The Financial Markets Authority (FMA) investigations and enforcement report for the financial year ended 30 June 2015 shows a regulator moving from a “scrutinise and prosecute” model to a more sophisticated use of early engagement and intervention, focussed on preventing harm rather than cleaning up the mess afterwards.
It’s been a busy year for our newest regulator, and the report details successful FMA activity aimed at market manipulation, non-compliance with disclosure requirements, non-filing of financial statements, insider trading and continuous disclosure breaches and improper use of the Financial Services Provider Register (FSPR).
The FMA is evidently pleased to be able to bid farewell to the long tail of finance company investigations and prosecutions inherited from the Securities Commission. Finance company litigation accounted for only 28% of FMA proceedings in the last year and, more significantly, only 2% of investigation activity.
But of more interest, in our view, is the clear emphasis on the range of enforcement mechanisms available to the FMA to respond to inappropriate behaviour.
Only 23% of the FMA’s investigations completed in the last year have led to litigation. The remainder have, according to the report, resulted in exercise of the FMA’s unilateral enforcement powers: warnings, enforceable undertakings and agreements to receive payments in lieu of pecuniary penalties. In conjunction with the Registrar of Companies, 28 companies have been removed from the FSPR.
Significantly, where proceedings have been filed only 7% of cases have led to settlement. The FMA shows an explicit preference for using its powers to impose sanctions, rather than doing a deal behind closed doors.
The FMA’s willingness to develop bespoke solutions to particular cases is neatly demonstrated by its approach to two market manipulation cases. At one end is the well-publicised investigation into Milford Asset Management – resulting in an agreed payment in lieu of a pecuniary penalty and civil proceedings against the trader concerned. At the other is a warning issued to an inexperienced trader who had inadequate guidance about permissible behaviour and did not appreciate that the relevant trades were illegal.
Key messages for the regulated
- Expect a proactive regulator, open to using the full scope of its powers to achieve the outcomes it sees as desirable for the market. Early intervention will be a priority, aimed at encouraging compliance before harm results.
- Early engagement with the FMA will be important, and valuable. Constructive and practical dialogue at the front end of an investigation will set the tone for the future – something which is much more significant when the regulator is also the one likely to determine the sanction. Holding the regulator at arm’s length and slugging it out in Court is generally inadvisable. Responding to the first interactions with the FMA effectively may be the difference between a constructive outcome and a destructive one.
- The report demonstrates the FMA’s commitment to transparency and clear criteria so that the market can understand when it will intervene and how. Hopefully that is an indication of a sensible exchange between the FMA and those it regulates about the regulator’s expectations, and how to manage them most effectively.
FMA’s powers to intervene
Part 8 of the FMCA contains powers for the FMA to make a broad range of injunctive type orders, without needing to go to Court.
Stop orders can prohibit offers, issues, and sales of financial products, or financial services being supplied, applications being accepted, or offer communications being distributed.
Direction orders can require a person to comply with the FMCA and stipulate reasonable steps a person must take to comply or to avoid or mitigate a contravention, including publishing corrective statements at the person’s own cost.
Various miscellaneous orders can prohibit use of concessions that might otherwise be available under the FMCA (such as simplified PDS documents, use of the mutual recognition or ‘same class’ offer regimes) and regulate unsolicited offers.
Generally, the FMA must not exercise its powers without giving prior notice to an affected party, and allowing an opportunity to be heard, unless the FMA considers urgent action is needed. Where urgency is required, the FMA can make interim orders without prior notice.
The Court has power to make the same orders as the FMA.
An affected party could seek judicial review of FMA decisions, although success may be difficult given the discretionary nature of the orders and deference to the regulator’s specialist financial markets expertise.