Derivatives are risky financial instruments people can invest in to make money from rises and falls in shares, markets and commodities.
Jarden Securities has been censured for historic financial licence breaches of a derivatives trading company it took over.
The Financial Markets Authority Te Mana Tātai Hokohoko (FMA) formally censured Jarden Securities for OM Financial’s (OMF) failure to keep investor money separate from its own.
This was a breach of its licence obligations, designed to ensure clients’ money was not co-mingled with the money of the company they are investing through, the FMA said.
The breach took place between September 2015 and July 2020, before OMF amalgamated with Jarden in March 2021, the FMA said.
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The amalgamation meant Jarden inherited the property, rights and liabilities of OMF, which was why Jarden, which is one of the country’s larger investment advisers, was censured, the FMA said.
James Greig, the FMA’s director of supervision, said: “A derivatives issuer failing to handle client money appropriately is serious, and we have previously signalled our concerns around this issue in our 2020 derivatives issuer sector risk assessment report.
“We have little tolerance for firms not meeting their obligations in this area,” he said.
The FMA has published a new guide to managed funds following research suggesting more New Zealanders are considering alternative investments because of low interest rates.
A fundamental obligation for derivative issuer licensees was to hold investor money on trust, separate from the licensees’ own money, Greig said.
This ensures client money is protected from the risk of loss that could occur from co-mingling, if the business becomes insolvent.
Jarden chief executive James Lee said: “Jarden agrees with the FMA’s findings that this practice should not have occurred.”
During preparation for amalgamation, OMF identified the issue, Lee said.
But, he said: “At no time was there a risk to client funds, and OMF always held sufficient funds to meet all client obligations.”
OMF ceased this practice, and self-reported the issue to the FMA and to the NZX sharemarket, Lee said.
Greig said OMF made at least 150 payments of its own money totalling US$1 million (NZ$1.4m) into the trust account designated to hold derivative investor money.
Derivatives issuers may deposit money into the trust account to safeguard against the risk of a shortfall, however, the FMA concluded the money deposited by OMF was for business-related payments to third party providers, not to safeguard against the risk of a shortfall arising.
Greig said: “Although no OMF clients lost money as a result of this issue, we considered that investor money was at risk while the necessary separation processes were not in place.”
Jarden had engaged constructively with the FMA through this process and implemented changes to ensure co-mingling of funds did not happen again, he said.