New Zealand: Taking Up Arms For The Investor – FMA’s Power To Litigate

The legislation to set up the Financial Markets Authority (FMA) creates a new right for the regulator to initiate or take over legal proceedings against financial market participants on behalf of investors.

The provision is modelled on Australian law.

This Brief Counsel compares the New Zealand approach with the Australian model and looks at the lessons to be drawn from the Australian experience.

Policy considerations

The new power is delivered via the Financial Markets (Regulators and KiwiSaver) Bill, introduced into Parliament last week, and is based on s 50 of the Australian Securities and Investments Commission Act 2001 ("ASICA").

The policy intention is two-fold:

  • to provide a remedy for small-scale retail investors who lack the resources to fund expensive litigation by themselves. In such situations, the FMA will be able to step in and provide a regulator-backed class action proceeding to pursue the wrongdoing, and
  • to restore public faith in financial markets and in the regulatory regime which governs them. As the explanatory note to the Bill makes clear, there is a strategic dimension in ensuring that the new "super-regulator" possesses, and is seen to possess, strong enforcement powers.

But, inevitably, there are risks associated with the change.

As we observed in an earlier Brief Counsel, there is a danger that directors and other decision-makers will become excessively cautious in their decision-making, or be deterred from taking up these roles at all. Although no new obligations are imposed on them through the Bill, the likelihood of civil litigation has clearly increased. Quite apart from the deep pockets of a government regulator, the FMA's decision to take action is explicitly guided by different criteria from those that will inform a private individual's decision to seek redress in the same situation.

Subpart 3 in detail

Parties

Clause 34 of sub-part 3 of the Bill provides that the FMA may "exercise the right of action a person (person A) has against a specified person by commencing and controlling specified proceedings against the specified person". Alternatively, it may take over such proceedings.

A "person" is defined in the Interpretation Act 1999 to include "a corporation sole, a body corporate, and an unincorporated body". The capacity to act on behalf of a company thus allows the FMA to bring the equivalent of a derivative action against the directors of that company. As discussed below, "person A's" consent is not required to proceed.

A "specified person" denotes anyone who is or has been a "financial markets participant", any qualified auditor, and any expert who makes an untrue statement in a prospectus or advertisement. "Financial markets participant" is further defined to include all financial service providers, as well as controlling owners, directors, senior managers and holding companies of such financial service providers.

"Specified proceedings" include civil proceedings under any financial markets legislation and any other proceedings seeking "damages or relief for fraud, negligence, default, breach of duty, or other misconduct". This second limb will cover not only common law actions such as negligence but also statutory duties and offences contained in legislation such as the Companies Act 1993.

As identified in our Brief Counsel on the Bill last week, the FMA will have responsibility for enforcing a broad range of statutes to the extent they apply or relate to financial markets participants. This is clearly a significant expansion of the existing jurisdiction of the Securities Commission.

Where the FMA exercises its power to commence or take over proceedings, the High Court may under clause 40 of the Bill appoint the FMA to represent any other person who has "the same or substantially the same interest in relation to the subject-matter of the proceeding". The language of this section – "same or substantially the same" – echoes s 173 of the Companies Act (relating to representative actions) and is similar to s 33C of the Federal Court of Australia Act 1976 (Cth) ("same, similar or related circumstances"). It is broader than HCR 4.24 (which currently allows for representative actions for "persons with the same interest in the subject matter").1

Process

Any exercise of the power to take proceedings must arise as the "result of an inquiry or investigation carried out by the FMA" and must be considered by the FMA to be in the public interest.

The Bill does not specify that the investigation must be completed before the power is exercised. Equivalent statutory language in Australia has been interpreted as not requiring completion. In practice, however, this requirement is likely to be easily achieved.

Leave will be required from the High Court where person A objects to the proceedings or where proceedings have been initiated and the FMA is taking them over.

In these circumstances, person A will have an opportunity to be heard by the Court before leave is granted. To grant leave, the Court must be satisfied that it is in the public interest for the FMA, not person A, to control the proceedings. It is important to note, however, that there is also a provision allowing the Court to grant interim relief to the FMA before any of these procedural requirements have been fulfilled.

In granting leave, the Court has a broad discretion to make orders relating to the conduct of proceedings. The Court can require person A to provide information or assistance to the FMA, order that they meet the costs of the proceedings, and require that any costs award be directed to person A's shareholders or creditors.

The Court's consent is also required to "settle, compromise or discontinue" any proceedings. Australian practice in this area is for settlement agreements to be concluded and then placed before the Court for approval, which is normally forthcoming.

The 'public interest' requirement – NZ and Australia

ASICA provides simply that ASIC can begin proceedings where "it appears to ASIC to be in the public interest". The extent of the discretion granted to ASIC by this provision was considered by the Full Federal Court in Australian Securities Commission v Deloitte Touche Tohmatsu2.

In that case, the Court held that while ASIC's decision to take action was judicially reviewable, s 50 "was intended to confer an extremely wide discretion"3 and that any assessment regarding whether the action was in the public interest "was essentially one of fact and degree, and by its very nature it will be something that is not easily susceptible to judicial review".

The New Zealand Bill is different to ASIC in two important respects which indicate the Government intends the FMA to be more rigorously controlled.

The FMA can exercise this power only where it "considers" this will be in the public interest. This is slightly less subjective than the "where it appears to ASIC" test applied in Australia.

Further, and unlike the Australian legislation, the Bill explicitly stipulates the factors the FMA must consider in making this judgement. Clause 34(4) provides that the FMA must have regard to its "main objective": to "promote fair, efficient and transparent financial markets". It must also consider:

  • the likely effect of the proceedings on the future conduct of specified persons in connection with the financial markets
  • whether exercising the powers is an efficient and effective use of the FMA's resources
  • the extent to which the proceedings involve matters of general commercial significance or importance to the financial markets
  • the likelihood of person A commencing the proceedings (if those proceedings have not yet been commenced) and diligently continuing the proceedings, and
  • any other matters it considers relevant.

Regulatory approaches to securities markets – NZ and Australia

Although Australia has had a provision equivalent to s 50 on its books since 1961, and the section in its current form since 1989, the power has been relatively rarely used (only 21 times between 1991 and 2007).

ASIC has, however, been making more use of it in recent years, most notably in its ongoing pursuit of the directors of the Westpoint Group and related entities to recover some of the A$388 million lost by investors after the collapse of the property development company in 2006. To date, five separate settlements have been reached in the litigation.

The low earlier use rate reflects the existence in Australia of both a civil and criminal penalty regime, which allows ASIC to pursue breaches of directors' duties and other market misconduct directly. Historically, ASIC appears to have preferred these mechanisms to s50.

Also potentially relevant is the availability and higher frequency in Australia of private class action proceedings, especially since the Australian High Court declared in 2006 that private litigation funding was not an abuse of process.4

The current enforcement powers of the Securities Commission are more circumscribed than those available to ASIC, and relate only to breaches of the Securities Act 1978 and Securities Markets Act 1978. Breaches of those Acts allow the Commission to commence proceedings seeking declarations of contravention, pecuniary penalties and compensation for investors. Such prosecutions are ongoing. Private derivative actions by shareholders are also currently available under the Companies Act 1993 but are relatively rare.

Conclusions

The expanded powers proposed for the FMA are another step along the path from treating securities trading as a purely private realm toward viewing a well-functioning and transparent securities market as a public good that requires policing and enforcement by state agencies.

This policy shift has been given impetus by the fall-out, both economic and political, of the finance company collapses and the global financial crisis. The Government is resolved that the enforcement capability of the new "super-regulator" will be sufficient to match the high public and media expectations the FMA is likely to face.

The more rigorous "public interest" test envisaged in the Bill may limit the situations in which legal action can be pursued here compared with Australia. But this effect may be more than outweighed by the comparative lack of enforcement alternatives in New Zealand, which may lead to sub-part 3 being used more extensively than the equivalent provisions across the ditch.

Our thanks to Michael Dobson for writing this Brief Counsel.

1. Interestingly, the inclusion of this provision anticipates a broader review of the rules relating to private class actions currently being considered by the Rules Committee and Ministry of Justice.

2. (1996) 70 FCR 93; (1996) 138 ALR 655; (1996) 21 ACSR 332; (1996) 14 ACLC 1486

3. Ibid.

4. Campbells Cash and Carry Pty Ltd v Fostif Pty Ltd (2006) 229 CLR 386; 229 ALR 58.

The information in this article is for informative purposes only and should not be relied on as legal advice. Please contact Chapman Tripp for advice tailored to your situation.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
 
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions