4 October 2015

FMA's deregistration powers constrained by natural justice

The first appeal against deregistration by a financial services provider (FSP) has succeeded.
New Zealand Finance and Banking
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The first appeal against deregistration by a financial services provider (FSP) has succeeded after the High Court found that the Financial Markets Authority (FMA) failed to observe principles of natural justice.

At least one further deregistration case has been lodged, and it may not be the last.

Practical implications

The case challenges the breadth of the recent amendment which sought to allow the FMA to deregister foreign-controlled financial services companies that purport to operate in New Zealand in order to imply New Zealand's regulatory oversight.

It demonstrates that the test for deregistration may be too hard for the FMA to establish in some instances. The Court held that it is "insufficient for the FMA to rely solely on the fact that an FSP does not provide services in or from New Zealand in order to come to the conclusion that deregistration is necessary or desirable".

Parliament intended that something more be required, and "the evidence must go to whether the registration of the FSP is misleading, not the fact that the FSP exclusively provides services overseas".

A change under the current review of financial adviser legislation may be needed to impose more stringent controls on FSP Register foreign-controlled New Zealand companies which solely offer financial services overseas. If the policy intent is to ensure that those companies cannot trade on New Zealand's good reputation by claiming they are registered here, then perhaps it is time to raise the bar on registration.

The case may also encourage further appeals where there is a suspicion the FMA does not have good reasons to back up its decisions. Appeals of the FMA's decisions have been rare in the past, but that may change.

Significant consequences will often follow from an exercise of the FMA's broad decision-making powers, particularly those recently introduced under the Financial Markets Conduct Act (FMCA) and other recent legislation. Parties affected by other FMA decisions may also be encouraged to challenge the FMA to justify its decisions with sound reasoning and to disclose the complaints underlying any FMA inquiries.

Deregistration under the FSPA

The Financial Services Providers (Registration and Dispute Resolution) Act 2008 was amended last year in response to concerns that foreign companies were registering in New Zealand in order to claim that they were approved by New Zealand regulators, when they did not in fact provide any services here.

The amendment allows the FMA to deregister a financial services provider where registration is likely to create a misleading appearance of the extent to which the services are provided in or from a place of business in New Zealand, and are therefore subject to New Zealand financial regulation.

An alternative criterion of damage to New Zealand's financial market's integrity or reputation is likely to be a higher threshold.

Vivier & Co Ltd v Financial Markets Authority is the first appeal to be heard against deregistration. The judgment (Brewer J) is notable for setting out the approach the court will take and how it will apply the principles of natural justice to a deregistration decision.

An appeal against the exercise of discretion

Courts will approach an appeal differently depending on whether it is a "general appeal" or an "appeal against the exercise of discretion":

  • on an appeal against the exercise of discretion, the Court will only set aside decisions where the decision-maker has made an error of law or principle, and
  • on a general appeal, the Court will make its own assessment of the merits of the case.

Brewer J decided the appeal was an appeal against the exercise of discretion because the decision to direct deregistration "required careful evaluation of options" and because deference should be given to the FMA's evaluation as the FMA was an expert body.

Although the FMA had to consider whether it was "necessary and desirable" for the financial services provider to be deregistered, this was a mandatory relevant consideration for the exercise of its discretion, rather than an objective legal test that could support a general appeal.

Proper evidential basis and proper process still required

Despite the high threshold for a successful appeal, Brewer J found that the FMA had made two errors of law.

First, it had relied on insufficient evidence to reach its conclusion. The Court held that the evidence to support a decision to deregister:

  • must relate to a particular financial services provider. The FMA cannot rely on generalisations and complaints relating to other financial services providers, and
  • must not rely solely on the fact a financial services provider does not provide services in or from New Zealand.

The Court found that the evidence the FMA had relied on to deregister Vivier did not reach these standards. Most of it went to whether Vivier provided financial services in or from New Zealand and whether those services were regulated by New Zealand law, rather than whether its registration was likely to mislead.

Insofar as there was evidence that Vivier's registration was misleading, this evidence consisted only of general complaints and "perceived general confusion unrelated to Vivier itself".

Second, Brewer J held that the FMA had breached principles of natural justice. Before directing deregistration, it was required to provide cogent, clear reasons as to why and to disclose all relevant information on which it had relied in coming to its decision.

Instead, the notice the FMA had provided was vague and lacked sufficient particulars to allow Vivier to make meaningful submissions, and it had failed to disclose a complaint and news article on which it had based its decision to deregister.

Chapman Tripp additional comments

The FMA has deregistered a significant number of financial services providers over the past year, and these companies may now be encouraged to challenge deregistration in light of Vivier's success.

They will welcome the High Court's forceful affirmation that the FMA must comply with natural justice when considering deregistration and that the fact a financial services provider does not provide financial services in New Zealand, does not, in itself provide grounds for deregistration.

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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