A new Financial Markets Authority (FMA) is to be created to monitor compliance with financial market legislation as well as the governance, reporting and supervision required by financial market participants. The Financial Markets (Regulators & Kiwisaver) Bill, which establishes the FMA is likely to be passed early next year.
The purpose of establishing the FMA is to provide "a single market regulator with a culture of visible, proactive, and timely enforcement", and to help rebuild the confidence of "mum and dad investors" in financial markets.
The FMA will take over the functions of the Securities Commission, as well as some of the responsibilities of the NZX, the Ministry of Economic Development and the Government Actuary and will monitor compliance with various Acts including the Securities Act 1978, the Financial Advisers Act 2008; Securities Markets Act 1998, Superannuation Schemes Act 1989, and some provisions of the Companies Act 1993 and the Crimes Act 1961. The FMA will regulate financial advisers, securities trustees, statutory supervisors, and auditors.
In order to carry out its functions, the FMA has been given wide ranging information gathering and enforcement powers, which are set out in part 3 of the Bill. There are two key areas of interest which relate to 1) the information gathering powers of the FMA (in particular its search powers) and 2) the ability of the FMA to take civil action on behalf of certain persons as part of its enforcement powers.
Information Gathering Powers
The FMA will be able to:
- require any person to supply information, produce documents or appear to give evidence (clause 25); and
- enter and search a place for the purpose of ascertaining whether a person has engaged in or is engaging in conduct that constitutes a contravention of any provision of the financial markets legislation (clause 29). The FMA must be satisfied that there are reasonable grounds to suspect that a person has engaged in conduct that constitutes a contravention and that the search will find evidential material. However, the FMA may only enter and search if the occupier consents or a warrant is obtained from a judge of either the High Court or the District Court.
Failure to comply with a request from the FMA, providing false or misleading information or obstructing the execution of a search warrant will be a criminal offence (with a maximum fine of $300,000) for either a company or an individual.
While the Securities Commission previously has had the power to require persons to supply information, it did not have the power to obtain and execute search warrants, and this is a significant extension to the information gathering powers.
There have been a number of public submissions on the Bill, some of which express concern about the scope of the information gathering powers that the FMA will have, and in particular with search warrants.
In general, the concerns are due to the fact that the FMA will have a wide range of functions spanning minor issues to criminal offences. The information gathering powers will apply to all of those functions. In its submissions on the Bill, the New Zealand Bankers Association has suggested a threshold be established which would exclude the search powers of the FMA in cases which involve less serious offences.
There is also a concern with the ability to require a person to provide information or evidence to the FMA where that person may face criminal charges (although a witness before the FMA will have the same privileges as they would have before a Court - clause 53).
Furthermore, the ability to challenge the exercise of these powers in Court will be dampened by clause 25, which allows the FMA to continue to require the information to be provided, evidence given or a search warrant executed until a final decision is given by the Court.
Another issue that is causing particular controversy is the proposed ability of the FMA to exercise rights on behalf of investors, or others, either by commencing a civil action, or taking over a civil action that has already been commenced (clauses 34-41).
The FMA can even apply to the Court for an order that the person whose rights it is exercising meet the reasonable costs of the proceeding (clause 38).
There are some limits on the exercise of this power, including that it must be in the public interest and the FMA must consider the effect of the proceedings on future conduct in financial markets and whether it would be an efficient and effective use of the FMA's resources.
The power does not change the duties or liabilities of any person and its primary objective is to promote the public interest rather than to obtain redress for investors.
This is not a power that is currently available to any regulator in New Zealand and marks a significant change to enforcement, including for example enforcement of director's duties. The power is however similar to that available to the Australian Securities and Investment Commission.
It remains to be seen in what circumstances the FMA will exercise this power, but it has already created much controversy in the submissions process.