Financial misconduct should be civil not criminal matters

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Commissioner for Financial Advisers David Mayhew says now is not the time to dwell on the resource implications of active enforcement by the Financial Markets Authority (FMA), but they are considerable.

Thursday, October 14th 2010, 7:39AM 1 Comment

by Jenha White

He says enforcement is high up the political and public expectations of the FMA with the Minister's mantra being: "...visible, proactive, and timely enforcement"

Mayhew says he is struck by the prevalence in New Zealand of the use of the criminal justice system in financial matters despite the fact it is a blunt instrument with the capacity to produce unexpected results.

Unless there is compelling evidence of fraud or dishonesty of a criminal standard, misconduct in financial markets is better dealt with, in Mayhew's view, by a civil fining regime.

For example, he says in the UK since 2000 and now across the European Union there is the market abuse regime dealing with misuse of confidential information, misleading statements and practices, and market manipulation, which sits alongside the criminal law and is dealt with by the Financial Services and Markets Tribunal.

Continuous disclosure obligations of listed companies and their directors are also covered by that Tribunal's jurisdiction.

He asks what might have happened in the Feltex case if such a regime had been available?

The issue before the Court was whether its five directors took all reasonable and proper steps to ensure compliance. The directors relied on professional advice (reviewing accountants) that disclosure of a breach of banking covenants was not necessary. The suspicion was they had not asked the right questions of their advisers.

The Ministry of Economic Development action was trying to extract a financial penalty out of the five directors - a maximum of $100,000, but likely to be less given the involvement of advisers and clean records.

Mayhew asks is this the stuff of criminal law and criminal justice system? Or would it have been better dealt with by an administrative enforcement regime with a specialist tribunal?

He says that is not a criticism of the criminal or civil courts, but simple recognition they have enough on their dockets to be getting on with.

"Moreover, given the combination of need for clarity about expectations of appropriate behaviours in the capital markets and deterrence of non-compliant conduct, speed is often of the essence."

He says here we have the beginnings of such a tribunal with the Rulings Panel replacing the New Zealand Markets Disciplinary Tribunal.

The Financial Markets (Regulators and KiwiSaver) Bill includes provision for market integrity regulations to replace or override exchange rules.

These would be enforced by the FMA through the Rulings Panel, but are limited by definition to the listed companies and broking firms and directors and employees.

There is also the potential to fold into the Rulings Panel the disciplinary committee under the Financial Advisers Act which is foreshadowed in the Securities Act Review discussion paper.

"Why not turn it into a Financial Markets Tribunal and give it jurisdiction to impose civil fines in relation to capital market misconduct generally, including beyond the listed market, for example, abuse of confidential price sensitive information; financial reporting requirements; failings by fund managers; by trustee supervisors; by directors; by auditors; and the like?" asks Mayhew.

He says then cases might be considered involving all relevant players, apportioning responsibilities appropriately.

Jenha is a TPL staff reporter. jenha@tarawera.co.nz

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