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Licensed vs Unlicensed Financial Institutions: What You Need to Know

Updated 12 October 2024

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​Summary
  • There will always be investment scams, big and small, obvious and deceptive. There are also outright risky investments unsuitable for everyday 'young', 'mum and dad', and 'senior' investors. But somehow, money gets transferred, and the investment goes sour. New Zealand, like the rest of the world, has its fair share of big investment losses from what are often seen in hindsight as 'bad investments'.
  • In 2008-2009, dozens of finance companies throughout New Zealand went bust, leaving behind hundreds of millions of dollars of debt. This burned the everyday investors who bought 'first-ranked debentures' or 'equity', thinking they were term deposits. Instead, they were high-risk loans to arguably lending companies that lacked the ability to properly credit control their loans. Investors lost big.
  • Then, in 2024, New Zealand saw the statutory administration of Du Val Group, which had previously advertised 10% p.a. returns on Facebook, talkback radio, and local papers to 'wholesale investors'. When repayments became problematic, some investors converted their $250,000+ investments to 'Du Val equity'. The case is ongoing as investors seek to recover their investments.
  • With so much interest in investing and so many risks, it has never been more important to understand the difference between trusted financial institutions (which are more heavily regulated by the New Zealand Government) and unlicensed financial institutions (and their investment offers) that may not be as heavily scrutinised. 
  • Additionally, with recent legislation set to arrive in 2024/2025 impacting financial institution licences LINK and new assurances around deposits (cash LINK, term deposit LINKs) provided to New Zealanders, it's critical to understand the real implications of these changes.  


An Introduction to the Financial Institution Licensing and Regulation Landscape

New Zealand's financial ecosystem is underpinned by a dual regulatory framework managed by the Financial Markets Authority (FMA) LINK and the Reserve Bank of New Zealand (RBNZ) LINK.
Financial institution licensing is a gatekeeping measure to ensure that financial entities operate with integrity, maintain consumer protection standards, and contribute positively to the market's stability.

There are four key financial services industry bodies or players:​

Financial Markets Authority (FMA) – The Regulatory Body

  • The FMA is the primary regulatory body overseeing financial markets in New Zealand. Its mandate is to promote fair and transparent financial markets while protecting investors from potential risks. The FMA issues licences to financial service providers, monitors their compliance with regulatory requirements, and enforces actions against those not meeting the required standards.
  • The FMA oversees conduct and market integrity in New Zealand's financial sector. It grants licenses to institutions like banks, insurance companies, and investment platforms and ensures they adhere to standards under the Financial Markets Conduct (FMC) Act 2013.
  • The FMA focuses on consumer protection, fair dealing, and maintaining transparency. Licensing under the FMA is crucial for companies that want to offer legal and financial services to New Zealanders. The FMA's scrutiny extends to monitoring compliance, risk management, and implementing penalties for violations.

Reserve Bank of New Zealand (RBNZ)

  • The RBNZ, New Zealand's central bank, has a distinct but complementary role. While the FMA concentrates on conduct, the RBNZ is responsible for regulation, focusing on the stability and soundness of financial institutions like banks, insurers, and non-bank deposit takers.
  • The RBNZ's licensing regime ensures these entities maintain adequate capital reserves, manage risks effectively, and are resilient against financial shocks. The RBNZ and FMA operate under a "twin peaks" regulatory model, where each institution manages separate but overlapping responsibilities, ensuring a balanced and stable financial system.
  • The Reserve Bank oversees New Zealand's banking industry, governed by the Reserve Bank of New Zealand Act 2021 and the Banking (Prudential Supervision) Act 1989. Its roles include setting and implementing monetary policy for price stability and sustainable employment, ensuring a sound and efficient financial system and managing and supplying New Zealand currency.
  • The Reserve Bank's responsibilities include registering and supervising banks to prevent or manage institutional distress or failure.

Financial Service Providers Register (FSPR)

The FSPR LINK is a public register maintained by the Companies Office that lists all financial service providers operating in New Zealand. Depending on the nature of their services, a registered financial service provider may or may not be licenced by the FMA.

Industry Associations

Industry associations, such as the Financial Services Council (FSC) and the New Zealand Shareholders Association (NZSA), provide valuable resources, including research, news, and advocacy on behalf of their members. These associations can help investors stay informed about industry developments and best practices.

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Frequently Asked Questions Concerning Licenced vs Unlicensed Financial Institutions

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How can I tell whether a company is licenced or unlicensed?

Financial institutions licenced in New Zealand will appear on the "Licensed & reporting entities" list on the FMA's website. If the company you're looking at isn't listed there, it is not licensed.

What's a Wholesale Investor? What's a Retail Investor?

  • A wholesale investor is typically a high-net-worth individual, large corporation, or sophisticated investor who meets specific criteria under New Zealand's financial markets law. These investors typically have more experience and financial capacity than everyday retail investors (such as those who use Sharesies or Hatch LINK, etc.), allowing them to access investment opportunities that are unavailable to retail investors.
  • Wholesale investors are considered more capable of evaluating risks and do not require the same level of consumer protection provided to retail investors. As a result, they can participate in private offerings, hedge funds, and more complex financial products. An example of a hedge fund only available for wholesale investors is Discovery Fund's Founders Fund LINK, although this closed to new investors in August 2024.
  • Retail investors are everyday individuals who do not meet the wholesale investor criteria. They are often less experienced and have smaller investment portfolios. Retail investors benefit from greater regulatory protections under New Zealand law, which include transparent disclosures, access to dispute resolution services, and product suitability requirements. Licensing regulations are more stringent for entities that serve retail investors to ensure that they receive adequate protection, especially when engaging in higher-risk investments.

What should I do if I suspect an investment company operates without a licence?

If you suspect an investment company is operating without a licence or engaging in fraudulent activities, you should immediately report your concerns to the Financial Markets Authority (FMA) LINK. You can submit a complaint or provide a tip-off through the FMA's online complaint form or by contacting them directly LINK.

What happens if I invest with an unlicensed investment company?

Investing with an unlicensed investment company arguably exposes you to higher risks, as they will, in almost all cases, not be subject to the same regulatory oversight as licenced entities. It is crucial to perform thorough due diligence and understand the risks before investing with an unlicensed investment company. If you encounter issues with an unlicensed provider, you may have limited recourse for dispute resolution and may be unable to recover your investment.

How can I verify if an investment company is licenced in New Zealand?

To verify if an investment company is licenced, you can follow these steps:
  1. Check the Financial Service Providers Register (FSPR) LINK to see if the company is registered as a financial service provider. The FSPR website allows you to search the register using the company's name or FSP number.
  2. Visit the Financial Markets Authority (FMA) website to see if the company has a licence for their specific financial services. The FMA provides a list of licenced entities LINK on its website.
  3. For banks, visit the Reserve Bank of New Zealand (RBNZ) website, which maintains a list of registered banks LINK operating in the country.

Know This: Every week, our research team receives emails from everyday New Zealanders who are in the process of investing in things they don't understand. Some are overseas 'banks' that are outright scams. Others ask about investment funds with offshore 'managers' who promise unrealistic returns. Many New Zealanders are fooled into such 'investments' after engaging with Facebook and Instagram adverts. Before making any investment, conducting thorough due diligence is essential, as some unscrupulous entities may use misleading information to deceive investors.