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.
Our 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.
Settlement policy
- 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.
Co-operation
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.
Download our co-operation policy
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.
