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Financial Regulation Update – February 2016

Home Insights Financial Regulation Update – February 2016

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Contributed by: Marika Eastwick-Field and Andrew McLeod, Polly Pope, Emmeline Rushbrook and Will Irving.

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Published on: February 19, 2016

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Guidance on what constitutes “all reasonable and proper steps” for directors

The High Court has recently shed new light on the extent to which directors can draw comfort from and rely on professional advice in the context of satisfying the company’s statutory obligations. The decision clarifies the steps that the courts will expect directors to have taken to avail themselves of a defence that they took “all reasonable and proper steps” to procure the company’s compliance.

While the decision concerned the Financial Reporting Act 1993, similarly worded defences appear in legislation such as the Financial Markets Conduct Act 2013 and the Companies Act 1993.

The decision is of particular importance where directors are aware that the company is not in compliance.  In those circumstances, to rely on the statutory defence directors will need to establish both:

  • that they had obtained legal or other professional advice on the range of options available to them to procure the company's compliance; and
  • that all reasonable options had been exhausted. 

The case

Directors of Apple Fields Limited were charged by the FMA under the Financial Reporting Act with failing to file financial statements and an auditor’s report for consecutive financial years. Apple Fields’ accountant had advised the directors that the group accounts could not be completed without including the accounts of a deemed subsidiary. Despite the diligent efforts of the directors, those accounts could not be obtained. No financial statements were therefore submitted as the directors believed that such statements would not comply with generally accepted accounting practice. The High Court considered whether the directors could rely on a defence that they had taken “all reasonable and proper steps” by relying on the accountant’s advice. 

The High Court found that the directors had not taken all reasonable and proper steps. The directors knew that Apple Fields was in breach of the Financial Reporting Act. In those circumstances, they were required not only to take all practical steps to ensure compliance but also to seek “comprehensive legal and/or accounting advice as to the range of options available to them when those practical steps did not bear fruit”. The most obvious step to take would have been to seek legal advice. The directors had not done so, and had accepted the accountant’s advice without further enquiry. The Apple Fields directors’ positions could be distinguished from those of the directors of Feltex in an earlier case, who had obtained and relied on advice that the company was compliant. In this case, the directors’ honest reliance on the accountant’s advice simply gave rise to the circumstances in which there was a knowing failure to comply with the company’s statutory obligations. 

While the Court did not expressly discuss the steps that the directors should have taken once they had obtained the “comprehensive legal and/or accounting advice”, it follows that the directors would need to establish that any reasonable options identified in that advice had been exhausted in order to avail themselves of the “all reasonable and proper steps” defence. 

Schroeder v Financial Markets Authority [2016] NZHC 4

De-registrations of financial service providers: A win for the FMA

In December last year, the High Court released its decision declining an appeal by Excelsior Markets Limited against the FMA’s decision to remove it from the Financial Services Providers Register. The FMA had decided that Excelsior should be deregistered as it provided only an administrative function from its place of registration in New Zealand, with its substantive operations mainly provided outside of New Zealand to clients outside New Zealand. The FMA considered that Excelsior’s registration was likely to create a false or misleading appearance that the provision of services from New Zealand to overseas clients was regulated by New Zealand law, which was not the case. 

Justice Nation respectfully disagreed with certain aspects of Justice Brewer’s approach in the first deregistration case of this kind, Vivier and Company Ltd v Financial Markets Authority:

  • In Vivier, Justice Brewer held that the FMA was required to undertake an assessment of whether the company’s registration on the Financial Services Providers Register misrepresented the extent to which it provided services in New Zealand, or the extent to which it was regulated in New Zealand. In Excelsior, Justice Nation held this assessment may not be necessary in all cases: where financial services were provided “almost wholly” outside New Zealand, that could provide a sufficient basis for a conclusion of misrepresentation.
  • In Vivier, Justice Brewer held that there would need to be evidence that the company’s registration would damage the integrity and reputation of New Zealand’s financial markets and/or law for regulating those markets. In Excelsior, Justice Nation did not regard such evidence as necessary, and would have been prepared to accept the view of the FMA (provided that it could be explained on a reasonable basis), due to the FMA’s specialist knowledge as to how financial markets operate.  

The Court of Appeal heard an appeal by the FMA of Justice Brewer’s decision in Vivier last week, and it will be interesting to see the approach taken by the Court of Appeal on these issues.

Excelsior Markets Ltd v Financial Markets Authority [2015] NZHC 3334

Territorial scope of the AML/CFT Act

A final point of interest to arise from Excelsior is Justice Nation’s comments on the territorial scope of the Anti-Money Laundering and Countering Financing of Terrorism Act 2009. While the Act does not specify a territorial scope, Justice Nation accepted that the Act did not apply to Excelsior, because it was not trading for the accounts of customers in foreign exchange in New Zealand.

Update on the FMA’s procedures during investigations

The FMA shared some useful insight into certain aspects of its investigations in a presentation by Paul O’Neil to the Competition and Law Policy Institute of New Zealand. The speech covers the FMA’s experience of bringing criminal proceedings in a commercial context, and sets out matters which the FMA takes into account when considering whether civil or criminal proceedings are an appropriate regulatory response. 

Notably, the speech records several aspects of the FMA’s current practice in relation to investigations. Mr O’Neil observed that the reality for the FMA has been that, at the investigation stage, it is usually not possible to adhere to a lesser “civil” standard. This is because at this stage it will generally not be possible or appropriate to pre-judge whether the conduct (and the evidence) will lead to bringing either civil or criminal proceedings.

The speech includes current indications of the FMA’s approach to issues including:

  • the written notice which a person can expect to receive prior to an interview;
  • the use of voluntary or compulsory interviews;
  • expectations around advising interviewees of their rights; and
  • issuing confidentiality orders over investigations.

A copy of the speech can be found here.

Busy year ahead at the Reserve Bank

In a speech this month, Toby Fiennes, Head of Prudential Supervision, set out the Reserve Bank’s regulatory plans for 2016 against the backdrop of a discussion about the importance of market discipline within the Reserve Bank’s regulatory and supervisory framework. The speech developed the theme that prudential regulation in New Zealand must support the conditions required for effective market discipline, including good access to meaningful and timely information; having incentives in place so that market participants use the information; and having a competitive environment that lets investors and depositors shift between financial institutions. With this in mind, in the next 1-2 months the Reserve Bank will be consulting on a “dashboard” – a new form of electronic disclosure. Mr Fiennes’ speech set out details of the Reserve Bank’s current preferences for the dashboard. 

Other changes planned for this year reflect the conclusions of last year’s regulatory stocktake, including:

  • redrafting and restructuring the Banking Supervision Handbook;
  • refining the suitability assessment process for the directors and senior managers of banks; and
  • creating a standing obligation to report breaches to the Reserve Bank, as soon as possible.

A copy of the speech can be found here.

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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.

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