Enforcement and deterrence is a critical part of the work that the FMA undertakes. It plays a key role in raising standards and responding to conduct that presents the greatest risk of harm in our financial markets. We do not have a ‘litigation by default’ approach to our enforcement response. Rather we use a range of tools to achieve appropriate, proactive and targeted enforcement action to:
To hold to account and impose penalties on professionals or entities that breach their legal obligations.
To deter others from doing the same.
We use a range of tools to respond to market conduct that poses the greatest likelihood of harm to capital markets.
We have looked across our markets and regulatory and economic environment to identify the most significant risks to the fair, efficient and transparent operation of our financial markets.
Our Strategic Risk Outlook identifies strategic priorities that reflect these risks and their drivers. It also identifies specific areas of focus where we think we can most effectively minimise conduct risks, improve market behaviour, benefit participants and investors, and help strengthen New Zealand’s economy.
In choosing these areas of focus, we have taken into account our role and resources. We have also made a conscious decision not to focus our regulatory resources on some areas.
We are committed to enforcement action which targets conduct that harms or presents the greatest likelihood of harm to open transparent and efficient capital markets. Our strategic priorities help us focus our enforcement resources in an appropriate and proportionate manner.
Our approach to formal functions and powers
We have a wide range of functions and powers to achieve our statutory objectives and this capability has been enhanced by the Financial Markets Conduct Act 2013 (FMC Act).
In the event of market misconduct, we may intervene on an informal basis or at a low level. Our action will be proportionate to the misconduct to achieve an appropriate market outcome. However, we are also committed to taking strong action and holding individuals and entities accountable when they break the law and fail to meet the standards that are expected of them.
We intend to use the full range of tools available to ensure the most appropriate and fit-for-purpose regulatory response to achieve the desired outcome. We have adopted a principled approach to providing consistency in choosing our regulatory responses, this is found in our regulatory response guidelines.
The regulatory response guidelines contain a comprehensive list of the regulatory responses which we can take, and the intended aim of each response. It also includes a non-exhaustive guide on the criteria that might be applied in deciding what the appropriate response in each case may be.
As with this policy, the guidelines are not exhaustive or legally binding. We will revise the regulatory response guidelines from time to time according to our objectives and priorities.
Third party accountability
Many concerns have been raised following the global financial crisis about the role of third parties in market collapses. Accordingly, we have responded to the role of third parties in instances of market misconduct by taking active enforcement action.
Third parties can include (but are not limited to) legal advisers, trustees, auditors, and expert advisers. Where unlawful market misconduct can fairly be attributed to third parties, we will continue to consider the pursuit of those parties.
Publication of enforcement action
We will continue to publicise enforcement action against those active in the financial markets unless there is policy, legal or other compelling reasons not to. This approach is intended to maximise the visible deterrence of enforcement activity, and to educate market participants about the behaviour and standards we expect of those operating in our jurisdiction.
Intervention earlier in the life cycle
Some financial products will fail as there are no guarantees in financial investments. No regulatory regime can prevent failures in the market. We will not intervene where there has been effective and lawful disclosure following the failure; where the investor understands and accepts the risks; and where there is no unlawful conduct.
However, we will intervene, and intervene earlier in the product lifecycle, where failure follows misconduct such as mis-selling, misinformation, or market manipulation.
We will also intervene where a product is well known and useful but the sales and distribution processes do not achieve appropriate customer outcomes or meet appropriate regulatory standards.
The use of administrative orders under the FMC Act will continue to support this approach.
Our approach to the use of criminal powers
We have powers to bring both civil and criminal actions against financial market participants for misconduct.
We are committed to financial markets that work well for both investors and businesses seeking capital. Accordingly, we will ensure that criminal sanctions are used appropriately. This ensures there are no disincentives for businesses and individuals (including directors) to participate in the market.
Under the FMC Act, criminal action is reserved for the most egregious and serious misconduct. Accordingly, we will only take criminal action where there is evidence of intentional, reckless, or other serious unlawful conduct.
We will apply the principles of fairness and proportionality to any decision on whether to pursue civil or criminal actions.
Use of section 34 powers
Section 34 of the FMA Act 2011 is a significant power, allowing the FMA to 'stand in the shoes' of another person's right to take action against a third party. For example, we may take action on behalf of a company against its directors for breach of the directors' duties owed to that company. We may also take the action for an individual against a particular financial market participant on behalf of that individual.
While the inclusion of this power was the subject of many submissions during consultation on the draft legislation, Parliament chose to maintain it to give us the ability to pursue actions that, for various reasons, others may not be able to.
We will use these powers consistently with Parliament's intention as and when the appropriate cases present themselves. This is likely to be in a priority area such as a case that involves risk of serious harm to the market, significant loss (or the risk of significant loss), a large number of investors, high product risk (including but not limited to complexity), particular investor vulnerability, or a case involving predatory, prevalent or increasing patterns of misconduct.
Where a financial market participant is considering a settlement proposal, we would encourage this to be brought to us early in the process before we have committed to pursuing an enforcement case.
A useful settlement proposal would be well developed, include draft admissions, a detailed and realistic remediation proposal, and reparation where appropriate.
Based on our model litigant policy, we will consider all reasonable settlement proposals which meet our regulatory objectives.
Openness and co-operation with us, in particular where a compliance problem is self-identified and reported, will be important in determining the level of any sanction or whether a sanction is warranted.
Our co-operation policy outlines how we might exercise our discretion on whether to take a lower level regulatory response or no action at all against an individual or business in exchange for information and full, continuing and complete co-operation.
Co-ordinating enforcement activity with other agencies
We work closely with other agencies to pursue our enforcement objectives. We have formal memoranda of understanding with various agencies.
This working relationship will include but is not limited to, information sharing, co-regulatory investigations, joint proceedings where appropriate, and co-operation in identifying problem areas of the market to focus enforcement activity on.
Clarification of the law
We have a statutory responsibility to review the law and practices related to providing financial products and services. Among other things, this may require us to test the boundaries of the law for the overall benefit of all market participants. Accordingly, we may take ‘grey area’ cases in order to provide clarity to the market.
Matters we are unlikely to enforce
We will not enforce every breach that comes to our attention.
These breaches may be cases where enforcement would not be justified in the public interest, are unlikely to further our statutory and strategic objectives, or where there are opportunities for more effective intervention.
On this basis, we are less likely to pursue matters that are one-off, isolated, or minor events relating to a technical error or similar issues, unless there are other compelling reasons to do so. We are more likely to respond to such matters in a low level and proportionate manner, and to keep the matter and/or the financial market participant under review.
We are also unlikely to pursue matters that are more appropriately resolved directly by dispute resolution schemes or between private parties as a matter of contract.
Our regulatory response guidelines give specific guidance on how we decide the appropriate regulatory response.
This policy is intended to guide and inform financial market participants.
It is also intended to be a living document and we may revise it from time to time according to what our objectives and priorities are. It is not exhaustive and is not binding.
This enforcement policy should be read alongside a number of other FMA documents: