Validus FZCO v Financial Markets Authority [2023] NZHC 1701 is the first judgment in which the courts of Aotearoa New Zealand discuss the Financial Markets Authority's jurisdiction to make stop orders.
While the FMA has made several stop orders since the Financial Markets Conduct Act 2013 came into force, Validus is the first appeal of a stop order that has required a decision of the courts.
What is a stop order?
There are a variety of civil remedies available under the FMCA for contravention of a civil liability provision, most of which can only be imposed by order of the Court. A stop order is one of the more serious enforcement powers available to the FMA that can be exercised without the Court's involvement.
The FMA can make a stop order if it is satisfied that contraventions of the FMCA have occurred, or are likely to occur, in certain cases. It is an offence to fail to comply with a stop order.
Stop orders may be made on a permanent basis. The FMA also has powers to make interim stop orders (of between 15 to 30 working days) if the FMA is considering whether it may make a stop order and considers the making of an interim stop order to be desirable in the public interest.
Background
On 19 November 2022, Validus held a seminar at Auckland's Mt Smart Arena where it promoted products in the "Validus Pool". A "loyalty rewards" programme was promoted as providing "2-3% weekly loyalty rewards for 60 weeks", earning compounding "rewards". An example of a $250 initial weekly contribution was illustrated as compounding at 29, 45, and 60 week periods at $10,000, $20,000, and up to $35,000, respectively. The products were promoted ("inexplicably", in the Court's view) as "educational packages".
The FMA issued an interim stop order to Validus on 15 February 2023. It then entered into correspondence with Validus. In the course of that correspondence, Validus contended that the pool "has been removed and no longer exists" and that "Validus is not, and does not intend to be, a financial product".
In communicating its intention to make a permanent stop order on 24 March 2023, the FMA explicitly proceeded on the basis that the statements made in correspondence on Validus's behalf were true and correct. On that basis, it formed the view that the prior communications made by Validus at the seminar were false and misleading. The FMA therefore caught Validus in a "catch-22" situation: by disavowing the statements made at the seminar in its attempts to argue that it was not selling a financial product under the FMCA, Validus had, in effect, established that those statements - which indicated it was selling a financial product - were false or misleading.
On 2 May 2023, the FMA made the permanent stop order, prohibiting Validus from making offers of, distributing communications that relate to, or accepting further contributions, investments or deposits in respect of its financial products. Validus appealed the FMA's decision to issue that stop order.
Appeal dismissed
Validus appealed on the following three grounds:
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that Validus was denied a proper opportunity to be heard before the permanent stop order was made;
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that the FMA was not authorised to make the permanent stop order because there was no actual financial product being offered by Validus; and
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that the FMA could not be satisfied that, absent the permanent stop order, the conduct prohibited by the order would occur and contraventions of the FMCA would result.
Did Validus have proper opportunity to be heard?
Validus's contention was that the material differences between a draft of the stop order provided to it and the final order as issued meant that it had been denied a proper opportunity to be heard.
Except in cases of urgency, the FMCA requires the FMA to give the person to whom the stop order is proposed to be directed an opportunity to make written submissions and to be heard on the matter within a period of at least 5 working days before issuing the stop order.
Validus had been given this opportunity, so its appeal was founded instead on a more generalised claim of breach of natural justice. The Court outlined that the right to natural justice in any case depends on the context, and accepted in theory that there may be circumstances where natural justice is not served by notice of a prospective decision that is materially different from the decision that is made.
However, in the context of a stop order under the FMCA, the Court held that the only two aspects that the FMA's notice must engage with were:
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the applicable grounds that satisfied the FMA to make a stop order under s 462 of the FMCA; and
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the FMA's reasons for considering exercising that power.
It was not necessary for the FMA to notify the subject of the proposed order the terms and conditions of the order, the reasons for the order, or other information the FMA thinks relevant before the stop order is issued. The corollary is that the subject of the proposed order's right to be heard and make submissions relates to the FMA's powers, and not to the consequences for that person.
On that basis, the Court held that, even if there had been a material difference between the stop order as notified and as issued (which it found there was not), that did not of itself undermine Validus' right to be heard.
Is the jurisdiction predicated on a "restricted communication" about an "actual financial product"?
Validus' next argument was that the FMA did not have the jurisdiction under the FMCA to make the stop order. Validus claimed that the Validus Pool did not exist for participation, and therefore there was no "actual financial product" which could be the subject of a "restricted communication".
The Court quickly dismissed this argument. It held that the stop order jurisdiction extends to capture financial products not yet in existence, as supported by the definition of "debt security" in the FMCA as a right to repayment of money that is "or is to be" deposited or lent to another person. The FMCA itself makes allowances for future entitlement, and omits any language suggesting that financial products must be in existence at the time of the offer of services.
Validus' submission was also met with a reflection on the practical effect it would have on the FMA's enforcement powers. To accept that the legislation could only apply to currently existing financial products would effectively exclude an outright financial scam (eg when a person promoted a financial product that did not exist). The Court considered that such an interpretation would undermine the purpose of the FMCA.
Validus relied on a similar, narrow interpretation of the term "restricted communication", which was also rejected as "strained" by the Court.
Must the FMA be satisfied, but for the stop order, the FMCA would be contravened?
The Court held that the FMA did not err in law in making the stop order, even if it were unable to be satisfied of Validus' likely future contravention or harm caused.
Instead, the question is whether the FMA's proposed exercise of power is supported by legitimate reasons. In this case, one such reason was that the FMA proceeded on the basis of Validus' (effectively) acknowledged past contravention. Past contravention, likely future contravention, or "imminent danger of substantial damage" could be reasons - amongst others - for the making of a stop order.
Conclusion
Although few market participants should find themselves in Validus' position, we consider that the case demonstrates two important matters at a more general level:
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the Court has endorsed a wide and permissive interpretation of the FMA's stop order powers. It will likely be difficult, if not impossible, to unwind matters once the FMA has exercised the power; and
- market participants will nevertheless be given an opportunity to make submissions to the FMA before it exercises its stop order power. That opportunity will usually be short and the market participant should generally look to respond as comprehensively as time permits.