Further MfE consultation on treatment of NZUs as financial products

  • Legal update

    17 November 2022

Further MfE consultation on treatment of NZUs as financial products Desktop Image Further MfE consultation on treatment of NZUs as financial products Mobile Image

The Ministry for the Environment (MfE) has released today a new consultation on proposals to improve governance of the New Zealand Emissions Trading Scheme (ETS) market for New Zealand Units (NZUs).

MfE is seeking feedback on the impact of treating NZUs as financial products, the leveraging of existing financial market legislation, and on alternative market governance proposals considered as part of the policy design phase.

The MfE consultation document is available here.

Our previous update on this topic from July 2021 is available here.

Who needs to read it? Why?

Participants in the ETS, particularly those who trade or advise on the trade of NZUs should read the consultation materials and consider the extent to which their trading activity and business operations in relation to New Zealand’s carbon market may be affected, and make submissions as appropriate.

What does it cover?

The changes proposed by MfE include:

  • Using existing financial legislation to regulate the market, which will prohibit insider trading and market manipulation. 
  • Requiring market operators of NZU exchanges to be licensed as a financial product market. 
  • Regulating NZU financial advice, transaction and/or custodial services to bring these in line with the Financial Markets Conduct Act 2013 (FMCA).
  • Improving transaction reporting to bring transparency to trading of NZUs, including the price and type of stakeholder buying or selling (while protecting sensitive information).
  • Improving transparency in transactions and providing participants with an optional centralised exchange.

The consultation document presents alternative options in some cases, such as continuing the status quo of relying on Crimes Act 1961 provisions to manage insider-trading risks alone, and parts of other Acts in relation to advice, transactional and custodial services. It does not, however, propose any additional Anti-Money Laundering and Countering Financing of Terrorism obligations for the NZU market beyond what already applies today.

Our view

In our response to the first stage of the consultation on governance in 2021, we expressed the view that NZUs are in substance financial instruments and that there would be significant efficiency benefits in regulating advice, trading and the market under the existing financial services law regime. A significant part of this regime, i.e. the FMCA and its associated regulations, focusses on advice, trading, and market conduct. The Financial Markets Authority (FMA) is New Zealand’s most experienced regulator of market conduct and should be a good supervisor of this activity. This would align with the approach in many other jurisdictions. The new proposals are following down the path we signalled, but as always the devil will be in the detail and there is much work to be done to ensure the new regime is both effective and efficient.

What next?

The government is carrying out targeted engagement with stakeholders most impacted by the proposals. Consultation is also open to any member of the public who wishes to submit feedback.

The consultation period runs from 17 November to 15 December, 2022. Submissions will be accepted up until 24 December 2022. Feedback will inform ETS market governance policy decisions which will be made in early 2023.

If you have any questions in relation to the consultation, or would like assistance in responding or understanding what it means for your business, please contact one of our experts.