The High Court has handed down an interesting judgment in Rockfort Markets Ltd v FMA [2023] NZHC 3210, which provides guidance as to when the Court will overturn a decision of the Financial Markets Authority (FMA) in a statutory appeal. This is the first decision of its kind relating to an appeal by a licensee against a decision of the FMA to cancel their licence.
The FMA cancelled the licence of Rockfort Markets Limited, a derivatives trader, for multiple breaches of its market services licensee obligations, under section 531 of the Financial Markets Conduct Act 2013 (FMCA). In its decision rejecting Rockfort’s appeal, the High Court has helpfully clarified that licensees’ section 531 appeal right is a right to a general appeal, meaning that the Court is free to substitute its own opinion for that of the FMA. However, this case shows that licensees may nevertheless face an uphill battle persuading the Court that the FMA erred. It is therefore of the utmost importance that licensees prioritise investment in their policies and procedures to ensure compliance with their licence obligations.
Who should read this? Why?
Any entity holding a market services licence.
Background
This was an appeal against a decision made by the FMA to cancel Rockfort’s derivatives issuer licence.
The FMA’s decision was made following its determination that Rockfort had materially contravened eight of its market services licensee obligations, and therefore no longer met the conditions for its licence. On appeal, Rockfort accepted that it had materially contravened four of its obligations – including its obligations under:
- standard condition 1, not to deal with unregulated financial service providers;
- standard condition 3, relating to record-keeping;
- section 479(1) of the FMCA, to comply with an order made by the FMA; and
- regulation 191(1)(c) of the Financial Markets Conduct Regulations 2014, which required Rockfort to notify the FMA of certain personnel changes.
However, Rockfort challenged the FMA’s findings that it had also breached other conditions and argued that the FMA had a duty to consult before making a decision on its enforcement response. Rockfort contended that its conduct did not merit cancellation and that it instead should have been required to submit an Action Plan.
Section 531 appeals are general appeals
The first issue for determination was the appropriate standard of appeal:
- If it were a general appeal, the Court would rehear the matter and be free to make any decision that it considered ought to have been made by the FMA.
- If it were an appeal against a discretion, there is much more limited scope for challenge. Rockfort would have to identify an error of law or principle, or otherwise demonstrate that the FMA had taken into account irrelevant considerations, failed to take account of relevant considerations or that its decision was plainly wrong.
The FMA submitted that cancellation of a licence involves both evaluative and discretionary assessments, such that the appropriate standard of appeal will depend on which aspect of its decision is challenged. The Court rejected this, relying on the Court of Appeal’s decision in FMA v Vivier. Vivier was an appeal against a decision to deregister the respondent under the Financial Services Providers (Registration and Dispute Resolutions) Act 2008, and the Court of Appeal held in that case that the appeal right was a right to a general appeal. While the legislative regime involved in Vivier differed from that before the Court in Rockfort, the High Court considered them sufficiently similar to warrant a consistent approach, commenting that “it is preferable that the same standard of appeal apply to decisions by the FMA which have similar consequences for the market participant”.
Interestingly, the Court further commented that, while on a general appeal the appellate Court must come to its own view of the merits, the “weight it gives the decision of the FMA is a matter of judgment … given the FMA’s particular advantage in terms of technical expertise, this appeal Court may hesitate to conclude that its findings of fact are wrong”. The authorities make it clear, however, that the Court must form its own view, and should not defer to the view of the original decision maker. The case authority which the Court cited in support of this proposition, Austin Nichols & Co Ltd v Stichting Lodestar [2007] NZSC 103, [2008] 2 NZLR 141, also makes it clear that “Those exercising general rights of appeal are entitled to judgment in accordance with the opinion of the appellate court, even where that opinion is an assessment of fact and degree and entails a value judgment. If the appellate court’s opinion is different from the conclusion of the tribunal appealed from, then the decision under appeal is wrong in the only sense that matters, even if it was a conclusion on which minds might reasonably differ. In such circumstances, it is an error for the High Court to defer to the lower Court’s assessment of the acceptability and weight to be accorded to the evidence, rather than forming its own opinion.” The role of the Court and its level of deference to the FMA in statutory appeals may be the subject of further consideration in cases in which the contraventions are less clear cut.
Review of contraventions
The Court then considered each of the obligations which the FMA considered had been breached. As set out in the following table, the Court upheld the FMA’s decisions in relation to each contravention.
| Licensing Obligation | FMA decision | Court’s finding |
|---|---|---|
| Adequate systems and controls: Obligation to have adequate and effective systems, policies, processes and controls to meet licensee obligations in an effective manner (Standard Condition 5). |
The FMA considered that Rockfort’s advertising policies and procedures were insufficient to ensure compliance with the FMCA’s fair dealing provisions. The FMA raised concerns with Rockfort regarding statements on its website throughout 2019, 2020 and 2021, and on several occasions, Rockfort advised the FMA that the relevant statements had been removed from its website – and yet those statements continued to appear on its website. | The Court agreed that Rockfort’s repeated failures in this area indicated that it does not have adequate and effective policies, processes and controls in place to ensure compliance with its fair dealing obligations. |
| Assessing suitability: Obligation to ask retail investors to provide information about their knowledge, experience and level of understanding of the relevant type of derivative, to assess suitability of derivative (Standard Condition 12). |
The FMA considered the online form which Rockfort required prospective investors to complete before investing to be inadequate. If an investor’s answers to questions on this form indicated that they had no knowledge or understanding of derivative trading and its risks, a risk warning would appear and investors would be required to confirm that they understood the products and risks before submitting their application. However, over a three-year period, Rockfort onboarded 40 clients whose answers on this form indicated that they had no knowledge or understanding of derivative trading, and there was no evidence that Rockfort obtained further information before onboarding them. | Rockfort argued that it was only required to assess the client’s ability to understand the derivatives and risks – not their actual knowledge and experience. However, the Court said that an assessment of the investor’s ability to understand the type of derivative would be informed by their knowledge, experience and level of understanding of it, and considered Rockfort’s questions would not elicit sufficient information to allow a suitability assessment to be made. |
| Capability, governance and compliance: Maintain same or better standard of capability, governance and compliance as when the FMA assessed initial licence application (Specific Condition 1). |
At the time of its licence application Rockfort had three directors who the FMA considered had the collective experience and skills to govern the business and oversee compliance. Rockfort also indicated that it would have a dedicated Compliance Officer. However, there was then a period of 7 months where Rockfort had only one director. Rockfort also merged its Compliance Officer role with a General Counsel role. The FMA considered this a contravention of specific condition 1. |
The Court agreed with the FMA. |
| Section 82, FMCA: Requirement to provide a Product Disclosure Statement (PDS) which includes details of hedging counterparty. |
Rockfort’s PDS did not include information as to the hedging counterparty. | The Court noted that the creditworthiness of the counterparty is important information given the risk that they may default on their obligations, causing losses for the investor. The failure to include this information was a material breach. |
The decision to cancel Rockfort’s licence was appropriate
Cancellation of a licence is only available where the FMA is satisfied that the licensee no longer meets the requirements of section 396(a)-(g) of the FMCA. In this case, the FMA concluded that Rockfort was no longer capable of effectively performing its service as a licensee (s 396(c)), and that there was reason to believe that Rockfort was likely to contravene its market services licensee obligations (s 396(d)). The FMA reached this conclusion after receiving submissions and an Action Plan from Rockfort.
Rockfort submitted that its Action Plan and ongoing engagement of a consultancy firm, Strategi Compliance, was sufficient reassurance as to its future compliance. The Court disagreed, noting Rockfort’s pattern of contraventions – which had occurred despite FMA reviews and a Direction Order, and despite Strategi’s past involvement in reviewing its policies and procedures. This cast doubt on Rockfort’s ability to implement Strategi’s recommendations, and the Court commented that Rockfort’s Action Plan was still “somewhat aspirational”, with no timeframe for full implementation.
Rockfort also argued that the FMA’s cancellation decision breached natural justice, on the basis that the FMA had a duty to consult and that it failed to engage with Rockfort in relation to its Action Plan and accord it proper weight. The Court did not accept that there is any duty to consult, expressing the view that to infer such a duty could “paralyse” the FMA. Even if there was such a duty, the Court was not clear as to how that would make a difference, due to Rockfort’s history of non-compliance.
The Court upheld the FMA’s decision and the FMA proceeded to cancel Rockfort’s derivatives issuer licence.
Key takeaways
The FMA continues to be concerned with issues arising as a result of poor policies and processes, and if an under-investment in policies and processes leads to repeat non-compliance with licensing obligations, the FMA may take action. This may include requiring an Action Plan, issuing Directions Orders and ultimately, if serious non-compliance continues, cancelling the entity’s licence.
Licensees will have a broad opportunity to challenge decisions by the FMA using the statutory appeal process. The standard of appeal which applies where the FMA decides to cancel a licence is a general appeal so the Court is entitled to substitute its own judgment for that of the FMA. There is nevertheless a risk that the courts may be reluctant to second-guess a specialist regulator’s findings. While Rockfort appears to be a clear case in which the entity was materially in breach of its conditions of licence, it will be interesting to see how the courts treat the FMA’s decisions in appeals which are less clear cut.
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