The Financial Markets Authority (FMA) is moving away from criminal enforcement and is using a new set of regulatory powers which provide the FMA with “a much wider range of options” in terms how it might deal with misconduct, says the FMA’s acting director of enforcement and investigations, Paul O’Neil.

“Our new Act – the Financial Markets Conduct Act 2013 (FMCA) – is framed up so that it is only the most egregious conduct, where there’s intent or recklessness, that will lead to criminal prosecution.

“However, even under the new Act, if the conduct is sufficiently serious, there will continue to be a place for criminal prosecutions ,” Mr O’Neil says.

“While shifting away from an emphasis on criminal liability, the FMCA provides a broader range of civil penalties and remedy provisions where market participants contravene the law.

“Under the FMCA, the FMA can apply to the High Court for orders including declarations of contravention, civil pecuniary penalties, and compensation orders. These civil liability provisions are strict liability in that a person who contravenes a civil liability provision is liable unless they make out a defence.

“Persons involved in a contravention may be liable if they were an intentional participant in the primary contravention and had knowledge of all essential facts. At the same time, for a number of these liability provisions the FMC provides robust defences for those who have good corporate governance structures and due diligence processes and procedures in place.

Stopping harmful conduct

“The FMA’s enforcement activities are intended to support the FMA’s overall regulatory objectives,” Mr O’Neil says. “Fundamentally, the FMA wants to identify problems as quickly as possible and make an early assessment of how the harm or potential harm should be treated.”

There are some policy questions which allow the FMA to make its decision in terms of what regulatory response it might choose. Some of these are:

• The seriousness of the conduct – is it intentional, reckless, grossly negligent or simply negligent? Is it merely a technical breach or are there any other aggravating or mitigating circumstances such as an abuse of trust or authority, vulnerable victims, or history of recurring misconduct?
• Market impact or detriment – has the offence resulted in serious financial loss and is the behaviour likely to have significant impact on financial markets?
• Public policy – would a decision not to commence or continue enforcement action likely undermine public confidence in the regulation of the financial markets?
• Deterrence – will enforcement action modify the behaviour of others by demonstrating or explaining the consequences of failure to comply?
• Maintenance of law – would enforcement action contribute to the performance of FMA’s statutory/strategic mandate?
• Compensation – is there an opportunity to take action that results in a return for investors?

“The factors cannot be viewed in isolation, nor does one necessarily trump the other. It’s a balancing act and one that becomes decidedly more difficult when criminal action – the most serious of regulatory responses – gets placed on the table.”

Helping your clients

Lawyers acting for clients are welcome to contact the FMA if they wish to discuss their clients’ obligations, Mr O’Neil says. And he advises that lawyers do this at an early stage.

“We are not in a position to give legal advice, but we do produce guidance and we obviously have subject matter experts who are happy to assist where they can.

“We are happy to have these conversations, and we prefer to have them at an early stage.

“If there are any doubts around what clients may or may not be able to do from an FMA point of view, we would much rather have that early engagement around rights and obligations.

“The FMA can help to educate lawyers and their clients about where they can go to access the right information and the sorts of things lawyers should be thinking about when advising their clients.”