The Financial Markets Authority (FMA) made its first stop order under ss 462 and 463 of the Financial Markets Conduct Act 2013 on 27 July. The making of the stop order illustrates the very significant powers that are available to the FMA and that appear to be relatively simple and quick to use.
The Commerce Commission, as a comparable regulator, cannot call on powers that are simple and effective to use as those available to the FMA. That is so even when the Commission is dealing with conduct of a kind that is subject to regulation by both the Commission and the FMA.
Lawyers whose clients’ affairs are potentially subject to the jurisdiction of the FMA need to be familiar with the extensive powers that the FMA possesses.
The stop order made by the FMA on 27 July was made against Green Gardens Finance Trust Limited (GGFT). The order prohibits GGFT from offering or issuing debt securities, accepting applications for debt securities, distributing any restricted communication (including any advertisement) that relates to the offer of debt securities and accepting further contributions, investments or deposits in respect of debt securities.
Claimed breaches
The FMA made the order as a result of a number of claimed breaches of the Financial Markets Conduct Act 2013 by GGFT, including making an offer of debt securities without preparing and lodging a product disclosure statement (PDS) in breach of s 48 of the Financial Markets Conduct Act 2013.
Stop orders are one of the suite of powers that the FMA can call on to address potential breaches of the Financial Markets Conduct Act 2013 without the need to seek the assistance of the Courts.
The exercise by the FMA of such powers will usually be accompanied by media releases by the FMA and will likely have major reputational implications for the parties affected.
The FMA’s powers to make stop orders are included in Subpart 1 of Part 8 of the Financial Markets Conduct Act. The forms of stop order that can be made by the FMA are set out in s463.
For example, stop orders can prohibit offers, issues, or sales of financial products specified in the order, or prohibit an offeror from accepting applications for financial products specified in the order, or prohibit the distribution of a PDS or any other disclosure document or prohibit other communications relating to an offer of financial products or the supply of financial services, or prohibit a person from accepting further contributions in respect of financial products specified in the order.
The circumstances in which the FMA may make a stop order are set out in s 462. They include, for example, the situation where a PDS or disclosure document is false or misleading or doesn’t comply with the Act or regulations. It also includes the situation in which a communication relating to an offer of financial products or the supply of financial services is false or misleading or does not comply with the Act or regulations.
Interim stop orders
Section 465 also allows the FMA to make an interim stop order. The FMA may make an interim stop order if the FMA is considering exercising the power to make a stop order and the FMA considers that making an interim stop order is desirable in the public interest.
An interim stop order is in force from the time it is made until the close of the date that is 15 working days after the date on which it was made (or a later date specified by the FMA which can be no more than 30 working days after the day the order is made).
Interim stop orders can be made on an ex parte basis provided that after an interim order has been made the issuer, offeror or service provider is given an opportunity to make written submissions and be heard.
Direction orders
The Financial Markets Conduct Act also gives the FMA the power to make direction orders. Direction orders are set out in s 469 and essentially are orders of a mandatory injunctive nature.
A direction order can direct the relevant person to comply with certain provisions of the Act and can stipulate any reasonable steps that the person must take in order to comply with the provision or to avoid or mitigate any actual or potential adverse effects of a contravention.
Such steps can include disclosing information for the purpose of securing compliance with the provision of the Act, publishing corrective statements and complying with a prohibition or restriction on the making of any statement or the distribution of any document by the relevant person.
The direction order may also require the relevant person to report to the FMA within the time specified in the order stating how and when the order has been or will be implemented.
Other powers
The FMA is given certain other powers to make orders under the Financial Markets Conduct Act (see ss 470, 472 and 474). This includes the power to make an order that a simplified disclosure PDS may not be used, and the power to make certain orders in relation to unsolicited offers.
Section 475 sets out certain steps that the FMA must follow before making any order under subpart 1 of Part 8 of the Act (except interim orders). That includes stop orders, direction orders and the other forms of order referred to above.
The FMA has to give the person to whom the order is proposed to be directed written notice that the FMA may make an order and of the reasons why it is considering exercising its power.
The written notice must be given at least five working days before the FMA makes the order. It must give each person to whom notice is given an opportunity to make written submissions and be heard on the matter within the notice period. The five working day period is very short but even that time period can be shortened by the FMA where the FMA thinks it is necessary or desirable in the public interest for any order to be made more urgently – see s 476.
Cease and desist orders
It is interesting to compare the FMA’s ability to impose a stop order with the ability of the Commerce Commission in certain circumstances to issue a “cease and desist order” in respect of anticompetitive conduct. The Commerce Act 1986 was amended in 2002 to allow for such orders.
A cease and desist order has only been made once – in 2006 in respect of Northport’s refusal to allow International Stevedoring Operations Ltd to undertake general cargo marshalling services in the Marsden Point port.
The relative lack of use of cease and desist orders may be the result of the relatively cumbersome procedure required for such an order to be issued.
The Commission has to seek the making of the cease and desist order from a separately appointed Cease and Desist Commissioner (see ss 74AA and 74C).
Before a cease and desist order is made the person against whom it is sought must be served with a notice specifying the nature of the alleged contravention of the Commerce Act, the terms of the proposed order and the reasons for the order (s 74B Commerce Act). The person against whom the cease and desist order is sought must be given an opportunity to:
- access the relevant information held by the Commission;
- make a written submission; and
- consent to the terms of the proposed order, or have the matter determined by a Cease and Desist Commissioner following a hearing (s 74B Commerce Act).
If the person against whom a cease and desist order is sought elects a hearing then that person is entitled to be represented at the hearing by counsel, and to call witnesses and cross-examine witnesses (s 74C Commerce Act).
Unlike the position with Commerce Act cease and desist orders, the Financial Market Conducts Act does not provide for a separate Commissioner to make such stop orders. An affected party does have the right to be heard (except potentially in the case of an interim stop order) but the time limits involved are short and there is no express right to call or cross-examine witnesses.
The Commerce Commission’s ability to issue cease and desist orders also only relates to breach of the Commerce Act. It does not extend to breaches of other legislation that the Commission has responsibility for (such as, for example, the Fair Trading Act 1986).
Responsibilities
Both the FMA and Commerce Commission have responsibility for similar legislation prohibiting false and misleading statements and unsubstantiated representations. Part 2 of the Financial Markets Conduct Act 2013 contains provisions relating to such conduct which are very similar to provisions in the Fair Trading Act.
However, while the FMA can impose stop orders in relation to false and misleading statements where a financial service or product is involved, the Commerce Commission has no ability to issue cease and desist orders in relation to false and misleading statements covered by the Fair Trading Act.
This results in the situation where both the FMA and Commerce Commission have responsibility for regulation of the very same form of conduct (false and misleading representations) but only the FMA has the ability to issue stop orders for such conduct. The Commission would need to apply to the Court for an injunction to prevent the continuation of the conduct.
FMA warnings
The other important power that the FMA has relates to warnings by the FMA. Section 49 of the Financial Markets Authority Act 2011 provides that if the FMA has issued a warning about any matter relating to a relevant person, the FMA may by written notice served on the relevant person order the relevant person or associated persons of the relevant person to:
- prominently disclose a copy of the warning on one or more websites maintained by the relevant person or associated persons;
- ensure that certain communications sent by the relevant person or associated persons contain a copy of the warning; or
- ensure that any offer document of a kind specified in the order contains or is accompanied by a copy of the warning.
The Commerce Commission does not have a corresponding power to simply order a trader in breach of the Fair Trading Act to publish warnings made by the Commission to the effect that a trader has likely breached the Act. Instead, the Commission would need to apply to the Court for an order for corrective advertising under s 42 of the Fair Trading Act.
It is important that lawyers whose clients’ affairs are potentially subject to the jurisdiction of the FMA be familiar with the powers that the FMA possesses.
John Land is a competition law specialist and commercial litigator at Bankside Chambers in Auckland. Formerly a partner of Kensington Swan for 20 years, he can be contacted on 09 379 1513 or at john.land@bankside.co.nz.