Enforcement by the Financial Regulators in February 2015

Home Insights Enforcement by the Financial Regulators in February 2015

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Published on: February 17, 2015


Points of interest this month

Secondary markets remain at the forefront of regulatory enforcement at the commencement of 2015, as foreshadowed last year.  At the start of 2015 we have seen:

  • The FMA issuing a formal warning to an unnamed individual online trader (discussed below).
  • The FMA reportedly investigating an individual trader employed by Milford Asset Management for alleged market manipulation. 
  • The FMA entering into a memorandum of understanding with NZX. The MOU recognises the FMA and NZX's shared responsibility for the regulation of New Zealand's capital markets and the desirability of greater cooperation between the two organisations. 

The MOU is intended to:

  • open the way for greater sharing of information, ideas and knowledge/processes;
  • reduce duplication of monitoring and regulatory operations;
  • lead to a more coordinated approach by regular discussion of investigations in which the other organisation has an interest including through each agency advising the other of actions taken or proposed; and
  • put in place a reporting structure to assist the FMA to carry out its statutory requirement to assess how well NZX is complying with its obligations.

The relationship between the FMA and NZX can be expected to be further clarified over the coming months, as the MOU outlines a series of protocols that are to be developed to cover areas of overlap between the FMA and NZX.  These protocols will set out the responsibility and role of each organisation (and their infrastructure and resources) across seven key areas, including live market issues, continuous disclosure, market manipulation surveillance and investigations, review of offer documents, and data requests.

The FMA's press release on the MOU is available here and the MOU itself can be accessed here.  

This is the latest in a line of recent collaborative efforts by the FMA, including an updated MOU that was signed with the Serious Fraud Office in August 2014 in an effort to use their joint resources more efficiently and effectively in investigating and prosecuting financial crime (discussed here), and a similar understanding entered into with the Commerce Commission in April 2014, clarifying how the organisations will work together in relation to the regulation of misleading and deceptive conduct in the financial sector (discussed in more detail here).

FMA publishes medium-term strategic risk outlook

The FMA continues to provide regular guidance to the market about its regulatory priorities, and has now signalled its medium-term strategic intentions by publishing its 2015 strategic risk outlook.  This document sets out seven key priorities which the FMA will pursue in the medium-term in order to achieve its primary objective of creating fair, efficient and transparent financial markets.

From an enforcement perspective, key signals from the document include that:

  • The FMA will prioritise enforcement responses to allegations of possible secondary market misconduct.
  • The FMA will use tools such as warnings, fair dealing powers and de-registration orders to address conduct on the perimeters of its regulatory regime that threatens the integrity of the regulatory system, including in wholesale and offshore markets and through abuse of financial service provider registration.
  • Kiwiaver and insurance mis-selling will be a monitoring priority.

A copy of the strategic risk outlook can be found here, and the FMA's press release commenting on the publication is available here.

Trans-Tasman guidance on issuing financial products

The FMA's collaborative efforts have also continued with organisations across the Tasman over the summer.  In December 2014, the FMA and the Australian Securities and Investments Commission issued an updated version of their joint guidance to offering financial products in New Zealand and Australia under the mutual recognition scheme.  This replaces a previous guide that was last updated in 2011, and has been published in order to accommodate the enactment of the Financial Markets Conduct Act 2013.

The mutual recognition scheme enables issuers to offer some financial products in both Australia and New Zealand using only one disclosure statement.  It is intended to make it easier to offer financial products in both Australia and New Zealand whilst also ensuring that sufficient measures to protect investors remain in place.  The guide focuses on explaining what issuers are required to do under the scheme for offers of financial products, and also contains a number of transitional provisions which will operate up until 1 December 2016 (when the last phase of the recent reforms to New Zealand's securities law come into operation).

The FMA/ASIC joint guidance can be found here.

FMA's 2014 Audit Quality Review Report

The FMA has published its annual Audit Quality Review Report for the period from 1 July 2013 to 20 June 2014, which confirms that minimum compliance standards are being met by the majority of the profession.  The 2014 report assessed the individual systems, processes, and policies of a total 17 firms, with the majority of audited firms receiving an overall rating of either "good" or "acceptable".

The Report can be accessed here and the FMA's press release is available here.

Investigations and enforcement

FMA issues formal warning to online trader

The FMA has issued a formal warning to an individual online trader after forming the view that the trader had likely breached the Securities Markets Act 1988 by engaging in trading that resulted in no change in beneficial ownership in the shares they traded.  The FMA also took the view the individual engaged in "bait-and-switch" trading conduct.  The FMA considered the trades were likely to have the effect of creating a false or misleading appearance about the extent of active trading in, supply of, price for, or value of the shares.

Despite its view that the conduct was likely to breach the Act, the FMA considered that a formal warning was the appropriate regulatory response given the trader's inexperience, unfamiliarity with the market rules, the fact that the trader did not profit from the conduct, and the trader's cooperation with the FMA's investigation.  Although the FMA noted that inexperience and ignorance of the law were not a defence, its choice of enforcement response reinforces that it will take into account fact-specific circumstances when determining what (if any) enforcement action may be justified in any particular case.

The market manipulation was initially brought to the FMA's attention by NZX, and the FMA has stated that the two regulators intend on taking further steps to ensure that casual online traders are aware of the rules (reinforcing the justification for the MOU discussed above).  This formal warning comes shortly after the completion of the first market manipulation case in New Zealand which, as discussed in a previous edition of this newsletter, resulted in the FMA successfully obtaining an order for a pecuniary penalty of $130,000.

The warning issued by the FMA can be viewed here and the FMA's press release is available here.

FMA rules out taking further proceedings against South Canterbury Finance Ltd

The FMA has decided not to take any further action in relation to potential civil claims relating to South Canterbury Finance Limited, and has closed its inquiries.  The FMA signalled that it did not believe further proceedings were justified given other proceedings related to the South Canterbury Finance case, the low likelihood of further recovery for investors from any FMA proceedings, and the fact that thorough investigations by the FMA had failed to identify sufficient evidence to justify the significant additional cost of taking further proceedings.

The FMA's press release can be read here.


Contributed by Polly Pope, Partner and Emma Rae, Senior Solicitor.


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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