Fair dealing and stop orders

The fair dealing provisions are fundamental to promoting the confident and informed participation of businesses, investors, and consumers in the financial markets. If investors and consumers are given information (or incomplete information) that is likely to mislead or confuse, or if they are subject to false, misleading or deceptive conduct, financial markets do not function fairly or transparently, and the purposes of the FMC Act cannot be achieved.     

Ultimately, confident participation in the financial markets can only exist if an intrinsic level of market integrity exists, which the fair dealing and stop order provisions serve to facilitate.

The fair dealing provisions apply widely with few exceptions, including to conduct:

• both inside and outside of New Zealand;    
• relating to financial products (such as debt securities, equity securities, managed investment schemes or derivatives) regardless of whether the person engaging in the conduct is licenced or authorised by the FMA or whether those products are aimed at retail or wholesale investors; and
• relating to financial services (as defined in section 5 of the Financial Service Providers (Registration and Dispute Resolution) Act 2008), with the exception of being a creditor under a credit contract (which is covered by equivalent provisions under the Fair Trading Act), regardless of whether the person engaging in conduct is registered on the Financial Service Providers Register or licenced or authorised by the FMA, or whether the financial services are aimed at retail or wholesale investors.

Persons "involved" in the conduct relating to a financial product or service may also be liable under the fair dealing provisions, even if they did not directly engage in any misleading or deceptive conduct themselves. For example, directors and senior managers of a financial product or service provider can be liable for misleading conduct carried out by the provider if they aided, induced, or otherwise are directly or indirectly a party to the misleading conduct.  

The stop order provisions also apply to providers of financial products and services, albeit in a more limited set of prescribed circumstances.

We expect all providers of financial products and services to develop and embed the principles underpinning the fair dealing and stop order provisions into their risk management processes – consider what processes need to be in place to ensure that customers are not liable to be confused or misled and to ensure that all representations have a sound basis in fact. In addition, we encourage directors, senior managers and those involved with providing financial products and services to also consider how their conduct can help investors and consumers make appropriate financial decisions taking into account their particular circumstances (such as vulnerable customers).

It is the overall impression which counts

Whether conduct or disclosure is likely to mislead or confuse depends on the overall impression created as perceived by the investor or consumer. This means that:

• Conduct and disclosure which is likely to mislead or confuse, without actually being misleading or confusing, is sufficient to breach the fair dealing or stop order provisions.
• Intention to mislead or confuse is irrelevant.
• Relatively more complex financial products or services are more likely to confuse and mislead compared to standard “vanilla” or simpler financial products and services.
• An audience who is vulnerable due to their personal circumstances is more susceptible to being misled or confused.
• Representations that are true and verifiable in isolation may nonetheless be capable, when viewed holistically, of leaving a confusing or misleading impression overall. This may be the case where material information or qualifications to the representation (e.g. risks or downsides to a product or service) is in fine print.

Omissions can be confusing or misleading

Confusing or misleading conduct extends beyond positive actions or positive statements – it also includes omissions. The omission can be either deliberate or inadvertent.  Therefore, it is not a defence to “do or say nothing” if silence or partial disclosure (e.g. cherry picking) is likely to leave an overall misleading or confusing impression on the consumer.

Substantiate your claims

The fair dealing provisions generally require representations to be substantiated, although some exceptions exist (such as for representations in a disclosure document or a register entry). Substantiation requires having a reasonable basis at the time the representation is made. Anecdotal evidence, unsupported opinions and assumptions do not constitute a reasonable basis. We are particularly interested in representations regarding the nature, suitability and characteristics of a financial product or service. 

A representation remains unsubstantiated at the time it was made, even if the representation turns out to be true or is subsequently substantiated.

The FMA has a variety of enforcement options available to address false, misleading, deceptive or confusing behaviour. The action taken will depend on the severity and level of misconduct.   

For example, there may be instances where engagement through dialogue is sufficient to address a breach. Alternatively, this may extend to formal feedback letters, monitoring reports, issuance of a public warning, direction order or stop order.

A stop order, which is required to be published (see here for an example), can be issued in some circumstances where the spread of information is likely to confuse investors on material matters (i.e. matters which would influence a reasonable investor’s decision to invest in the financial product or obtain financial services). It prohibits the issuer from continuing the relevant activity to protect investors and the integrity of the market. For example, the FMA can issue a stop order to prevent or stop the issuer of a financial product from:

• distributing the PDS, other disclosure document or advertisement (including keeping its website up);
• continuing to offer the financial product;
• accepting applications or deposits from customers for the financial product.

Failure to comply with a stop order can result in a fine of up to $300,000.

If the FMA considers that it is in the public interest to do so, it may issue an interim stop order whilst it considers the grounds for a stop order.    

More egregious breaches may result in the FMA taking court action.

The fair dealing provisions are civil liability provisions. This means the courts have the discretion to issue civil liability orders, such as a pecuniary penalty order or compensatory order, for a breach of a fair dealing provision. In addition, civil liability orders can be made against not just the person in contravention, but also against those involved in the contravention. The aim is both to sanction the issuer for its misleading conduct and, where necessary, to seek redress for affected parties.

For more information on the enforcement options available to the FMA, please refer to our Regulatory Response Guidelines.

Contact us if you believe the fair dealing or stop order provisions have been breached in relation to financial products and services. Please note that consumer credit contracts are regulated by the Commerce Commission.