Financial Markets Authority (FMA) executive director evaluation and oversight, Liam Mason, has hit back at claims of increasingly heavy-handed regulatory information-gathering tactics.
As reported last week, legal firm DLA Piper warned financial services firms to better-prepare for a more hard-line approach from the FMA after clients reported a sharp rise in the use of ‘Section 25’ notices that compel recipients to provide all requested information to the regulator.
Based on figures supplied by the FMA, Section 25 issuance increased from 140 in 2019 to 222 in the 2022 calendar year – or a 60 per cent jump.
At the same time, the number of underlying FMA investigations using Section 25s rose from an estimated 38 in 2019 to 48 in 2022: the regulator typically sends multiple information requests as cases develop.
Both Section 25 send-outs and related matter numbers remained more-or-less stable over 2021 and 2022.
Mason, who doubles as FMA general counsel, said “there has not been a significant increase in the use of these notices in recent years”.
The regulator has taken on more regulatory responsibilities since 2019, too, including broader oversight of the financial advice sector under a new regime that came into force in 2021 (moving from transitional phase to full-licensing this March).
He also refuted DLA Piper observations that the Section 25 notices usually come with an attached secrecy order, applying strict confidentiality measures to recipients backed with criminal breach penalties.
The FMA put six matters under a cone-of-silence in 2019, doubling to 12 last year (or a quarter of the investigations in that period).
“Confidentiality orders are issued by the FMA most commonly in relation to specific investigations,” Mason said. “These orders are used either where there is a particular need to preserve confidentiality in order to protect complainants or witnesses in connection to a case, or where confidentiality is important in order to preserve the integrity of an investigation, such as where there is a risk of contamination of evidence or unconscious tainting of evidence between witnesses, or of deliberate collusion between witnesses.”
In general, he said the regulator uses Section 25 powers to gather evidence in specific cases of suspected breaches or to aid its ‘thematic reviews’ of industry practices such as the recent wholesale investor exclusions study.
“We do not routinely use section 25 notices in our supervision of licensed firms, as we rely on cooperation from these firms under the terms of their licences,” Mason said. “However, circumstances may call for the use of section 25 notices in this work also. A small number of section 25 notices are also used to obtain information on behalf of overseas regulators.”
The regulator also has internal guidelines for triggering Section 25 powers including the confidential status of any information, a timeframe for complying with requests, the need for “full access” to documents and a judgment that an individual “is unlikely to provide information on a voluntary basis”.
Mason said the guidelines “require FMA personnel to consider whether a voluntary request for information would be appropriate in the circumstances before issuing a section 25 notice”.
“These guidelines also note that in some circumstances, where there are real concerns to preserve the integrity of an investigation, such as a real risk of non-compliance with a notice, it may be more appropriate for the FMA to seek a search warrant to obtain the information,” he said.
But Mason said while the Section 25 and confidentiality clauses “can provide challenges” to boards and management, feedback to date suggests the problems are idiosyncratic rather than systemic.
“Where concerns are raised, it is our experience that these have been very situation-specific, so we have not attempted to provide general guidance on this topic to date, but may do so in the future if appropriate,” he said.