The Government has always been clear that to restore public confidence in New Zealand’s capital markets will require both law change and tougher enforcement of the new framework.
Accordingly it is critical to the achievement of the Government’s policy objectives that the Financial Markets Authority (FMA) is well-designed and fit for purpose. The evidence from the establishment legislation – the Financial Markets (Regulators and KiwiSaver) Bill – is that it will be both.
The FMA will have a broader role than the Securities Commission, which it will replace, as it will also assume functions now exercised by the Ministry of Economic Development, the Government Actuary and the Minister of Commerce. It will be an independent Crown entity with between five and nine part-time members who, like the Commerce Commission, will be able to act in divisions of three.
The FMA will have the power to:
require people to supply information and documentation relevant to the performance of its supervisory and investigative roles
enter and search premises to obtain evidence, and
initiate civil actions on behalf of investors against a broad range of financial market participants (including directors), auditors and experts who make statements in prospectuses.
Because these powers tread new territory in the New Zealand regulatory landscape, it is important that everyone who is potentially affected understand exactly what is envisaged.
Information gathering, entry and search
The information-gathering provisions are more comprehensive than those currently applying to the Commerce Commission, particularly in relation to the ability remotely to access and seize electronic data. But this is probably a timing issue which will be resolved when the Search and Surveillance Bill is finally passed.
The Bill will likely give the Commerce Commission the same rights as the FMA. Less obvious at this stage is how extensive those rights will be as the Bill is highly controversial and has been referred back to the Justice and Electoral Select Committee for further consideration.
The FMA will need to obtain a warrant, or the consent of the occupier, before conducting a physical search of premises and will need reasonably to believe that the property is being used for activities in breach of financial market law and that the search will produce evidential material.
The power to initiate civil actions
This new power is modelled on the Australian system, but modified to put the FMA on a tighter leash than is the Australian Securities and Investments Commission (ASIC).
While both jurisdictions require that the regulator can initiate proceedings only where satisfied that this will be in the public interest, the New Zealand Bill stipulates the factors the FMA must consider in making these judgements. These include:
whether the action is consistent with the promotion of fair, efficient and transparent financial markets
whether it is a good use of the FMA’s resources
the extent to which matters of general commercial significance are involved, and
the likelihood of any of the investors taking proceedings themselves and pursuing them to conclusion.
The FMA does not need an investor’s consent to exercise that person’s legal rights. Indeed, if the rights-holder (which can be an individual, a company or an unincorporated body) objects to the FMA taking action on its behalf, the FMA can apply to the High Court for leave to over-ride that objection.
Proceedings can cover not only common law actions such as negligence but also statutory obligations and offences, such as directors’ duties under the Companies Act.
We discussed in our contribution to the August Boardroom the proposal in the Review of Securities Law to give the FMA the power publicly to enforce directors’ duties. This policy debate has now been pre-empted to some extent by the Bill, at least so far as directors in the financial sector are concerned. However, the Bill is still subject to change through the select committee deliberations and anyone with strong views on this issue will have the chance to make their argument in submissions to the committee.
ASIC has made high profile and effective use of its ability to initiate civil proceedings in its pursuit of the directors of the failed property development company Westpoint Group and related entities to recover investor losses of A$388 million. To date, five separate settlements have been reached in that litigation.
But it has had access to the mechanism in one form or another since 1961 and, for most of that time has used it relatively sparingly (only 21 times between 1991 and 2007). This low use rate probably reflects the availability in Australia of both a civil and a criminal penalty regime which allows ASIC to pursue market misconduct directly, and a greater propensity among investors to take private class action proceedings.
It is difficult to assess in advance how use of the power will compare between the two countries. The more rigorous public interest test envisaged in New Zealand will mean that the threshold for use is higher. However, this effect may be more than outweighed by the comparative paucity of other enforcement alternatives in New Zealand.