New Zealand firms tend to “lawyer up” more quickly than offshore counterparts, often to the detriment of regulatory conflict resolution, Financial Markets Authority (FMA) general counsel, Nick Kynoch, told a legal gathering last month.
Kynoch told the Financial Markets Law Conference that the trigger-finger approach to regulatory disputes “may be beneficial to the private practitioners involved, but perhaps not so much for the institution”.
“How regulated firms react to these situations plays into how we decide to conduct what could quickly become a pointy conversation. This is often driven by advisers,” he said.
“Abroad things are a little different – far less time is spent arguing about which provision might apply, rather there is a focus on understanding why a regulator might take a dim view of some particular conduct or action, and seeking to address that underlying matter.”
Kynoch told Investment News NZ (IN NZ) that an overly-prescriptive regulatory regime could see the industry complying with the letter, but not the purpose, of the law.
“The last thing we want to do is for the industry to adopt a ‘tick the box’ mentality – that doesn’t address the underlying objective of the regulations,” he said.
Kynoch said there needs to be a shift from simply a ‘can we’ approach – where if the law doesn’t specifically prohibit an activity, it’s viewed as acceptable – to one where industry participants also ask ‘should we’.
“Those are two different things,” he said. “For example, just because you could be allowed to sell a complex financial product to a range of customers doesn’t mean that you should.”
In a broad-ranging speech, Kynoch laid out the FMA’s approach to enforcement, including a preview of soon-to-be-released policy documents relating to the issue.
As well as a Model Litigant Policy and Crown Law’s Prosecution Guidelines, the FMA would also publish its Regulatory Response Guidelines.
The latter publication would list the legal options open to the FMA “and the factors that we may take into account when deciding on an appropriate regulatory response”.
He said the regulator would consider criteria such as the FMA’s current “strategic priorities”, seriousness of the conduct, market impact, public interest, and deterrence, in determining a response.
The guidelines would also be augmented by enforcement and co-operation policies detailing specific courses of action open to the regulator, including when the use of the FMA’s “criminal powers” may come into play.
“On brief note here –co-operation does not equal fulfilling your legal or regulatory obligations. Complying with a s25 notice, for example, is not co-operation in that sense,” Kynoch told the conference delegates. “… it may be necessary for us to test the boundaries of the law for the overall benefit of all market participants. Accordingly, we may take ‘grey area’ cases in order to provide clarity to the market.”
Overall, he said market participants should note the specific areas of interest the FMA was focusing on such as: sales and advice; effective frontline regulation; conflicted culture; and, governance and culture.
However, Kynoch said a “black letter law” approach would not by itself ensure firms escaped regulatory attention.
“… in order to comply rather than be faced with potential enforcement, get conduct and culture right,” he said.
Finally, Kynoch told the room – packing in almost the entire NZ financial services legal contingent – that they may have to restrain their professional instincts to always “reach for the statute book”.
“Perhaps the most valuable advice that you could give to your clients, or to your executives, might be to ensure that you think about our regulatory priorities,” he said.
“… think about the matter that has given rise to the query or intervention from the FMA, and engage with the FMA about the underlying issue, rather than seek to immediately question the legal basis of our interest.”
Kynoch joined the FMA in January this year, returning to his native after lengthy offshore career, including serving for the last two years as global head of contentious regulatory compliance and conduct risk at the investment banking arm of Barclays Bank in London.