How to deal with the regulator in times of tougher enforcement

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Lawyers specialising in financial services are warning of a “more muscular” approach being taken by the FMA when it comes to enforcement.

Monday, March 28th 2022, 9:21AM 1 Comment

by Jenni McManus

In part, this is happening because regimes such as the AML/CFT legislation and the Financial Markets Conduct Act 2013 have been in force for some time and after a honeymoon period of education and light-handed enforcement, the regulator now expects market participants to fully understand their obligations and be compliant.

Another reason is continued fallout from the Australian Haynes commission, where some regulators were heavily criticised for their lax approach to enforcement.  While the FMA’s approach is different to that of its Australian counterpart, ASIC, the commission’s findings have influenced its thinking”, Lloyd Kavanagh, a partner at MinterEllisonRuddWatts, told a webinar on compliance last week hosted by the Financial Services Council.

“They need to be seen to be taking action….It’s a very different world to what we were seeing a couple of years ago.”

The FMA has also received a funding boost for enforcement action.

In dealing with the regulator, Kavanagh’s best advice to the financial services sector is to take every engagement seriously, no matter how good your relationship might be with those at the front end of the organisation.

It’s important advice: financial advisers will be supervised by the FMA when their licensing regime under FSLAA (the Financial Services Legislation Amendment Act) comes into full force in March next year. And the conduct and culture of insurers, banks and non-banking financial institutions will also come within the FMA’s remit when COFI (the Financial Markets (Conduct of Institutions) Amendment Bill) becomes law, probably later this year.

Good relationships with the FMA’s front-end supervisory teams are vital but that doesn’t mean industry participants will get a free ride. “We’ve seen clients struggle with this,” Kavanagh says. “They have very good relationship with a front-end person then, weeks later, they get a letter asking some very aggressive questions.”

Before talking to the regulator, he advises clients to make sure they’re prepared, have done their due diligence, and are focused on their investors’ best interests and delivering good outcomes.

Sam Hiebendaal, a senior associate at Bell Gully and a financial services specialist, says the FMA’s “more muscular” approach puts the onus on industry players and their advisers to ensure they are “carefully scoping” their communications with the regulator while maintaining the proactive and transparent engagement the FMA says it requires.

Hiebendaal says the FMA’s separation of its supervisory and enforcement teams is “by design” and aimed at reducing the risk of enforcement being captured by the market.

“It allows the supervisory people to [perform] their role and if there are any issues, [they can] just pass it along to the investigation and enforcement department to deal with separately. I would say this as a litigator, but I think it highlights the importance of getting a disputes lawyer or someone who specialises in investigations on board early if you think that something has the potential to develop into an investigation.”

While newly appointed FMA boss Samantha Barrass said earlier this month that she wanted to remain “completely connected” to the industry and work collaboratively with it, this does not appear to mean a softer approach to persistent non-compliers. 

For more information on how the FMA views enforcement, Kavanagh recommends that market players read a speech given by its then Acting General Counsel, Karen Chang, last November. https://www.fma.govt.nz/news-and-resources/speeches-and-presentations/karen-chang-speech-to-minter-ellison-clients/

In her speech Chang, who has just been appointed head of the Serious Fraud Office, made it clear that those who do not meet the FMA’s expectations around conduct will be held to account.

When the regulator sent a request to a firm for information, Chang said it expected “thorough, accurate and constructive answers”.  It encouraged firms to pro-actively self-report issues and, at the same time, detail the remedial action they intended to take to make things right for investors.

But in cases of serious misconduct, self-reporting would not immunise a firm against enforcement action, Chang said. “The nature of the underlying misconduct itself will always be the driving factor in assessing the appropriate response…A confession does not absolve responsibility.”

Timely self-reporting to the regulator was expected, she said. Delays, and incomplete self-reporting would be viewed as aggravating factors.

Chang was also sceptical about firms which claimed their problem was created by faulty systems.  If misconduct was inadvertent, or caused by systems failure, that demonstrated a lack of prioritisation and investment in appropriate systems and processes, she said.

It was all about New Zealanders having confidence and trust in the financial services they were receiving. “This means investing in systems that put customers first and showing a willingness to deal with the regulator in a way that is open, transparent and engaged.”

Kavanagh says self-reporting is a good idea to mitigate the impact of any potential harm but is not a panacea and firms should expect the regulator to ask hard questions.

“Proactively make sure your approach and systems and processes are right at the front end.  There have been lots of reports in the media over the past year of formal warnings or directions being given [to firms] whereas in the past, regulator would have said ‘ok, you’ve brought this to us, fix it and don’t make another error’.”

When dealing with regulators, Hiebendaal says it’s important to strike a balance between doing the prudent and sensible thing by self-reporting matters as they arise and carefully calibrating the information you’re providing.

“It’s always better to raise a problem and a solution at the same time, rather than saying ‘we’ve come across this issue, we don’t know how many people it has affected and we’re going to do something about it at some undefined period in the future’.”

Kavanagh agrees. “They typically won’t react well to being told there’s a bit of a problem, you don’t know how big it is or what you’re going to do about it but you’re just sharing,” he says. “If you find an issue, it’s important to work really fast to find out as much as you can and what you are planning to do about it …As Samantha Barrass pointed out, it’s all about the investors.”

Hiebendaal warns of the need to be careful with all business-as-usual conversations with the regulator if there’s an investigation going on in the background. “And your internal teams need to be very linked-up to make sure that nothing they’re saying is cutting across each other.”

Or, as Kavanagh puts it: “One thing to be conscious of is that even in everyday interactions, your teams make sure what they’re saying is accurate. “It’s important to be super-clear that you can stand by what you’re saying and that it’s factually based.”

Tags: FMA

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