New Zealand: Crime and punishment in the draft Financial Markets Conduct Bill

Brief Counsel

A key objective of both the establishment of the Financial Markets Authority (FMA)and the general review of securities law is to persuade retail investors that they can have confidence in the regulatory framework and that misconduct will be punished.

The draft Financial Markets Conduct Bill (the draft Bill) creates an enforcement system which relies primarily on civil remedies, reserving criminal sanctions for egregious conduct and for "knowing" and "reckless" behaviour.  The remedies are flexible, calibrated to the severity of breach. 

The draft Bill has, however, moved away from the February Cabinet decision to focus liability for product disclosure on the issuer and instead extends onerous disclosure standards to underwriters and a broader range of market participants involved in the issue. 

This change could undermine the objective of the Bill to develop New Zealand capital markets.


The draft Bill:

  • includes infringement notices for minor contraventions, as an alternative to a summary offence
  • applies civil pecuniary penalties for many contraventions — for example, a minor and careless, but not reckless and intentional, misstatement in a product disclosure statement (PDS)
  • contains broad prohibitions on misleading or deceptive conduct, backed by a range of civil remedies to ensure correction, or compensation for loss, and
  • reserves criminal sanctions for egregious violations of the law, where the conduct was deliberate and reckless — for example, knowingly and recklessly making a misleading or deceptive statement in a PDS, or insider trading.

Infringement notices

For minor "compliance" type breaches, the FMA will be able to issue an infringement notice — a securities law "speeding ticket" in a prescribed sum of up to $20,000.  An infringement fee will be payable to the Crown, and will not result in a conviction. 

For disputed matters, the FMA will be able to revoke the infringement notice or the notice may be challenged in the District Court under the Summary Proceedings Act.

Alternatively, as now, the FMA could pursue a summary offence where the Court can award a fine of up to $50,000 if a person is found guilty.

Civil pecuniary penalties

A civil pecuniary penalty is a fine imposed by the High Court.  The standard of proof is on the balance of probabilities, and the matter will proceed as a civil proceeding rather than a criminal case.  A penalty may be sought alongside other civil remedies, such as a compensation order. 

Two levels of penalty are envisaged.  Less serious breaches will attract penalties of up to $200,000 for individuals and $600,000 for corporates.  Examples specified in the Bill are:

  • failure to secure the consent of each director and of any other prescribed person before lodging a PDS
  • failure to notify the offeror immediately on becoming aware of defective disclosure in a PDS or register entry
  • offering a financial product in the course of an unsolicited meeting, telephone call or other electronic communication
  • failing to disclose a substantial holding or plus 1% changes to a substantial holding, and
  • failure by a licensed market operator to notify the FMA of any suspected contraventions and of any disciplinary action taken.

More serious breaches will attract a penalty of the greater of (i) the consideration for the relevant transaction, (ii) three times the gains made or the losses avoided through the transaction, or (iii) up to $1 million for an individual and $5 million for a company.  Examples are:

  • failure to prepare, lodge or issue to investors a PDS (if the contravention is knowing or reckless, it will attract a criminal sanction)
  • failure to include in a PDS all material information, or to meet the prescribed requirements relating to form and presentation
  • failure to honour either the five working day (extendable to 10 by the FMA) waiting period restriction or any minimum subscription conditions before accepting applications to invest
  • insider trading
  • market manipulation
  • breach of continuous disclosure rules, and
  • trading in regulated financial products without a licence or holding out that one is licensed when one is not.

A full list of the civil contraventions and penalties is available here.

Civil liability and remedies

The general prohibition on misleading or deceptive conduct

Part 2 of the draft Bill contains broad prohibitions on misleading or deceptive conduct, or false or misleading representations, in trade in relation to dealings in financial products and the provision of financial services.  

The provisions are not limited to retail dealing, and are modelled on sections 9 to 13 of the Fair Trading Act 1986, and section 12DA of the Australian Securities and Investments Commission Act 2011.

The Fair Trading Act will no longer apply to conduct that contravenes Part 2.  The FMA will be responsible for enforcement rather than the Commerce Commission. 

This Part is a powerful foundation for the FMA to make direction orders under section 438 requiring compliance or corrective disclosure and prohibiting the distribution of misleading documents, or to seek Court intervention to make compensation orders.

Product disclosure liability – a flawed regime

The Part 2 prohibitions will not apply to misleading PDS or register entry disclosure, as the draft Bill contains a separate regime in Part 3. 

However in our view the regime is flawed by imposing liability on too broad a range of market participants, and setting too onerous a disclosure standard.

The February Cabinet Paper said:

There is strong anecdotal evidence that the preparation of disclosure documents is sometimes seen as an exercise in risk management and fear of liability, rather than a genuinely useful mechanism for conveying information....The risk of liability arguably encourages issuers to add in unnecessary matters, due to concern around potential liability for missing issues out.

The Cabinet Paper observed that under current law directors are liable for most breaches, but that under the new regime issuers will have primary liability for contraventions in relation to the issue of securities. 

Unfortunately this has been lost sight of in the draft Bill which, in section 462, puts liability for defective disclosure on:

  • the offeror (and issuer, if different) 
  • each director at the time of the contravention
  • an underwriter (but not a sub-underwriter) who is named in the deficient PDS or the register entry
  • anyone named in the document who consented to the misleading statement or to other material on which the misleading statement was based, and
  • every other person that contravenes the disclosure obligation. 

"Contravene" has a wide definition which includes a person who aids, abets, counsels, procures, or is "in any way, directly or indirectly, knowingly concerned in, or a party to" the contravention.

This language is wide enough to cover investment bankers, lawyers, accountants and other professional advisers. 

Inclusion of underwriters and professional advisers will increase underwriting and other transaction costs.  In Australia a similar approach to share and debt security issuance has resulted in expensive disclosure document litigation against professional advisers – for example Ingot Capital Investments v Macquarie Equity Capital Markets, where the advisers proved the statements made were not misleading, but only after a 108 day trial.  Significantly, in Australia liability for defective managed investment scheme and derivative product disclosure statements is focused is on the product issuer, and directors are liable only if the issuer does not pay.

MED is consulting on two possible disclosure standards for disclosure of all "material information":

  • Option A: information that a reasonable person would expect, if it were publicly disclosed, to have a material effect on the demand for the financial product on offer, and
  • Option B: information that a reasonable person would expect would, or would be likely to, influence persons who commonly invest in financial products in deciding whether to acquire the products on offer.

In either case, information would only be material if it relates to the financial products on offer, or the particular issuer or offeror, rather than financial products, issuers or offerors generally.

In Australia, the disclosure standard for shares and debt securities is all information that investors and their professional advisers would reasonably require to make an informed assessment of the rights and liabilities attached to the securities, and the assets and liabilities, financial position and performance, profits and losses and prospects of the issuer.  Issuers must disclose what they know, or ought to know having made reasonable enquiries, which gives rise to significant due diligence processes, as issuers and advisers seek to minimise liability for defective disclosure. 

By contrast, for managed investment products and derivatives, the Australians have a "directed disclosure" regime focused on information the issuer actually knows that might reasonably be expected to have a material influence on the decision of a reasonable retail investor to acquire the product.  Disclosure content for simpler products is largely prescribed.

In our view, thought should be given to applying different "materiality" requirements to different types of product as what is appropriate for genuine (equity) fundraising is not automatically appropriate for managed investment products and derivatives.

There is a real risk that, at least for managed investment products and derivatives, the less onerous (but still appropriate) Australian liability regime and disclosure standards could encourage issuers to prepare disclosure documents under Australian law and offer into New Zealand under the mutual recognition of securities regime – which would undermine the draft Bill objective to develop New Zealand financial markets. 

Civil remedies

The draft Bill largely carries forward the broad range of civil procedures and remedies available under the Securities Markets Act.  These include:

  • a declaration of contravention – made by the court on the application of the FMA if the court is satisfied that a breach has occurred.  These orders have the status of conclusive evidence in any subsequent application for compensation or other order of the court, so can facilitate investors later claiming losses once the FMA has established a breach
  • a pecuniary penalty order (discussed above) – these are made on the application of the FMA and may be issued where the court is satisfied that a contravention has occurred, except for contraventions relating to misleading or deceptive conduct.  Any penalties must be applied first to pay the FMA's actual costs in bringing the proceedings, and
  • orders to refund money or return property to an aggrieved person or to vary an agreement or any collateral arrangement or to require the offender to take any action the court thinks fit to reinstate the parties as near as possible to their former positions.  They may also restrain the exercise of rights attached to financial products, or their transfer, acquisition or disposal. 

The draft Bill carries forward controversial existing powers for the FMA to seek High Court orders freezing assets while it carries out an investigation, or pursues civil proceedings.

Compensatory orders

These can be applied for by the FMA or any other person. 

Importantly investors will not need to prove actual reliance on a defective PDS or register entry, as section 463 contains a rebuttable presumption that materially adverse misstatements have caused a financial product's loss in value.  Under the current law, investors may find it difficult to prove they have relied "in the faith" of a misleading prospectus.

Criminal offences

A four tier system of criminal sanctions is envisaged depending on the seriousness of the misconduct.




A fine under the Summary Proceedings Act of not more than $50,000 or an infringement notice from the FMA.


Prison for up to 3 years and a fine of up to $200,000 (or both) for an individual; a fine of up to $600,000 for a company.​


Prison of up to 5 years and a fine of up to $500,000 (or both) for an individual; a fine of up to $2.5 million for a company.​


Prison for up to 10 years and a fine of up to $1 million (or both) for an individual; a fine of up to $5 million for a company.​

A full list of the criminal misconduct related to each tier of offence is available here.

Criminalisation of director duties

The Bill currently contains criminal sanctions for serious and deliberate contravention of directors' duties to act in good faith and in the best interests of the company and in relation to reckless trading.  The draft Bill notes that these provisions may ultimately be included in a separate Bill to amend the Companies Act rather than in the securities law reform legislation.

As noted in our Brief Counsel of August last year on directors' duties, this aspect is controversial, with some submitters (including Chapman Tripp) expressing concern that public enforcement might discourage individuals from taking up directorships.  The Minister considers that this risk can be avoided by only criminalising egregious and intentional misconduct.

No action statements

The draft Bill proposes to amend the Financial Markets Authority Act to make it clear that the FMA has a function of making "no action" statements — stating whether or not, or in what circumstances, the FMA intends to take or not take action over a particular state of affairs or particular conduct. 

This mechanism is to be welcomed as it should give market participants some level of certainty that the FMA will take no further action in relation to a matter — although it will not bind third party claimants.

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

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

Roger Wallis
Emma Harding
Penny Sheerin
Mike Woodbury
Bradley Kidd
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
Font Size:
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
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
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 (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

To Use 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.


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.


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