The high level of enforcement activity by the Financial Markets Authority (FMA) last month may become the new normal as we transition fully into the Financial Markets Conduct Act (FMCA).
Issuers should stay vigilant but have little reason to fear, so long as they have robust systems and processes in place to comply with the increased expectations, resources, powers and tools of the regulators under the new regime.
FMA enforcement activities in May
The FMA made four major enforcement announcements in May.
- Apple Fields directors fined (AFL): Two directors were each fined $30,000 for breaches of the Financial Reporting Act 1993 (FRA).
- De-registration of firms: The FMA has directed the Registrar to remove 23 offshore Forex firms from the Financial Service Providers Register (FSPR) in the year to date.
- Asset preservation orders: The FMA has obtained asset preservation orders over Arena Capital Limited, trading as BlackfortFX.
- Warning on continuous disclosure: The FMA issued a warning and secured a $500,000 compensation payment from Pacific Edge Limited for breaches of the continuous disclosure provisions of the NZX listing rules.
Apple Fields directors fined for failing to file financial statements
Two directors of AFL were each fined $30,000 and convicted for failing to file financial statements for the 2011, 2012 and 2013 years.
The directors argued that they took all reasonable and proper steps to comply with the FRA, but were unable to submit group accounts to their auditors because the sole director and shareholder of a joint venture partner, Noble Investments Ltd (NIL), refused to supply them with its accounts and that to submit the AFL accounts without them would be misleading and dishonest, and would not comply with proper accounting standards or their obligations as directors.
The Court rejected the directors’ defence and held that they were required explain to their auditors that the NIL accounts could not be obtained. Their desire to avoid receiving a qualified or incomplete audit was no excuse for failing to file their financial statements.
FMA de-registers offshore Forex firms from the FSPR
The FMA announced that so far in 2015 it has directed the Registrar to remove 23 entities from the FSPR and has taken action to prevent 20 firms from registering.
The FMA has concerns that some offshore companies have registered on the FSPR to take advantage of New Zealand’s reputation as a well-regulated jurisdiction. The FMA noted it had received complaints from offshore investors who had lost money to forex companies operating abroad that were registered on the FSPR.
The FMA also noted that local registration agents in New Zealand were facilitating the registrations of such entities, including by taking a role as director and providing local registered office facilities to these offshore companies. These activities gave the appearance of the companies offering financial services from New Zealand.
There is a statutory process the FMA must follow to direct de-registration from the FSPR. This allows firms to respond to the FMA’s concerns and to submit reasons why they should remain on the register.
FMA secures asset preservation orders over Arena Capital
On 21 May 2015, the FMA announced it was undertaking an investigation into Arena Capital Limited (Arena), trading as BlackfortFX. The FMA obtained asset preservation orders over the assets of Arena and associated persons and appointed receivers in light of concerns that investor funds may be at risk.
Arena was registered on the FSPR and purported to offer foreign exchange services to clients. The FMA was concerned that Arena may be operating in breach of financial markets legislation. At this stage only limited information is available, but we will watch this proceeding with interest.
FMA warns Pacific Edge for breach of continuous disclosure rules
Pacific Edge has received a public warning from the FMA and will make a $500,000 compensation payment and undertake a compliance audit as a result of breaches of the continuous disclosure provisions of the NZX Listing Rules.
The breach arose when Pacific Edge took several days to disclose to the market the signing of two material contracts with offshore parties. The settlement records that the FMA expected that the contracts should immediately have been disclosed. The delay arose from contracts that obliged Pacific Edge to obtain approval from the US counterparties before announcing to the NZX that the agreements had been signed.
The FMA stated in its announcement that listed entities engaged in material transactions must take into account their disclosure obligations when settling the final steps to be taken in the execution of a transaction.
This activity shows that the FMA is increasingly prepared to flex its regulatory muscle and use the significant enforcement powers available to it.
Issuers should ensure that:
- they file their audited financial statements, together with copies of any required auditor’s reports, within the required timeframes
- they comply with their FSPR registration and any specific licensing requirements for regulated financial activities
- if they receive a notice from the FMA or the Registrar prior to de-registration from the FSPR, and believe they are properly registered, they should engage promptly and comprehensively with the FMA, and
- they undertake appropriate market disclosure planning (including for any required third party consents) before material contracts move from an incomplete proposal to a signed deal.