New Zealand: A Regulator With Teeth: The Enforcement Capabilities of the FMA: Part 1

New Zealand's new "super regulator", the Financial Markets Authority (FMA), opened for business on 1 May 2011. The FMA's main purpose, as defined in the establishment legislation, is to promote fair, efficient and transparent financial markets.

Compared to its predecessor agencies, the FMA has been equipped with extensive enforcement powers and capabilities in the service of this objective. This paper explores these powers, their genesis and likely manner of application. It does not seek to question the utility of, or justification for, the powers. Rather it focuses on the practicalities of what the FMA can do, to whom, and how.

First, however, a brief background to the creation of the FMA and the perceived need for "a regulator with teeth".

A gun-shy dog is useless for duck hunting

Among the many explanations for the precarious state of New Zealand's financial sector in the aftermath of the finance company collapses and the global financial crisis was one recurrent theme – regulatory enforcement was inadequate and wholesale reform of the regulatory environment was essential if investor confidence in New Zealand's financial markets was to be restored.1

A leading advocate of the need for institutional reform was the then head of the Securities Commission, Jane Diplock, who wrote an opinion piece for the New Zealand Herald (Unify regulatory framework and confidence will grow, March 2010) arguing that current regulatory arrangements were not fit for purpose and that "a single, comprehensive regulatory agency with extended powers" was needed.

Those who point their fingers at the Securities Commission and the other New Zealand regulators for doing too little to prevent [the finance company collapses], should look instead at the regulatory framework in which we operate – a patchwork quilt of add-ons and band aids cobbled together over the past eight years, none of which helped protect finance company investors.

The regulatory vacuum attracted opportunistic operators and the result was market failure of an entire industry and tragically the loss of retail investor confidence in the New Zealand capital markets once again.

Despite warnings by the Commission, it could do nothing to prevent this failure. A government agency can only act within its warrant. Time has come to extend the warrant of New Zealand's regulators.

While the article may have appeared somewhat defensive (as demonstrated by the heated online responses), it did illustrate the frustrations experienced by industry regulators and was certainly not a lone voice. Similar concerns were expressed in submissions to the Capital Market Development Taskforce, the Prada and Walter Review of the Securities Commission, and in comments by the Registrar of Companies to the Commerce Select Committee inquiry into finance company failures.

All identified as problems:

  • the fragmentation of the regulatory framework, leading to concerns about gaps and overlaps
  • the regulators' perceived unwillingness actively and visibly to prosecute wrongdoers and to take cases in order to clarify the boundaries of the law, and
  • the adequacy of regulators' powers.

The Capital Market Development Taskforce, in its 2009 report Capital Markets Matter, observed:

...several of the main regulators have a role in policy formation, monitoring and enforcement. They also regulate both product and institutional behaviours, and there is overlap in regulatory enforcement. In short, there is room for improvement in defining the role of each institution (settling issuers' and investors' expectations) and reducing overlaps in activities, especially enforcement, while building critical mass in expertise.

...such overlaps create a number of problems, in particular:

  • Lack of coordination between regulators leading to gaps and regulatory arbitrage
  • Added costs and uncertainty for issuers and investors leading to unanticipated risks and lack of redress.

In addition to overlaps, there are gaps in the regulatory landscape and concerns that the current regulatory framework is insufficiently enforced by the multiple regulators across the market.

The Taskforce recommended that greater emphasis be placed on monitoring and enforcement capability and activity. Although the recommendation was (perhaps necessarily) somewhat lacking in detail, the discussion that preceded it provided a clear articulation of the Taskforce's thinking:

Enforcement

In the design of the regulatory framework and the regulatory agencies, it is important for enforcement to be prioritised. As Bhattacharya and Daouk argue, regulation that is not enforced can be worse than having no regulation at all. The intuition is that regulation adds compliance costs to those who are law abiding, reducing their competitiveness and giving a competitive advantage to those not complying.

Visible and credible enforcement, therefore, needs to be seen as an integral part of the regulatory regime if it is to be effective. As a member of the public noted in a submission to us, a gun-shy dog is useless for duck hunting. While regulatory agencies may engage in considerable 'behind-the-scenes' activity, the credibility of regulators depends on their being seen to be effective – a visible deterrent. Working alongside market participants to educate and inform them is likely to be much more effective when the participants understand that enforcement action is a realistic possibility. Enforcement activities are also necessary for clarifying the interpretation of regulatory settings – particularly where these are principles-based. There will be some cases where the regulator should take action to help clarify boundaries, rather than because it expects to win.

As will be discussed later, the desire that the regulator "[be] seen to be effective" resonated through the legislative process and, if initial indications are anything to go by, will be a primary plank in the FMA's campaign to restore investor confidence in the market.

The Taskforce's work also informed the Regulatory Impact Statement prepared by the Ministry of Economic Development (MED) to provide "an analysis of options to establish a more effective, efficient and coherent arrangement of regulatory bodies in the financial sector".

MED accepted that "the degree of consolidation or fragmentation of powers across different financial sector regulators" was a key determinant of overall regulatory performance:

...the dispersal of regulatory roles affects the culture of the different regulatory agencies involved, by encouraging those regulators to read their roles narrowly and to treat matters that were not squarely within their responsibility as matters that should be considered by other agencies.

Hence the creation of an entirely new "super regulator" was "more likely to provide the desired cultural shift required to focus the regulator more strongly on enforcement matters" than could be achieved by simply extending the functions of the existing Securities Commission. In April 2011, the necessary legislation was passed. Two weeks later the FMA was in operation, and ready to "go duck hunting".

The following sections of this paper will examine the FMA's new powers in general terms, going into the specifics of enforcement in relation to particular pieces of legislation only where necessary.

Overview – monitoring, investigating and enforcing

The Financial Markets Authority Act 2011 (the FMA Act or the Act) lists among the FMA's six functions:

  • to monitor compliance with, investigate conduct that constitutes or may constitute a contravention of, and enforce certain pieces of legislation (s9(1)(c)), and
  • to monitor, and conduct inquiries and investigations into any matter relating to, financial markets or the activities of financial markets participants or of other persons engaged in conduct relating to those markets (s9(1)(d)).

The Act lists the pieces of legislation which the FMA is responsible for enforcing under two parts, Part 1 and Part 2.

PART 1 PART 2

Financial Advisers Act 2008



Anti-Money Laundering and Countering Financing of Terrorism Act 2009
Financial Service Providers (Registration and Dispute Resolution) Act 2008 Building Societies Act 1965
KiwiSaver Act 2006, Parts 4 & 5, Schedules 1 & 2 Companies Act 1993
Securities Act 1978 Co-operative Companies Act 1996
Securities Markets Act 1988 Corporations (Investigation and Management) Act 1989
Securities Transfer Act 1991 Crimes Act 1961,ss220,228,229, 240,242,256-260
Superannuation Schemes Act 1989 Financial Reporting Act 1993
Unit Trusts Act 1960 Friendly Societies and Credit Unions Act 1982


Industrial and Provident Societies Act 1908


Limited Partnerships Act 2008


Reserve Bank of New Zealand Act 1989, Part 5C


Trustee Companies Act 1967

The FMA's monitoring, investigation and enforcement role in relation to those Acts in Part 2 extends only so far as the legislation applies or otherwise relates to financial markets participants. As defined in the FMA Act, a financial markets participant is (broadly):

  1. a person required to be registered, licensed, appointed or authorised under the Part 1 legislation
  2. certain persons acting in relation to offers of securities to the public (issuer, promoter, trustee, auditor etc), and
  3. a related company, director or senior manager of (i) or (ii).

The FMA's powers in relation to monitoring and enforcement are specifically provided for in all of the Part 1 legislation and most of the Part 2, but not all. The Crimes Act 1961, for example, makes no reference to the FMA. In these cases, the FMA's jurisdiction derives entirely from its general functions in sections 9(1)(c) and 9(1)(d) of the Act.

Continue in Part 2

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.

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This article is part of a series: Click A Regulator With Teeth: The Enforcement Capabilities of the FMA: Part 2 for the next article.
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