A leading NZ financial services law firm has warned the industry is ill-prepared for an increasingly heavy-handed regulatory enforcement tactic.
In a recent workshop, DLA Piper partner, Emma Moran, said the Financial Markets Authority (FMA) had stepped up use of sweeping information-gathering powers under Section 25 of its governing legislation.
Moran said anecdotal evidence from clients and other industry sources suggest Section 25 notices – that compel recipients to supply all requested information to the FMA – have become a go-to regulatory tool.
And more disturbingly, she said the FMA orders “almost invariably” come with a strict confidentiality clause that forbids anyone receiving the notice from sharing that knowledge.
“Section 25 notices can be issued to anybody in the business,” Moran said, “but the confidentiality requirement means they can’t discuss it with anyone else – except a legal adviser – or risk a criminal conviction and fines of up to $300,000.”
She said the for-your-eyes-only diktat could create serious conflict-of-interest issues for Section 25 recipients who may have internal disclosure responsibilities (such as reporting to the board or during merger due diligence).
Furthermore, Moran said the secret orders pile immense stress on individuals if they are unsure of where to seek help with potential mental health consequences.
“All regulated financial services firms need to be aware [of the Section 25 and confidentiality clause rules] and have a plan and process in place to deal with them,” she said. “Employees need to know what to do and that they can talk to a legal adviser – and who that legal adviser might be [if the business has one].”
The FMA could also help by issuing industry guidance on how to comply with Section 25 notices, Moran said.
“There is some concern in the industry that the regulator has made excessive use of the Section 25 powers,” she said. “Of course, the FMA should have these powers but it needs to exercise them reasonably and proportionately. The devil is in the detail of how the regulation is applied.”
Feedback from DLA Piper clients suggests that in most cases the businesses would have supplied the information to the FMA on request without a Section 25 kicker.
“Most people in the industry want to do the right thing and comply with regulations,” Moran said. “But a combative approach from the FMA could end up being counter-productive.”
Alasdair McBeth, DLA Piper partner, said the regulator has used Section 25 notices in the past to pursue enforcement actions ranging from relatively minor disclosure document errors to anti-money laundering breaches and other more serious matters.
“We’ve seen Section 25s issued for a raft of things – it appears to be the number one enforcement tool,” McBeth said.
“We don’t know how the FMA decides to issue the notices or identify who to send them to but it seems they are sometimes used in situations where it is unwarranted.”
The regulator has previously used Section 25 powers in industry-wide investigations including the 2019 insurance and banking reviews and in a 2021 probe of life insurer relationships with financial advisers.
As of publication time, the FMA had not responded to queries.