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Financial Regulation Update – July 2016

Home Insights Financial Regulation Update – July 2016

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Contributed by: Tom Hunt, Polly Pope, Marika Eastwick-Field, Emmeline Rushbrook, Tim Stewart and Ella Watt

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Published on: August 04, 2016

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Court of Appeal revisits ‘all reasonable and proper steps’ for directors

The Court of Appeal has given guidance in Prain v Financial Markets Authority [2016] NZCA 298 on when directors can be said to have taken ‘all reasonable and proper steps’ to procure compliance. This is a key defence under the Financial Markets Conduct Act 2013 and Companies Act 1993.

The background to the case, and the decision of the High Court, is discussed in our February 2016 Financial Regulation Update. In summary, the directors of Apple Fields Limited were charged under the Financial Reporting Act 1993 with failing to file financial statements and an auditor's report for consecutive financial years. The High Court found that an ‘all reasonable and proper steps’ defence was not available: the directors were required not only to take all practical steps to ensure compliance but also to seek ‘comprehensive legal and/or accounting advice as to the range of options available to them when those practical steps did not bear fruit’.

The Court of Appeal allowed the directors’ appeal. The Court placed significant emphasis on the question of whether taking further accounting and/or legal advice would have produced a different outcome.

  • In relation to the accounting advice, the Court held that the directors must be taken to have acted reasonably where they honestly relied on advice from Apple Fields’ accountant, unless the circumstances required a second opinion to be sought and that second opinion could have resulted in a different conclusion. If directors can prove that the advice they relied on was correct, then it does not matter how few professional opinions were taken.
  • In relation to the question of legal advice, the Court found that there was no reason to suppose that Apple Fields had any legal right that could be exercised to ensure compliance (in this case, to compel its deemed subsidiary to provide its accounts). Accordingly, legal advice would have made no difference and it cannot be said that reasonable and proper steps required that legal advice be obtained.

The Court of Appeal’s decision provides some comfort that the courts should not generally ‘second guess’ a director’s decision to rely on advice that turns out to be correct, or require a director to have taken steps that ultimately would have made no difference.

In many cases, however, it can be difficult for directors to assess (without the benefit of hindsight) whether any advice obtained is or may be incorrect, or whether professional advice would identify a further course of action available to them. It will therefore remain important for directors to consider taking additional professional advice or obtaining a second opinion in relation to their obligations and the options available to them.

A copy of the judgment can be found here.

Final report on financial advisors regime released

The Ministry of Business Innovation and Employment (MBIE) has released a final report on its review of the Financial Advisers Act 2008 and the Financial Service Providers (Registration and Dispute Resolution) Act 2008.

The report highlights the following issues with the current regulatory regime:

  • The current regime limits the provision of certain types of advice, including automated ‘robo-advice’ and simple personalised advice (eg. advice about KiwiSaver funds).
  • The quality of advice under the current regime may be sub-optimal.
  • Compliance costs are unbalanced.
  • The current regime contains unnecessary complexity that may confuse consumers.
  • Access to fair and effective redress could be improved.
  • The Financial Service Providers Register (FSPR) is being misused by offshore-controlled firms to gain the appearance of being regulated in New Zealand.

The report recommends a number of changes to the current regime to address the issues identified, including:

  • Removing the definitions of class and personalised advice, and the distinction between category 1 and 2 products.
  • Removing the requirement for personalised advice to be provided by a natural person, to enable the provision of ‘robo-advice’.
  • Introducing uniform conduct and competence obligations, including requiring all platforms and people providing financial advice to put customers’ interests first and only provide advice when competent to do so.
  • Introducing a universal Code of Conduct that covers all financial advice (although some standards in the Code will vary depending on the type of advice).
  • Replacing the current categories of advisers with three new categories: financial advisers, agents and financial advice firms. Financial advisers would be individually accountable for their conduct, whereas financial advice firms would be accountable for the conduct of their agents.
  • Improving customer understanding by simplifying and shortening disclosure and requiring advisers and agents to ensure that customers are aware of the limitations to their advice. All financial advisers and agents will be required to disclose the same information regarding conflicts of interest and conflicted remuneration in a prescribed format.  
  • Requiring any person or platform providing financial advice to be covered by a licence. 
  • Requiring businesses to have a stronger connection to New Zealand to register on the FSPR. 
  • Making dispute resolution scheme rules more consistent and requiring financial service providers to provide information about dispute resolution when a consumer complains.

The proposed changes to the regime will be refined further through consultation on an exposure draft of the new legislation and testing with consumers and industry later this year. The aim is to introduce a Bill to the House at the end of 2016. 

A copy of the paper and other information relating to the review can be found here

AML/CFT for lawyers and accountants – update on timing

The Shewan Report on New Zealand’s foreign trust disclosure rules has recommended revocation, by the end of 2016, of the exclusion of lawyers and accountants from the existing reporting and monitoring requirements of the Anti-Money Laundering and Countering Financing of Terrorism (AML/CFT) regime.

While the Government chose not to adopt this recommendation, it noted in its response to the Shewan Report that it was already committed to a reform programme involving bringing lawyers and accountants under AML/CFA requirements as soon as practicable, and that this process was being expedited.

The first phase of the AML/CFA regime took effect from 30 June 2013. The implementation of phase two will extend the application of the regime to professions and businesses dealing in high-value goods; in particular, lawyers, accountants, conveyancing practitioners and real estate agents. Justice Minister Amy Adams says she aims to pass legislation enabling the implementation of phase two by July 2017.

FMA seeks feedback on conduct guide

The FMA has released a guide detailing how it will examine whether financial service providers are demonstrating good conduct under the Financial Markets Conduct Act 2013. The guidance note is primarily aimed at directors and senior managers of financial service providers, but recognises that, as conduct is at the heart of all customer experiences of financial products, it will be relevant to other leaders and managers in the financial services industry.

The guide is not a checklist or manual, but instead is principles based guidance about how the FMA views conduct. The guide states that the FMA will use conduct as a “lens” for how it views the activities of those it regulate, and how it interacts with them. The guide sets out six key areas which the FMA intends to focus on: communication; control; culture; conflict; capability, and accountability. Under each of these headings, the guide sets out questions that FMA monitoring and supervisory staff are likely to ask when engaging with financial service providers.

The FMA is currently seeking feedback on the guide, in particular whether the guide is a useful and practical tool. The guide recognises that there is ongoing debate globally on the subject of conduct. In this regard, for those interested in this area, we note the recent speech by Jonathan Davidson, Director of Supervision – retail and authorisations at the UK Financial Conduct Authority. 

Submissions on the guide are open until 31 October 2016. The guide and consultation form can be accessed here

KiwiSaver statements engagement survey results released

The results of an FMA KiwiSaver Statements Survey have been released. That survey considers how New Zealanders use and perceive their KiwiSaver annual statements. The survey indicates that, while high numbers of KiwiSaver members are reading their annual statements, few are taking the time to check how their KiwiSaver account is tracking in relation to their retirement goals.

The Commission for Financial Capability (CFFC) says that the results indicate more needs to be done to make KiwiSaver statements more useful documents. The CFFC is particularly concerned that 73% of KiwiSaver members have not checked they are on track for their retirement needs (a further 4% answered thay they "don't know whether they are on track").

The results of the survey will be used in a review undertaken by MBIE, the FMA and the CFFC to consider how the content and format of KiwiSaver statements could be improved.

The survey results can be found here.

FMA funding under consultation

MBIE recently released a consultation paper reviewing FMA funding and levies. The paper, which was produced with help from the FMA, is the first review of the FMA’s funding since it was established in 2011.

The paper sets out a range of funding options for consideration, and seeks feedback on setting an appropriate split between industry levies and taxpayer funding. Under the 2011 model, the FMA currently receives 61% of its funding from levies; MBIE’s proposal is to increase levy funding to 70%.

Submissions on the consultation paper are open until 5pm, Monday 22 August. The consultation paper and instructions on how to submit are available here.

Commerce Commission charges Harmoney with FTA breaches

The Commerce Commission has filed charges against peer-to-peer lender Harmoney for alleged breaches of the Fair Trading Act. The charges relate to a letter sent to over 500,000 New Zealanders between October 2014 and April 2015, a letter which the Commission alleges misled recipients by representing they had been pre-approved to borrow money from Harmoney. Instead, recipients had to go through the lender’s normal approval and application process in order to apply for a loan. Harmoney has reportedly cooperated with the Commission's investigation and has indicated it intends to plead guilty to the charges.  

A copy of the media release is available here. Note that the charges relate to a period before the Responsible Lending Code came into force in June 2015. The Code contains specific guidance relating to claims that suggest a lender has ‘pre-approved’ a loan and will not inquire into a borrower’s circumstances at 3.4 (b).

Commerce Commission focus on mobile traders continues

Further to earlier reports in our Financial Regulation Update, the Commerce Commission continues to investigate and prosecute mobile traders.

Goodring Company Limited and Betterlife Corporation Limited were fined $98,000 and $73,500 respectively after pleading guilty to failing to provide borrowers with the information required under the Credit Contracts and Consumer Finance Act 2003 (CCCFA). Goodring also failed to register on the Financial Service Providers register. See the Commission’s media release here.

Also last month, Smart Shop Limited, another mobile trader, pleaded guilty to 11 charges brought by the Commission under the CCCFA and the Fair Trading Act 1986. Those charges related to inadequate disclosure of key information to customers about their loans and extended warranty agreements, and misrepresentations about their consumer rights. See the Commission’s media release Watching Brief – September 2016here.

Australian High Court releases penalties decision

The decision of the High Court of Australia in Paciocco v Australia and New Zealand Banking Group Ltd was handed down on 27 July 2016. The primary legal issue before the High Court in Paciocco was when a clause will be penal in nature, including whether it is necessary for the quantum of the clause to be closely tied to a contractual party's direct losses arising from a breach.

Paciocco has a fairly complex procedural history. This summary focuses on the facts and issues before the High Court only.

The lead plaintiff, Mr Paciocco, held two credit card accounts with the defendant bank, ANZ. Under the terms and conditions governing Mr Paciocco‘s account, he was required to make certain monthly payments to ANZ by the date specified on his bank statements. Failure to pay on time would result in Mr Paciocco being required to pay a late payment fee. The quantum of the late payment fee changed from time to time, and was $35 until December 2009 and $20 thereafter.

ANZ admitted from an early stage in the litigation that the late payment fees were not a genuine pre-estimate of the loss that it would likely suffer as a direct result of a customer failing to pay on time. However, ANZ argued that it had other financial interests which were indirectly affected by late payments, and that the late payment fees were therefore justified as they helped to protect these other interests.

By a 4:1 majority, the High Court ruled that ANZ’s late payment fees were not penalties. All five justices adopted an approach that was similar to the one recently endorsed by the United Kingdom Supreme Court in Cavendish Square Holding BV v Makdessi [2015] UKSC 67, [2016] 2 All ER 519. In his lead judgment, with which the other judges broadly agreed, Kiefel J’s key findings were:

  • a clause will be a penalty clause if its primary purpose is to punish;
  • a large range of interests, including not only compensation for loss directly caused by breach of contract, but also operational costs, regulatory cost of capital and increase in loss provisioning, are properly able to be protected through fees; and
  • the test for whether the damages clause is extravagant and unconscionable, and therefore a penalty, is whether a provision for the payment of a sum of money on default is out of all proportion to the interests of the party which it is the purpose of the provision to protect.

In our view, together with the decision of the UK Supreme Court in Cavendish, Paciocco is likely to form the foundation of the courts’ approach to the application of the penalties doctrine in New Zealand. Please email us if you would like to receive a more detailed summary of this case.


This publication is intended only to provide a summary of the subject covered. It does not purport to be comprehensive or to provide legal advice. No person should act in reliance on any statement contained in this publication without first obtaining specific professional advice.

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