Unnecessary regulation for developers

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Property developers and investors are being asked whether corporate vehicles used to manage costs associated with communal facilities should be regulated by the Financial Markets Conduct Act.

Wednesday, September 30th 2015, 2:44PM

by Miriam Bell

Property developers often establish corporate vehicles to manage the costs associated with communal facilities like access ways, lifts and common garden areas.

The Financial Markets Authority (FMA) is now consulting on whether such vehicles should be regulated by the Financial Markets Conduct Act regime.

If such a vehicle is structured as a company, interests in it could be caught in the Act’s definition of “financial products”, under the “equity securities” subset.

This means the developer must comply with the obligations of an equity security issuer and the disclosure and other requirements of the Act might apply to an offer of these interests.

However, if such a vehicle is structured as an incorporated society, then interests in it won’t be caught by the definition of “equity security”.

This means it will generally not fall under the definition of “financial product” and will not be regulated under the Act’s regime.

The FMA’s preliminary view is that companies set up for managing communal facility costs in property developments should not be regulated under financial market laws.

This is because interests in such companies don’t constitute “financial markets” activity.

Further, the FMA said there is no reason for treating a company used to manage costs in property differently from an incorporated society used to manage costs for the same purpose.

For this reason, the FMA proposes that such companies should be exempt from the requirements of the Act.

Prominent Auckland property developer David Whitburn said regulating such companies was unnecessary and would be a case of over-regulation.

“It wouldn’t benefit anybody and there would be a ripple effect down effect in terms of costs as the imposition of new regulations on developers always trickle down.”

He said the issue had probably emerged due to a few complaints about exorbitant body corporate fees.

“But to regulate such companies would be to take a sledgehammer approach to something which can be easily fixed with a nail.”

Anybody concerned about the activities of such a company should seek legal advice, Whitburn said.

The FMA’s consultation paper on the issue is available here. 

Submissions on the issue close on Friday 6 November 2015.

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