMS.

For AFAs who are not providing personalised DIMS as principal (ie, they are providing DIMS under another party’s licence), and have personal authorisation for personalised DIMS:

  • Our view is the investor must clearly understand, when reading the documents, although authorised by the FMA, the AFA does not provide personalised DIMS in their own capacity.
  • We expect the primary DS to make it clear that although authorised to provide personalised DIMS, the AFA is doing so under another party’s licence. The AFA cannot provide personalised DIMS in their own capacity due to the restrictions placed as part of their authorisation. If the AFA is not accredited by the licensee to provide personalised DIMS (ie they will only provide class DIMS under the other party’s licence), this should also be made clear.
  • The secondary DS will need to meet requirements of sections 1A and 7, of schedule 2, of the Financial Advisers (Disclosure) regulations 2010. The document also needs to make it clear that although the AFA is authorised to provide personalised DIMS in their own right:

- the AFA’s accreditation arrangement with another party prevents the AFA providing personalised DIMS except as an agent for the licensee (or prevent provision of personalised DIMS if applicable) 

- the information set out in section 1A of the secondary DS does not relate to the investment authority and client agreement signed or accepted by the investor (as these will be licensee branded documents).

For AFAs who provide class DIMS under a license, and personalised DIMS in their own capacity as principal under their FA Act authorisation, their disclosure documents must have all information required for personalised DIMS set out in the Financial Advisers (Disclosure) regulations 2010.

Does an AFA need to be authorised to provide personalised DIMS under the FA Act if they will only provide personalised DIMS to wholesale investors?

No.