Statutory de-registration process
Nature of appeal against regulatory direction
Financial Markets Authority errors in issuing direction
Two High Court decisions towards the end of 2015 delivered conflicting results on the ability of New Zealand's main financial regulator, the Financial Markets Authority, to bring about a company's forced de-registration from the Financial Service Providers Register.
Both cases involved appeals against proposed de-registration by a financial services company that was registered in New Zealand, but had its substantive operations offshore and no New Zealand customers. The Financial Markets Authority lost one case and won the other, with a degree of regulatory confusion now prevailing for international businesses looking at the New Zealand jurisdiction. Higher appellate courts will have to resolve the inconsistencies in due course.
In parallel with this, a government ministry is also consulting on possible future legislative changes.
In New Zealand, all providers of defined types of financial services must apply to be on a public register and subscribe to a dispute resolution service under the Financial Services Providers (Registration and Dispute Resolution) Act 2008. However, this is an administrative and regulatory visibility tool only; it does not create any substantive licensing or supervisory regulation.
There has been public and government concern in the past about the use of shell companies or offshore trusts and foreign businesses attempting to take advantage of the light-handed New Zealand registration system. One concern was that offshore entities with no real connection to New Zealand could register and then misrepresent their status to consumers, and trade off the reputation for good compliance and low corruption levels that the New Zealand financial sector enjoys.
Consequently, amendments to the act in 2014 set out the Financial Markets Authority's power to direct de-registration in certain circumstances. The threshold test for the authority is found in Section 18A – whether registration of a financial service provider:
- is likely to have the effect of creating or causing the creation of a false or misleading appearance of the extent to which the firm provides financial services in New Zealand or from a place of business in New Zealand or is regulated by New Zealand law; or
- is otherwise damaging the integrity or reputation of the financial markets or regulatory system.
There is a statutory process for the authority to follow, including issuing to the financial service provider a notice of intention to direct de-registration and considering any response before determining whether the financial service provider should be de-registered. In an attempt to clean up the registration regime, in 2014 and 2015 the authority initiated the statutory process a number of times, particularly regarding offshore forex trading firms.
The Financial Markets Authority had directed the Financial Service Providers Register Office to de-register a company known as Vivier, which then appealed to the High Court, marking the first time an appeal of this type had to be determined (Vivier v Financial Markets Authority  NZHC 2337).
The authority had initiated this process after receiving an email complaint from a member of the public attaching a news media article about Vivier. The article said that the company was accused in Ireland of tax fraud and money laundering and referred to New Zealand regulatory legislation. The authority made inquiries and established that Vivier had a basic office in Auckland, but did not provide any financial services to clients in New Zealand, its activities and clientele being entirely offshore.
The authority gave written notice of intention to direct de-registration from the Financial Service Providers Register, partly because it had received many complaints generally from investors overseas who believed registration in New Zealand to mean that a firm was regulated or licensed by the authority for services provided. However, it had not received any specific complaints about Vivier in that regard. Vivier responded to the notice, requesting clarification and supporting evidence, and challenging the points that the authority had raised. However, this did not cause the authority to change its position. The registrar was directed to de-register Vivier.
In upholding Vivier's appeal on grounds of error of fact/law and natural justice (points that will be familiar to judicial review lawyers), Justice Brewer in the High Court delivered a setback to the authority's attempts to tighten regulatory scrutiny. The decision contains helpful discussion on the role and responsibilities of the authority in seeking to de-register a financial services business and clarifies the obligations of natural justice and necessary evidential basis for intervention. However, it may fall short of fulfilling Parliament's intentions to prevent misuse of the Financial Service Providers Register status and aspects of the reasoning have been called into question in a subsequent case.
In the second appeal Excelsior Markets, a different offshore forex trader, failed to halt the de-registration process, with another High Court judge (Justice Nation) explicitly disagreeing with some of the Vivier decision. The factual setting was similar: Excelsior was operating through the MetaTrader online platform on a website registered in Panama, with a corporate shareholder in the United Arab Emirates and operations outsourced in Sri Lanka.
Excelsior did have a properly constituted New Zealand resident director and registered office, but had no clients or substantive financial activities in New Zealand.
In a decision delivered in late December, the High Court agreed with the Financial Markets Authority that Excelsior's business was being conducted substantially (if not wholly) outside New Zealand. That meant its operations were not in fact subject to regulation by New Zealand law (eg, as to a licensing regime or anti-money-laundering compliance requirements), which could create a false or misleading appearance to overseas investors.
In these findings, the judge made a close review of the authority's evidence and its reasoning and preferred to differ from the Vivier approach in certain respects. The decision perhaps can be said to have taken a more holistic view of Parliament's purpose in the 2014 amendments designed to address concerns with misuse of the register.
The Financial Services Providers (Registration and Dispute Resolution) Act is silent as to whether an appeal against a direction of the Financial Markets Authority is one of broad general appeal or limited to the exercise of discretion. Sometimes the courts will afford a good degree of deference to a specialist regulator's expert views by limiting a right of appeal to one against discretion, with grounds of challenge resembling traditional narrow bases of judicial review. If so, in order to succeed, Vivier would need to establish that the authority's decision:
- was plainly wrong;
- had made errors of law or failed to consider relevant considerations; or
- took into account irrelevant considerations.
On the other hand, if to be treated as a general appeal, the court could take its own view on the merits. In Vivier, the court concluded that the authority's decision to make a direction involves the exercise of discretion, requiring an evaluation of options rather than an objective application of a defined legal test to established facts. The act requires the authority to consider whether it is necessary or desirable to issue the direction, suggesting that it is a mandatory relevant consideration, not a legal test. In Excelsior, the court broadly agreed that this type of appeal is against a regulatory discretion, but said that it still required clear objective assessment of fact against a statutory test.
Vivier argued that the Financial Markets Authority made errors of fact in concluding that it should be de-registered. The court considered that Section 18A is a mandatory relevant consideration that the authority must take into account before considering whether to issue a direction and after receiving responding submissions of a financial service provider.
Vivier accepted that the authority had not overlooked Section 18A, but challenged the factual findings that the authority had made. Brewer noted that the weight given to a mandatory relevant consideration can result in an error of law if the decision maker makes factual findings which are clearly untenable. In taking Section 18A into account, the authority needs to make findings regarding the way in which the financial service provider provides financial services and the nature of representations it makes about those services. These findings must be supportable and based on satisfactory evidence.
The evidence relied on by the authority related mainly to whether the services provided by Vivier were regulated by New Zealand law and were provided in or from New Zealand. The act allows financial service providers to register even if they do not provide financial services in New Zealand. Given that, the court concluded that generalised evidence of complaints about offshore financial service providers was insufficient; evidence of specific problems with the way in which Vivier promoted itself was required. After receiving Vivier's response to the notice, the authority made no further inquiries. Accordingly, it had erred in failing to acquire a sufficient evidential basis that would properly weigh the statutory considerations, before reaching its conclusion that Vivier should be de-registered.
The other main issue that Vivier raised was that the Financial Markets Authority had not correctly adhered to the principles of natural justice in issuing the notice of intention to de-register, in two respects.
First, Vivier said that the authority should have advised it of the email complaint and the news article. The court agreed, deciding that natural justice requires the authority to provide all relevant information it has in its possession on which the notice to de-register is based, in order for the financial service provider to properly respond. As the complaint and article were relevant to the authority's decision to issue the direction, they should have been disclosed to Vivier.
Second, Vivier argued that the authority had breached natural justice by ignoring requests for further information or clarification of the assumptions made by the authority in its notice. The authority argued that the act does not require a dialogue with the regulated financial service provider; rather, the authority sets out its intention, the provider makes its submissions and the authority then makes its decision. However, the court disagreed, taking into account the severe consequences of de-registration and the relatively low administrative costs of engaging in an ongoing dialogue with a single entity. The act gives a consultation right, requiring the authority to provide the financial service provider with sufficient information for it to be able to make intelligent and useful responses. The authority's notice was vague and lacked sufficient particulars; it needed to specify why it was necessary or desirable to consider de-registration and set out all the relevant supporting evidence and give reasons.
Vivier provides a good illustration of judicial oversight principles in action, and at a policy level it calls into question the effectiveness of government amendments intended to clean up the registration process in New Zealand and prevent misuse. However, the judge's approach is quite understandable, in effectively reading the obligation to take into account Section 18A as an obligation on the Financial Markets Authority to make a factual finding, supportable and based on satisfactory evidence, as to whether one of the statutory scenarios exists. Because the decision to direct de-registration remains a discretion of the authority, it is possible – although unlikely – that even if a scenario in Section 18A were established, the authority might consider further submissions and ultimately decide it is unnecessary or desirable to de-register.
Surprisingly, given the limited grounds on which an authority discretionary decision may be appealed, the Vivier decision applied a high threshold to the type and sufficiency of evidence that can be relied on. The evidence relied on by the authority must be specific to that particular financial service provider and any misleading effects caused by that provider's registration. The authority cannot rely on complaints about offshore financial service providers in general or thematic sector concerns – it must consider whether those issues relate to the particular financial service provider in question.
The court in Excelsior was much more inclined to give the authority the benefit of the doubt on evidential sufficiency and rejected any breach of natural justice in the investigation. Notably, the court disagreed with the earlier case on two fundamental points:
- that the authority can take into account the extent to which any services are provided in New Zealand in considering the desirability of allowing a firm to remain registered; and
- that it need not show specific evidence that the way in which a particular financial service provider is conducting its business or marketing itself is likely to damage the integrity or reputation of New Zealand financial markets or regulatory regimes.
The authority has appealed Vivier further. It seems likely that Excelsior may do likewise. The fundamental problem remains the wording of the act. Vivier suggests that a financial service provider providing services only to clients outside of New Zealand, with a mere postbox or one-man administrative office locally, is not sufficient in itself to justify de-registration. This is a consequence of the act's territorial scope provision, which explicitly provides that the act applies to financial service providers ordinarily resident in New Zealand, regardless of where or to whom the financial service is provided. Whether it was a government policy decision or drafting inadvertence, it allows foreign companies to register in New Zealand with little physical presence and service a client base entirely outside of New Zealand – with the effect that local anti-money laundering and other regulatory rules may be sidestepped.
While not directly related, the Ministry for Business, Innovation and Employment has issued an options paper to reform the act and further prevent misuse of the Financial Service Providers Register. Six options for reform are outlined, including:
- making the Financial Service Providers Register non-public and for use by law enforcement agencies only;
- introducing a more formal statement of the act's territorial scope; and
- requiring not just a place of business, but actual provision of financial services to clients in New Zealand.
These contradictory cases have provided more fuel to the reform debate.
For further information on this topic please contact Gary Hughes or Emma Armstrong at Wilson Harle by telephone (+64 9 915 5700) or email (email@example.com or firstname.lastname@example.org). The Wilson Harle website can be accessed at www.wilsonharle.com.
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