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Financial Regulation Update – May 2017

Home Insights Financial Regulation Update – May 2017

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Contributed by: Polly Pope, Will Irving and Andrew McLeod

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Published on: May 04, 2017

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ENFORCEMENT

FMA enforcement

Guilty plea in FMA insider trading case; FMA drops obstruction charges

The FMA has had success in an insider trading case, with an individual pleading guilty in the Auckland District Court. The guilty plea was made to a charge of insider trading, as an information insider advising or encouraging another person to trade in breach of section 243 of the Financial Markets Conduct Act 2013. 

The individual is one of two charged by the FMA in relation to trading in shares of Eroad. The FMA alleges that an Eroad employee sent text messages to a former employee, containing confidential material information relating to Eroad’s performance in the period to 30 September 2015. The former employee then traded 15,000 Eroad shares.

There are interim name suppression orders currently in place.

Interestingly, the FMA also originally laid two charges of obstruction under s 61 of the FMA Act. The FMA has agreed to withdraw those charges. Section 61 makes a number of acts a criminal offence.  These include failing, without reasonable excuse, to comply with a notice issued by the FMA under s 25 of the FMA Act requiring a person to supply information, produce documents or give evidence, deceiving or misleading the FMA in providing evidence, and wilfully acting in contravention of any confidentiality order made by the FMA.  

The fact that the charges were laid serves as a reminder of the need to take compliance with confidentiality orders and FMA investigations seriously.

The FMA's press release on the charges can be found here, and on the guilty plea can be found here.

FMA warns 12 entities for breaches of Anti-Money Laundering and Countering Financing of Terrorism Act 2009

In February, the FMA issued warnings to 12 reporting entities for failing to comply with their auditing requirements under the Anti-Money Laundering and Countering Financing of Terrorism (AML/CFT) Act 2009.

Under that Act, reporting entities are required to audit their AML/CFT risk assessment and AML/CFT programme every two years. The FMA made requests of 77 reporting entities to provide these audits to the FMA. Twelve of these entities (each either individuals or small organisations) were found to be non-compliant, and were given a warning. However, their names were withheld, which the FMA stated was done to protect the organisations from the "disproportionate effect" of publication. 

The FMA's press release on the warnings can be found here.

FMA files charges for unregistered provision of financial services

The FMA has filed charges against Garry James Patterson, alleging Mr Patterson was, or was holding out as being, in the business of providing financial services in contravention of the Financial Service Providers (Registration and Dispute Resolution) Act 2008 (FSP Act). Further charges for obstructing the FMA's information gathering powers have also been laid.

The FMA's press release on the charges can be found here.

Commerce Commission enforcement

Individual sentenced to two years' imprisonment for mobile trading offending

The owner of mobile trader Flexi Buy Limited, Vikram Mehta, has been sentenced to 2 years' imprisonment – the first jail sentence ever imposed in a Commerce Commission prosecution. Mr Mehta was the sole shareholder and director of Flexi Buy Limited, which took money from customers without providing them the goods they purchased, or intending to supply the goods promised. In sentencing, the judge noted that because the offending was so serious, and in the interests of deterring similar actions, home detention was not appropriate. 

Mr Mehta was convicted under the "party provisions" of the Crimes Act 1961, whereby an individual may be held criminally liable as a party to the offending of another (in this case, the company). This case serves as a reminder to individuals that they can be personally criminally liable even where the primary acts in question are carried out by a company.

The Commerce Commission's media release on the sentence can be found here.

Rapid Loans to refund $1.4 million in unreasonable fees

Internet-based lender Rapid Loans NZ Limited has agreed to refund $1.4 million in fees as compensation to borrowers, as part of a settlement agreement with the Commerce Commission. The total amount to be paid includes an added 5% to reflect the borrowers' lost opportunity to use the money, and Rapid Loans is required to make its best efforts to contact all affected borrowers owed more than $20.

As the dispute was settled, the case provides little specific guidance on the Commission's approach reasonableness in the fees context. However, after the Supreme Court's decision in the Sportzone litigation last year, the Commission's finalised Consumer credit fees guidelines are anticipated soon.

The Commerce Commission's media release on the settlement can be found here.

FMA REPORTING/GUIDANCE

FMA reports indicate its future focuses

The FMA has indicated its future focus in two significant reports on its activities, the Strategic Risk Outlook, and the Conduct Outcomes Report (previously known as the Investigations and Enforcement Report).

  • In the Strategic Risk Outlook 2017, which sets out the strategic priorities guiding the FMA's operations over the next three years, the FMA identified a number of "developing themes" that it has expressed a desire to better understand the stability of New Zealand's financial markets.  These include regulating for rapid technological innovation, retail investor uptake of risky and complex products, and helping investor decision-making in changing market conditions. 
  • In the Conduct Outcomes Report, the FMA outlined key issues and actions from the FMA's enforcement, supervision and preventative actions for July 2015 to June 2016. In its "Future focus" section, the Report identifies specific areas of focus for 2017 (and beyond) include:
    • conduct in wholesale markets;
    • monitoring the FMA's regulatory perimeter;
    • improving investor capability and education;
    • following up on conditions imposed during licensing; and
    • sales practice and conflicted conduct. 

The Strategic Risk Outlook can be found here. The Conduct Outcome Report can be found here, while the FMA's media release on the Report can be found here.

FMA guidance on "good conduct" of licensed financial services providers

One of these key areas of focus was the conduct of market participants. To this end, the FMA has also published "good conduct" guidance that will be important for providers of financial services. The “A guide to the FMA’s view of conduct”, published in February, is intended for directors and executives of licensed financial services providers, but will also be relevant to others operating in the financial services industry. It sets out a "good conduct profile", in particular focusing on five key areas:

  • capability (the provider competently providing an appropriate service or product);
  • conflict (ensuring the interests of customers are served as well as the provider's own business interests);
  • communication (ensuring that customers are listened to and understand the products or services);
  • culture (from the leadership down, the provider encourages and recognises good conduct); and
  • controls and governance (there are internal systems which support good conduct).

A copy of the guidance for licensed financial services providers can be found here, while a copy of the FMA's media release can be found here.


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. If you require any advice or further information on the subject matter of this newsletter, please contact the partner/solicitor in the firm who normally advises you, or alternatively contact one of the partners listed below.

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