Regulatory roles revealed

The former has been in place since 1986, mainly regulating competition and fair trading, and the latter started in 2011 to oversee financial markets.

Auckland QC and former NZ Solicitor-General Michael Heron outlined their functions and priorities in a presentation to NZILA and ICNZ.

He said the likelihood of enforcement action increased where it was consistent with organisational enforcement guidelines and stated priorities. “Some regulators are express about those, others not,” Mr Heron said.

“It’s also a matter of what evidence is available, and whether you meet the thresholds required for prosecution, for example, the Solicitor General’s prosecution guidelines.”

Mr Heron said CC was well established; employed about 190 people; had a $NZ10.5 million litigation budget, of which it spent only $5.8 million in 2017; and was a crown entity, acting independently and performing quasi-judicial functions.

It  conducted a broad range of regulatory activity, had experienced litigators, and most prosecutions were for Fair Trading Act breaches.

CC’s enforcement response guidelines said it did not apply a rigid formula. “Rather, we weigh competing considerations and exercise our judgement. Much will depend on the circumstances and the attitude and responsiveness of parties involved. Not every breach requires litigation; nor can we accept every offer of settlement.”

CC responses can include warnings, stop instructions, enforceable undertakings, civil proceedings and prosecutions.

The NZ Solicitor-General’s prosecution guidelines apply to CC prosecution decisions. The guidelines are underpinned by values that aim to achieve consistency and common standards in key decisions and trial practices. Prosecutors must act in a fundamentally fair, detached, and objective way and foster a rational trial process, not one based on emotion or prejudice.

The two tests for prosecutions to proceed are:

• Evidence that can be adduced in court is sufficient to provide a reasonable prospect of conviction, and
• Prosecution is required in the public interest.

CC’s vision is that New Zealanders are better off because markets work well and consumers and businesses are confident market participants.

CC’s enduring priorities are the likelihood of significant harm to consumers or potential for significant harm; credit issues and impacts on vulnerable consumers; and competition. It prioritises cartels and anti-competitive mergers because of the potential market impact.

Mr Heron said FMA was not yet an experienced litigator but “rational and pragmatic”. It preferred alternatives to prosecutions, including civil proceedings and warnings. FMA employed 186 people (FTE) and had a $36 million operating budget. Its litigation fund was $1.6 million, which it over spent by $700,000 in 2016-17. NZ’s Financial Markets Conduct Act 2013 only came fully into force in 2017.

FMA’s role was to “promote and facilitate development of fair, efficient, and transparent financial markets” and “to promote confident, informed participation … in the financial markets”.

FMA’s enforcement policy guidelines state: “As a risk-based regulator, our resources are focused on conduct we think poses the most significant risk ... we are committed to enforcement action which targets conduct that harms or presents the greatest likelihood of harm to open, transparent, and efficient capital markets.”

Some key FMA investigations include:

• CBL Corp, which was suspended by NZX on 8 February 2018. CBL’s website says the company is focused on identifying specialty, non-traditional niche insurance lines, and building strong relationships with partners and clients. Click here for FMA’s update on progress.

• FMA issued civil proceedings in FMA v Warminger [2017] NZHC 327, alleging 10 examples of market manipulation. Two were proved and Warminger was fined $400,000. Both parties withdrew appeals, with FMA CEO Rob Everett saying: “We are satisfied our regulatory objectives have been achieved in taking these proceedings.”

• Last November, FMA closed an investigation into Goldman Sachs NZ (GS). It said during its investigations into the Mark Warminger case, trading activity at GS may have presented a false or misleading appearance of the price and supply of securities. FMA decided not to enforce action, but released a report detailing concerns. Mr Everett said: “We’ll continue to engage with industry to ensure they are clear about the standards of conduct, governance, systems and controls we expect.”

• Last October, FMA filed criminal charges against an individual alleging insider trading in shares of VMob Group Ltd, in contravention of the Securities Markets Act 1988. Mr Heron said there was an ongoing investigation about other conduct.

• In March 2017, FMA charged a person who then working at Eroad who sent confidential information to a former employee and suggested the former employee sell their Eroad shares. The former employee then traded 15,000 shares. The person who sent the confidential information pleaded guilty to insider trading charges.

• In another insider trading case, FMA v Honey [2017] NZDC 12793, Jeffrey Honey was charged under a ‘tipping offence’ carrying a maximum penalty of five years’ jail and a $500,000 fine or both. Honey also breached a confidentiality order given by FMA during investigations. He received six months’ home detention.Mr Heron said a mitigating factor was the length of time FMA took to bring proceedings but “the court was reluctant to criticise FMA”.

• FMA took a negligence action on behalf of investors against Prince & Partners, which was trustee for Viaduct Capital, which collapsed in 2010 owing investors about $7.8 million. A settlement of $4.5 million was achieved.

Mr Heron said FMA’s 2018 focus was:

• Intelligence-led approach
• Continue to address issues on the regulatory perimeter
• Strengthen and build intelligence gathering
• Remain active where there was non-compliance with licence conditions
• Continue to improve knowledge on market conduct
• Continue to communicate and engage with those it regulates.