What’s been keeping the Financial Markets Authority busy?

​The Financial Markets Authority (FMA) has released a report on its investigations and enforcement activity in the year to 30 June 2014. Some of the key themes of the enforcement work carried out in the past year have been:

• Responding to serious financial crime;

• Investigating alleged secondary markets violations;

• Addressing failures to file important financial statements;

• Completing the legacy finance company cases; and

• Focusing on actual and potential harms facing the market.

This update summarises the report and comments on likely areas of focus for the FMA in the current year.

Areas of focus

One of the key themes for the FMA was ensuring assertive action against serious misconduct. As expected, finance company litigation (both civil and criminal) was the primary focus accounting for 48% of the FMA’s litigation matters before the courts for the past year. The key pieces of litigation which were resolved during the past year included:

• Claims by the Serious Fraud Office (SFO) and the FMA against Belgrave Finance Limited (In Receivership and In Liquidation). Mr Hugh Hamilton, a lawyer, was found guilty of 14 charges under s 220 of the Crimes Act 1963 (theft by a person in a special relationship). It was held that he assisted the directors of Belgrave by carrying out the directors’ instructions for the execution of loan advances in breach of the trust deed.

• Mr David Ross of Ross Asset Management pleaded guilty to charges laid by the SFO in relation to a Ponzi scheme and also to charges of: providing a financial service (brokering) when he was not registered to provide that service; making a false and misleading declaration or representation to the FMA for the purposes of obtaining authorisation as an Authorised Financial Adviser; and supplying information to the FMA which he knew to be false or misleading. Mr Ross was sentenced to a term of imprisonment of 10 years and 10 months.

• Civil proceedings against Mr Brian Henry alleging market manipulation in the trading of shares in a listed entity. The FMA alleged that the trades created a false or misleading appearance regarding the extent of active trading and the supply, demand, and price of the shares. Mr Henry admitted the claims and the Court imposed a $130,000 pecuniary penalty.

Another area of significant focus for the FMA has been the secondary markets including NZX. While the NZX has an obligation to ensure that its markets are fair, orderly and transparent, the NZX also has an obligation to report potential breaches of the law and NZX rules to the FMA. The main issues considered by the FMA during the past year have been: potential insider trading, market manipulation, and continuous disclosure breaches. The FMA and NZX routinely make inquiries of market participants about the reasons for unusual trading patterns and timing. In the case of market manipulation, the FMA expects brokers to keep clear records of client instructions so that these may be referred to the FMA or NZX where there is suspected market manipulation. It is up to the broker when executing a trade to consider whether the purpose of the order is genuine or manipulative.

The FMA has also started to tackle the perennial issue of late filing of financial statements and auditor’s reports. Directors who fail to ensure that the issuer’s financial statements and auditor’s report are filed within the correct timeframe commit an offence and are liable for a fine of up to $100,000 under the Financial Reporting Act 1993. The FMA has said that accurate and timely disclosure is a key priority for it and it will take enforcement action where there is persistent non-compliance. The FMA has prosecuted the directors of eight issuers this year and has made recommendations to the Registrar of Companies to issue infringement notices to directors of 13 more entities at the time of the FMA’s report. Recently a director has been fined $30,000 (after a discount for an early guilty plea) for failing to file financial statements on time. The FMA has also brought actions against contributory mortgage brokers for failure to file annual reports with the Companies Registrar on time.

What’s in the tool kit?

The FMA is focusing on using the full range of regulatory tools in its tool kit to ensure that the action taken is proportionate to the harm. Under the new Financial Markets Conduct Act 2013 (FMCA), the FMA notes that there will be a shift away from criminal liability and a trend towards using the broader range of civil penalties and remedy provisions which are now available to it under Part 8. The FMA now may use Direction Orders (which direct compliance with the FMCA including identifying specific steps for compliance) and Stop Orders (which prohibit certain action). During the year to 30 June 2014, the FMA used a range of other means at its disposal including public or private warnings about conduct and products, cancelling prospectuses and imposing management bans on directors. For example:

• The FMA issued a number of public warnings including a warning to Phoenix Forex Limited (In Liquidation), a company which provided access to a foreign exchange trading system. The FMA warned that it considered the claimed level of returns was unsubstantiated and that the profitability and risks associated with the system were misrepresented. The FMA also noted that Phoenix Forex Limited ought to have been registered in the Financial Service Providers Register and authorised by the FMA as it was dealing in futures contracts.  The company has now ceased offering its products in New Zealand.  The FMA also has the power to issue public warnings on a non-compliant company’s website.

• The FMA has used its powers under s 43G and s 43F of the Securities Act 1978 to cancel a proposed offer of securities where the prospectus or investment statement was false, misleading or omitted material particulars.

• The FMA has sought management bans for directors and sees these as playing an important role in protecting investors and allowing confidence to be restored in the market. At the time of the report, 32 directors were subject to an automatic five year ban under the Securities Act and/or the Companies Act 1993.

Conclusion

As the tail end of the finance company cases work their way through the courts, the FMA will likely have more time and resources to devote to other key areas of concern: potential insider trading, market manipulation, continuous disclosure breaches, late filing of financial statements, breaches of the Code of Professional Conduct for Financial Advisers and the Financial Service Providers Register and monitoring the trustee, auditor and Chartered Accountant sectors. We are also likely to see a wider array of mechanisms used by the FMA from its expanded tool kit which now includes Direction Orders and Stop Orders as well as public warnings, the ability to cancel prospectuses and to impose management bans on directors.