FAQs regarding ARFP Annual Implementation Review
Who must have an annual implementation review?
The Financial Markets Conduct (Asia Region Funds Passport) Regulations 2019 require an annual implementation review of the operation of all Passport Funds where the FMA is the home regulator. These are funds that:
- have been approved as Passport Funds; and
- are managed by licensed MIS managers in New Zealand.
The implementation review is required to determine if there is reason to believe the funds have not been (or are believed to have not been) operated in compliance with the Passport Rules.
Who can perform an implementation review?
The implementation review must be completed by either:
- a licensed auditor, i.e. licensed in NZ; or
- the licensed supervisor of the Passport Fund.
Note that the implementation reviewer cannot be the Operator of the Passport Fund or a related party of the Operator of the Passport Fund.
What period of time must the implementation review cover?
The implementation review must cover the same period as the audited financial statements for the scheme that includes the Passport Fund. Note that this is not necessarily the same period covered in the MIS manager’s audited financial statements.
When is the implementation review report due?
The implementation review report must be delivered to the FMA and all relevant addressees within 3 months of the end of the review period. Note that this is earlier than the scheme’s custodian assurance review report due date.
Who is the implementation review report delivered to?
The implementation review report must be delivered by the Operator of the Passport Fund to each of the following by the due date:
- Each Host Regulator for any country where:
- any Passport Fund member (regardless of whether a Passport Fund was offered during the review period):
- resided during the review period; and
- did reside when originally purchasing the Passport Fund;
- any offer of the Passport Fund was made during the period between the beginning of the review period and the date of the implementation review report.
Note that the implementation reviewer (i.e. supervisor or licensed auditor) must provide the implementation review report to the Operator of the Passport Fund in time for the Operator of the Passport Fund to meet its due date.
The implementation review report and reviewer’s opinion must be addressed to the Operator of the Passport Fund and to each party to whom it is delivered, and must authorise its use for the purposes of operating or providing oversight of the Passport Fund.
Who is party to the engagement for the implementation review?
The Operator of the Passport Fund and the entity performing the implementation review will be the parties to the review engagement. This reflects the requirement that under Clause 15(6) of the Passport Rules, the Operator is responsible for ensuring that an implementation reviewer is engaged for the Passport Fund. The other addressees are not required to be included in the engagement, but must be addressed and provided a copy of the report pursuant to 15(8) and (9) of the Passport Rules.
When must the engagement letter for the implementation review be signed?
The Passport Rules require that an implementation reviewer must be engaged at all times. As the fund is registered as a Passport Fund after approval from the FMA, the engagement must commence upon FMA approval. In order to approve the application for Passport Fund status, we require evidence that the implementation reviewer has been engaged. This can be either:
- a signed engagement letter without contingencies; or
- a signed engagement letter that is contingent upon FMA approval of the fund as a Passport Fund.
Who is required to provide assistance in the performance of the implementation review?
- Operator of the Passport Fund
- Outsourced service providers of the Operator of the Passport Fund
- Custodian of the Passport Fund
- Supervisor in its role as custodian or in its role of providing oversight of the custodian
- Supervisor in its role as supervisor of the Passport Fund
Can the implementation reviewer limit their liability?
We believe it is acceptable for the implementation reviewer to limit their liability to three to five times the fee for their engagement.
Does the implementation reviewer need to receive a legal opinion in the host country that the Passport Fund has complied with local regulations?
The implementation reviewer should take steps to ensure they are comfortable that the Passport Fund has complied with local regulations in any host countries. A legal opinion is acceptable for this aspect of the review, but is not required.
What information is included in the implementation review report?
The Passport Rules require that the report note whether the supervisor is aware of any matter that indicates, or is likely to indicate, that the Passport Fund was not operated in accordance with the Passport Rules during the review period in any respect that may be material to an addressee of the report.
Any matters identified must be described, including:
- the information leading to this determination
- why it is believed to be (or likely to be) a breach of the Passport Rules.
Our interpretation of this requirement is that the opinion above is meant to be a summary of the implementation review akin to the opinion in an assurance review.
There are two aspects of this review:
- Summarisation of any material limit breaks or material breaches of the Passport Rules.
- An Agreed Upon Procedures report supporting a conclusion that the fund has operated in compliance with the Passport Rules, i.e. what did the supervisor look at to determine compliance with the various Passport Rule requirements – general oversight and some level of testing.
The opinion must be based on sufficient enquiry to support a reasonable opinion for the control objectives noted below.
The detail of the report should indicate the information that was tested to form the basis of any findings, the nature of those findings, and whether they are considered to be material from the perspective of the addressees of the implementation report.
Note that while the implementation review and report should be structured similarly to an assurance review and report, that does not imply that the implementation review should be conducted in accordance with SAE 3150 or ISAE (NZ) 3402. While the structure is similar, we do not require the same level of rigour.
However, we do expect the review to be sufficiently thorough and rigorous to provide a reasonable basis for the opinion.
A simple certification is not sufficient. Similarly, a description of ongoing monitoring, while a large part of the implementation review, is not sufficient – that is second line activity; there needs to be some amount of reasonable third line checks.
What are the required control objectives for the implementation review?
The control objectives are meant to cover the key requirements of the Passport Rules in broad terms, leaving flexibility in determining how to implement those rules to the Operator of the Passport Fund and the supervisor. The controls are meant to cover aspects that are unique to the Passport Rules, not to replicate effort already taken under the FMC Act.
At all times during the review period, in accordance with the relevant provisions of the Passport Rules:
(1) Operator has officers with relevant qualifications (Clause 6)
(2) Operator meets the financial resources test (Clause 7)
(3) Operator has adequate internal controls to ensure that:
i. Assets are managed in accordance with relevant requirements of the SIPO and the Passport Rules and limit breaks are recognised and reported as required through a sufficient monitoring framework (subclause 8(2)(b)(i))
ii. Records sufficiently explain the transactions of the fund and all transactions in the interests of the fund (Clause 8(2)(b)(ii))
iii. Operator has duly kept a register of members including information sufficient to determine the passport jurisdiction of each member and the related obligations in the event of deregistration (Clause 8(2)(b)(iii) and Clause 54)
(4) Operator has a risk monitoring and management process sufficient for the size, complexity, and risk of assets managed (Clause 8(2)(c))
(5) Operator is in compliance with the requirements of the FMC Act and other relevant New Zealand legislation (Clause 8(d)). Note this does not require additional testing, but should describe ongoing efforts by the supervisor to ensure material compliance
(6) Operator meets the track record tests (Clause 9)
(7) Operator provides sufficient oversight for outsourced functions (Clause 11(4) and Clause 11(5))
(8) Supervisor has ensured that the custodian meets the specified criteria and adequately holds and accounts for portfolio assets (Clause 13)
(9) Operator provides audited scheme financial statements within 3 months of the balance date (Clause 16)
(10) Operator meets all requirements for making an offer in both New Zealand and any host economy (Clause 17)
(11) Operator has processes adequate to make redemptions as required under the Passport Rules (Part 7)