Financial Regulation Update – 16 October 2017

Home Insights Financial Regulation Update – 16 October 2017

Contributed by:

Contributed by: Marika Eastwick-Field, Polly Pope, Will Irving, and Joanna Khoo

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Published on: October 16, 2017


High Court rules the Serious Fraud Office (SFO) was wrong to exclude former Zespri chairman's lawyer from interviews

The High Court has ruled that a decision by the Director of the SFO to prevent the former Zespri chairman, John Loughlin, from having his preferred legal counsel present for an interview was unlawful. 

Mr Loughlin had been informed that while he was entitled to have counsel, he was unable to have his chosen counsel, Mark Corlett QC, on the basis that Mr Corlett QC had attended SFO interviews with other persons during the course of the SFO's investigation into Zespri. Mr Loughlin sought judicial review of this decision.

Venning J in the High Court accepted that the SFO has the implied power to exclude counsel of choice in certain circumstances. The issue was whether, in the context and circumstances of this particular case, that power was exercised reasonably (and therefore lawfully). In Venning J's view, it was, "difficult to identify the practical reality of the concerns expressed by the Director", particularly given Mr Corlett QC's ethical obligations, including in relation to conflicts of interest. Venning J also noted that the Director was unable to prevent Mr Corlett QC acting for Mr Loughlin and giving him general advice on the matter, and that there was little logical difference between Mr Corlett QC providing such general advice and attending the interview. Therefore, the decision to exclude Mr Corlett QC was not reasonable. The evidence did not support a conclusion that the investigation or examination process would or would be likely to be prejudiced by allowing Mr Corlett QC to represent Mr Loughlin at the interview.   

The decision affirms the protection that the Courts will give to the right to consult and instruct a lawyer (which is codified in s 23 of the New Zealand Bill of Rights Act 1990) and the presumption that that lawyer will be a lawyer of the client's choosing, including in the context of regulatory investigations, which often involve strict confidentiality requirements. 

A copy of the judgment is available here.

Commerce Commission releases Consumer Issues Report

The Commerce Commission has released its annual "Consumer Issues Report". The purpose of this report is to assist the Commission to better understand the potential issues New Zealand consumers face and where there is likely to be the greatest harm. See also our Competition Alert on the same topic.

The report notes that complaints under the Credit Contracts and Consumer Finance Act (CCCFA) in 2016/17 increased 22% compared to 2015. 

The four most complained about areas of lender conduct in the 2016/17 financial year, which collectively accounted for 45% of CCCFA complaints in that year, were:

  • reasonable enquiries being made by the lender about a borrower's needs and/or ability to pay, as prescribed by the Responsible Lending Principles;
  • lenders potentially failing to properly disclose the terms and conditions of borrowing prior to the borrower agreeing to lending;
  • repossession practices; and
  • consumers finding it difficult to apply for hardship protections from their lender when in financial distress.

Outside the CCCFA context, issues noted in the Consumer Issues Report include an increase in Fair Trading Act complaints arising from the continuing increase in online sales, misrepresentations as to the price, quality and/or nature of goods, and that consumers find it difficult to exercise their rights (which is consistent with complaints in relation to CCCFA hardship).                                 

The report can be downloaded here.

FMA reports on its approach to misuse of Financial Service Providers Register (FSPR)

The FMA has released a report describing the work it has undertaken since 2014 to prevent the misuse of the FSPR. In the FMA's view, some businesses and individuals attempt to give a misleading impression that their activities are regulated by New Zealand authorities or have a significant connection to New Zealand by registering on the FSPR. 

The report notes that, since 2014:

  • the FMA has received over 1,000 complaints about businesses and individuals registered on the FSPR;
  • the FMA has reviewed the registration (or attempted registration) of 208 financial services providers;
  • of the 115 existing registrations reviewed:
    • 90 were deregistered (21 voluntarily, following correspondence with the FMA); and
    • only 15 were subject to no further action.

Three companies appealed the FMA's decision to deregister them, and we have reported on those Court decisions in previous Financial Regulation Updates. The appeals by Excelsior Markets Limited and Innovative Securities Limited were dismissed by the High Court. The appeal by Vivier and Company Limited was upheld by the High Court but overturned by the Court of Appeal. No further appeals are pending.

The report outlines features that are likely to cause the FMA concern when reviewing a financial service provider application, including:

  • the shareholders and directors of the company are largely based overseas;
  • the setup of the company and FSPR registration has been outsourced to a company formation agent or service provider;
  • the registered office of the business is a serviced or virtual office with administration support staff only; and
  • the response from the company demonstrates a lack of understanding of the definition of financial services under the Financial Service Providers (Registration and Dispute Resolution) Act 2008.

There are two ways that potential misuse of the FSPR comes to the attention of the FMA. First, when the Registrar refers an application to register to the FMA; and second, in the case of a company that is already registered.  In the former case, the FMA can prevent registration of the financial service provider; and in the latter case, it may deregister the financial service provider. 

A copy of the report is available here

FMA publishes annual corporate report

The FMA has released its annual report for the financial year ending 30 June 2017. The report highlights some of the initiatives undertaken by the FMA during the period, as well as some of its future focus areas. In light of reports from the International Monetary Fund and Deloitte, as well as an increase in Government funding, the FMA also signals a number of changes in direction. A few of the key takeaways from the annual report are discussed below.

Supervision and monitoring

The FMA provides greater detail on its supervision and monitoring activities than in past annual reports. By way of background, the FMA explains that it had not expected providers to reach a high common standard of conduct immediately due to New Zealand's new regulatory environment. The FMA notes, however, that as its experience as a regulator has increased, its approach to evaluating providers has evolved and that this has led to it "marking harder" in this respect.

Situations where the FMA has followed up with a provider and found that the provider has not fulfilled conditions on its licence are of particular concern to the FMA. The FMA has an expectation that this situation will improve and has been putting in place time limits for providers to meet the conditions imposed. Where there has been no progress within a given time limit, the FMA expects that the entity and its supervisor will report this to the FMA as a breach.

The FMA identifies further areas of deficiency (both in licensing applications and monitoring visits) in the reporting of information on customer outcomes to the provider's board, clarity around roles for testing and monitoring compliance, and explanations of how outsourced service providers (for example, external investment managers and custodians) are performance managed.

Three onsite reviews of MIS supervisors were conducted during the financial year. The FMA found an improvement in standards, but notes that more is required to meet the requirements for supervisors in the Financial Markets Conduct Act 2013.

Corporate governance

The FMA highlights an intention to shift its focus regarding corporate governance towards disclosure by unlisted companies. This follows the FMA's August 2016 review of corporate governance disclosure, where it found there was generally a higher standard of reporting by listed companies.

The FMA indicates that it will rewrite its corporate governance handbook to focus on unlisted companies and seek to encourage such companies to consider improving their corporate governance disclosure. The FMA also states that it may review corporate governance disclosure as part of its monitoring programme.


Market integrity remains a focus for the FMA and the FMA states it will continue to invest in regulatory action, similar to the actions brought against Mark Warminger (for market manipulation) and two EROAD employees (for alleged insider trading).

Following the Viaduct Capital and Mutual Finance trial, which was aborted in May 2017 due to late disclosure, the FMA has begun a review of its enforcement governance process. The focus of this review is on ensuring that investigatory decision-making is efficient and that enforcement matters progress in a timely manner.

Innovation and alleviating the regulatory burden

The FMA also took the opportunity to highlight its work in supporting innovation, for example, its proposed class exemption for robo-advice (a decision on which will be made by the end of 2017) and to alleviate the regulatory burden, with 20 class exemptions and 50 individual exemptions granted during the financial year.

International Monetary Fund report and Deloitte review

The International Monetary Fund's Financial Sector Assessment Program report contained recommendations for the FMA relating to supervisors, custodians, the wholesale asset management sector and conduct in the insurance industry.

Deloitte's efficiency and effectiveness review contained 13 recommendations for the FMA, including a need to increase communication with the market, operate more efficiently, and attract, retain and develop talent. The review also recommended changes to the FMA's performance measures. In its annual report, the FMA outlines how these measures will change from 2018.

The FMA's annual corporate plan further details the FMA's response to these reports. A copy of the annual report is available here

FMA releases guidance note on substantial product holder disclosure

Following the consultation paper released in June seeking feedback on substantial product holders' disclosure obligations, the FMA has released a guidance note on substantial product holder disclosures. Please see our recent Corporate Alert for further details.

This article 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. If you require any advice or further information on the subject matter of this newsletter, please contact the partner/solicitor in the firm who normally advises you, or alternatively contact one of the partners listed below.

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