2014 marks the start of a new era for New Zealand’s financial markets – an ambitious and exciting period of change for market participants and investors. This is the seventh, and final, article in a series by the Financial Markets Authority (FMA) outlining the key changes, the impact they will have on the future of our financial markets and the role lawyers can play in helping achieve that change.

In this article we discuss the changes to the liability regime and highlight some of the new regulatory tools available to FMA under the Financial Markets Conduct Act 2013 (FMCA).

Changing liability landscape

The FMCA simplifies what has been a complex liability regime in New Zealand’s financial markets. It adopts a system of escalating levels of liability introducing a new set of regulatory powers and infringement offences, and increases the emphasis on civil liability for contraventions. Serious criminal offences, which may result in imprisonment, are reserved for the most serious violations of the law. A key focus of the regime, with the expanded regulatory toolbox, is to ensure that the regulatory response to actual or potential misconduct is proportionate to the contravention.

Part 8

While FMA’s powers and the offence provisions are present throughout the FMC Act, Part 8 specifically deals with FMA’s enforcement powers, the High Court’s enforcement powers, civil liability including civil remedies and defences, banning orders, infringement offences, asset preservation orders and appeals.

Part 8 confers on FMA the power to make a range of orders including Direction Orders which may direct compliance with the Act and stipulate steps that must be taken to comply and Stop Orders which prohibits certain action. These orders are designed to enable FMA to proactively and swiftly respond to threats of harm to the market across a wide range of regulated activities. 

Infringement notices

The FMCA introduces the infringement notice regime which provides an effective regulatory response for minor compliance contraventions.

Civil liability regime

While shifting away from an emphasis on criminal liability, the FMCA provides a broader range of civil penalties and remedy provisions where issuers contravene the law, and where directors and others are involved in these contraventions. In pursuing a civil claim, FMA may apply to the High Court for orders including declarations of contravention, civil pecuniary penalties, and compensation orders.

These civil liability provisions are strict liability. A person who contravenes a civil liability provision is liable unless they make out a defence. People involved in a contravention may be liable if they were an intentional participant in the primary contravention and had knowledge of all essential facts.

The FMCA provides robust defences for those who have good corporate governance structures and due diligence processes and procedures in place.

Criminal liability

Criminal liability is now reserved for misconduct involving knowledge or recklessness. For example, offerors of products will be criminally liable for knowingly or recklessly making an offer where there is defective disclosure. Directors will only be criminally liable if the offer document was issued with their authority, permission or consent and they knew or were reckless about whether there was a defect.

What to expect

FMA’s primary focus is to help market participants understand their obligations and to support honest and reasonable efforts to comply. The FMCA equips FMA with a wide range of powers enabling FMA to act swiftly to minimise harms to the market and to protect investors.

Raising investor confidence and promoting the integrity of the market is at the core of the new regime and will guide FMA’s use of these powers.

FMA encourages legal advisers to work with their clients to focus on high standards of corporate governance where the interests of investors are promoted and protected in the course of the financial services and products that are offered. Those financial markets participants, who have high standards of conduct, ethics and integrity at the core of their business activities, will be well placed to adapt to the requirements of the FMCA.

Keep an eye on the FMA website www.fma.govt.nz for more details or sign up to the FMA’s engagement site www.talktous.fma.govt.nz to receive regular updates.

Belinda Moffat is Head of Enforcement at the Financial Markets Authority.

Key Dates

1 April 2014 – Part 8, Enforcement, Liability and Appeals came into force (excluding ss 470 to 473 which relate to certain FMA orders and ss 510 and 511 which relate to offences for defective disclosure).

1 December 2014 – The remainder of Part 8 comes into force (ss 470 to 473, 510 and 511).

For more details about the timeline for change go to www.fma.govt.nz/keep-updated/the-future-of-financial-markets/timeline-for-change.