Most Read Contributor in New Zealand, September 2016
The Financial Markets Authority (FMA) investigations
and enforcement report for the financial year ended 30 June 2015
shows a regulator moving from a "scrutinise and
prosecute" model to a more sophisticated use of early
engagement and intervention, focussed on preventing harm rather
than cleaning up the mess afterwards.
It's been a busy year for our newest regulator, and the
report details successful FMA activity aimed at market
manipulation, non-compliance with disclosure requirements,
non-filing of financial statements, insider trading and continuous
disclosure breaches and improper use of the Financial Services
Provider Register (FSPR).
The FMA is evidently pleased to be able to bid farewell to the
long tail of finance company investigations and prosecutions
inherited from the Securities Commission. Finance company
litigation accounted for only 28% of FMA proceedings in the last
year and, more significantly, only 2% of investigation
But of more interest, in our view, is the clear emphasis on the
range of enforcement mechanisms available to the FMA to respond to
Only 23% of the FMA's investigations completed in the last
year have led to litigation. The remainder have, according to
the report, resulted in exercise of the FMA's unilateral
enforcement powers: warnings, enforceable undertakings and
agreements to receive payments in lieu of pecuniary
penalties. In conjunction with the Registrar of Companies, 28
companies have been removed from the FSPR.
Significantly, where proceedings have been filed only 7% of
cases have led to settlement. The FMA shows an explicit
preference for using its powers to impose sanctions, rather than
doing a deal behind closed doors.
The FMA's willingness to develop bespoke solutions to
particular cases is neatly demonstrated by its approach to two
market manipulation cases. At one end is the well-publicised
investigation into Milford Asset Management – resulting in an
agreed payment in lieu of a pecuniary penalty and civil proceedings
against the trader concerned. At the other is a warning
issued to an inexperienced trader who had inadequate guidance about
permissible behaviour and did not appreciate that the relevant
trades were illegal.
Key messages for the regulated
Expect a proactive regulator, open to using the full scope of
its powers to achieve the outcomes it sees as desirable for the
market. Early intervention will be a priority, aimed at
encouraging compliance before harm results.
Early engagement with the FMA will be important, and
valuable. Constructive and practical dialogue at the front
end of an investigation will set the tone for the future –
something which is much more significant when the regulator is also
the one likely to determine the sanction. Holding the
regulator at arm's length and slugging it out in Court is
generally inadvisable. Responding to the first
interactions with the FMA effectively may be the difference between
a constructive outcome and a destructive one.
The report demonstrates the FMA's commitment to
transparency and clear criteria so that the market can understand
when it will intervene and how. Hopefully that is an
indication of a sensible exchange between the FMA and those it
regulates about the regulator's expectations, and how to manage
them most effectively.
FMA's powers to intervene
Part 8 of the FMCA contains powers for the FMA to make a
broad range of injunctive type orders, without needing to go to
Stop orders can prohibit offers, issues, and
sales of financial products, or financial services being supplied,
applications being accepted, or offer communications being
Direction orders can require a person to comply
with the FMCA and stipulate reasonable steps a person must take to
comply or to avoid or mitigate a contravention, including
publishing corrective statements at the person's own cost.
Various miscellaneous orders can prohibit use of concessions
that might otherwise be available under the FMCA (such as
simplified PDS documents, use of the mutual recognition or
'same class' offer regimes) and regulate unsolicited
Generally, the FMA must not exercise its powers without giving
prior notice to an affected party, and allowing an opportunity to
be heard, unless the FMA considers urgent action is needed.
Where urgency is required, the FMA can make interim orders without
The Court has power to make the same orders as the
An affected party could seek judicial review of FMA decisions,
although success may be difficult given the discretionary nature of
the orders and deference to the regulator's specialist
financial markets expertise.
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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