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Brief Counsel

FMA Enforcement Policy – as you'd expect but it's nice to be told

16 September 2011

​The Financial Markets Authority (FMA) has released an Enforcement Policy setting out its enforcement priorities and the approach it will take toward the use of its powers.

This is a useful initiative which will provide welcome clarity and transparency.  We summarise the main points of the Policy and provide a brief commentary.

Enforcement priorities

The FMA emphasises that this is “a living document” so the enforcement priorities can be expected to change over time.  Early priorities are:

  • compliance with the new licensing regimes – for financial service providers, financial advisors, trustees, statutory supervisors and auditors, including monitoring the boundary between regulated and unregulated activities, particularly in relation to the financial advisers’ regime
  • misconduct in KiwiSaver sales and distribution practices, including those entities providing KiwiSaver through “information only” services
  • trading conduct, “with a view to taking early action should the need arise”
  • ensuring compliance with the Anti-Money Laundering and Countering the Financing of Terrorism legislation, when it comes into force on 30 June 2013.

These priorities are appropriate and as we would have expected.  Given that some of the issues involved are legally and factually complex, early test cases are highly likely.

Openness and co-operation with the FMA, in particular where a compliance problem has been self-identified and reported, will be important in determining the level of any sanction or whether the FMA considers that a sanction is warranted. 

Use of powers

The FMA states that it will use “the full toolbox available to us”.  This includes the use of criminal prosecutions for serious misconduct, exercising a person’s right of action when it is in the public interest to do so, and requiring offenders to compensate their victims.

It notes that, while there has been a recent focus on directors’ duties, it will also be holding senior executives, shadow directors and external advisers to account.  Tools to do this include management banning orders and pecuniary penalty orders for untrue statements made by experts in disclosure documents.

The Policy promises enforcement action which is “proportionate” to the offence, and that the FMA will “apply the principles of fairness and proportionality to any decision on whether to pursue civil or criminal actions”.  The FMA may be making a virtue of necessity here as resource constraints will mean that it is going to have to pick its battles to some extent.

Publication of enforcement action

The FMA favours a highly public approach “to maximise the visible deterrence of enforcement activity”.  Accordingly, it will allow name suppression and confidentiality only under exceptional circumstances.  This is in sharp contrast to the historic position of the NZ Markets Disciplinary Tribunal (and predecessors) which faced criticism for refusing, in some cases, to identify firms and individuals under investigation.

Settlement policy     

The FMA will encourage out of court settlements where appropriate but wants this option to be raised before it has committed to pursuing litigation.  For market participants, this means that early case analysis will be essential to assess whether it is better to go to court or to settle. 

The FMA will expect a settlement proposal to be well developed and to include draft admissions, a detailed and realistic remediation offer and reparation where possible.

Conclusion

The FMA’s commitment to transparency is commendable.  We note that it is planning two companion documents to the Enforcement Policy: a model litigant policy and a policy on its intended approach to conducting investigations. 

These are also “nice to haves” – at least in principle.  Most public sector enforcement bodies have some form of model litigant policy, requiring them to conduct any litigation with the utmost propriety and to the highest professional standards. 

But experience has shown that this can mean different things to different people – for example, it may (or may not) include the taking of procedural points or strike outs applications.  This is particularly so as such policies are not binding or enforceable.

Much more effective is the creation and nurture of an institutional culture around enforcement.  The FMA, given the scope of its jurisdiction, seems the perfect agency to provide leadership in this respect.

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