Taking Up Arms For The Investor - FMA's Power To Litigate

The legislation to set up the Financial Markets Authority (FMA) creates a new right for the regulator to initiate or take over legal proceedings against financial market participants on behalf of investors.

The provision is modelled on Australian law.

This Brief Counsel compares the New Zealand approach with the Australian model and looks at the lessons to be drawn from the Australian experience.

Policy considerations

The new power is delivered via the Financial Markets (Regulators and KiwiSaver) Bill, introduced into Parliament last week, and is based on s 50 of the Australian Securities and Investments Commission Act 2001 ("ASICA").

The policy intention is two-fold:

to provide a remedy for small-scale retail investors who lack the resources to fund expensive litigation by themselves. In such situations, the FMA will be able to step in and provide a regulator-backed class action proceeding to pursue the wrongdoing, and to restore public faith in financial markets and in the regulatory regime which governs them. As the explanatory note to the Bill makes clear, there is a strategic dimension in ensuring that the new "super-regulator" possesses, and is seen to possess, strong enforcement powers. But, inevitably, there are risks associated with the change.

As we observed in an earlier Brief Counsel, there is a danger that directors and other decision-makers will become excessively cautious in their decision-making, or be deterred from taking up these roles at all. Although no new obligations are imposed on them through the Bill, the likelihood of civil litigation has clearly increased. Quite apart from the deep pockets of a government regulator, the FMA's decision to take action is explicitly guided by different criteria from those that will inform a private individual's decision to seek redress in the same situation.

Subpart 3 in detail

Parties Clause 34 of sub-part 3 of the Bill provides that the FMA may "exercise the right of action a person (person A) has against a specified person by commencing and controlling specified proceedings against the specified person". Alternatively, it may take over such proceedings.

A "person" is defined in the Interpretation Act 1999 to include "a corporation sole, a body corporate, and an unincorporated body". The capacity to act on behalf of a company thus allows the FMA to bring the equivalent of a derivative action against the directors of that company. As discussed below, "person A's" consent is not required to proceed.

A "specified...

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