Court of Appeal ruling challenges confidentiality of documents provided to the Financial Markets Authority

The Court of Appeal has issued a much-awaited judgment regarding the ability of the Financial Markets Authority (FMA) to disclose to third parties documents and information obtained compulsorily pursuant to notices issued under section 25 of the Financial Markets Authority Act 2011 (FMA Act).  The Court of Appeal’s decision, Financial Markets Authority v ANZ Bank New Zealand Ltd,[1] is available here.

The case revolves around an investigation by the FMA into ANZ’s alleged participation in breaches by a company referred to in the judgment as Company X (now known to be Ross Asset Management).

ANZ applied for judicial review of the FMA’s decision to disclose to third parties documents that were obtained from ANZ pursuant to section 25 notices. One of the purposes of disclosure was for the FMA to assess whether to bring proceedings on behalf of investors under section 34 of the FMA Act.

The Court of Appeal found that the proposed disclosure was within the FMA’s powers and was consistent with the purpose of the FMA Act. This overturned an earlier decision of the High Court in favour of ANZ.

ANZ applied for leave to appeal to the Supreme Court, however leave was declined.  The Supreme Court’s decision dismissing the application for leave to appeal is available here.

What does this mean for you?

This is an important decision for financial industry participants and any person responding to a section 25 notice. The Court of Appeal’s judgment confirms that the FMA can disclose documents and information that you provide to the FMA to third parties, including investors that may have a claim against you as the provider of the documents.

Non-compliance with a section 25 notice is a criminal offence.  We therefore expect that recipients of section 25 notices will be more likely to challenge the scope and purpose of such notices, particularly if there is a risk that the FMA might disclose the response in circumstances adverse to the recipients’ interests.

On the other side of the coin, if you are an investor considering a claim against a person or company that has been subject to FMA investigation, this decision gives you the ability, through the FMA, to obtain documents that you would not generally be entitled to prior to commencing proceedings.

We expect the Court of Appeal’s decision may ultimately facilitate more (and more timely) civil litigation against financial services participants.

Basis for the Court of Appeal’s decision

The FMA’s case was that disclosure of ANZ’s information was permissible for the following purposes:

• to obtain responses and any additional information from Company X’s investors to the information received from ANZ;
• to determine the next steps that should occur to enable the Company X’s investors to evaluate the merits of a claim against ANZ and consider their position with respect to any such claim; and
• to enable the FMA to consider and determine whether to exercise its powers under section 34 of the FMA Act.

ANZ argued that disclosure was outside the powers of the FMA, and was for an unauthorised purpose. It asserted that there was no basis for the FMA to disclose its findings to Company X’s investors, that the FMA had no legitimate reason to disclose the information, and that the investors had no legitimate interest in receiving it.

The FMA Act provides for confidentiality of information or documents provided to the FMA. The FMA must not publish or disclose such documents unless any of the circumstances listed in section 59(3) apply. The FMA submitted that its proposed disclosure was permissible under the FMA Act either because it was for the purposes of performing its statutory functions under section 59(3)(c) and/or because the proposed recipients have a proper interest in receiving the information under section 59(3)(f).

The Court of Appeal’s analysis considered the legislative history of the FMA Act establishing the FMA and the objectives and functions of the FMA. It was relevant to the Court of Appeal that the FMA was intended to have a more active surveillance and enforcement role in respect of financial markets, and that the FMA was given additional functions and powers (compared to its predecessor, the Securities Commission) enabling it to take on a more hands-on regulatory function. [2] Ultimately this weighed in favour of disclosure in these circumstances.

The Court of Appeal dismissed the High Court’s gloss on permitted disclosures under section 59, holding that disclosure did not need to be “reasonably necessary”, and nor did there need to be a “close connection or nexus” between the disclosure and the performance or exercise of the FMA’s relevant function, power or duty in order to make it lawful.[3]

By implication, the Court of Appeal disagreed with the High Court’s view that “absent clear wording to the contrary, the purpose for which documents may be compulsorily obtained by a public body will ordinarily limit the purpose for which they can be used and disclosed”.[4] This is a fundamental difference between the findings of the High Court and the Court of Appeal, and appears to diverge from the approach taken in other jurisdictions regarding confidentiality of documents provided to regulatory bodies (albeit in different statutory contexts).

The Court of Appeal rejected the High Court’s distinction between the public functions of the FMA and private interests of civil litigants, commenting that the FMA Act does not draw a sharp public/private divide between the functions, powers and duties of the FMA and the interest of investors in obtaining civil redress.  Rather, the Court of Appeal held that “the scheme of the [FMA] Act, and in particular section 34, recognises that civil redress against financial markets participants may help to meet the public interest in promoting and facilitating the development of fair, efficient and transparent markets”.[5] The Court of Appeal found that Parliament contemplated the FMA working closely with investors or investor representatives in exercising its duties under section 34, and this was another factor in favour of disclosure.

Anthony Harper’s comments

The Court of Appeal took a broad view of the FMA’s powers, allowing it to share information with third party investors for the purpose of ascertaining whether it should pursue a representative action against ANZ on behalf of those investors under section 34 of the FMA Act.

The facts of this case show an increasing willingness by the FMA to investigate, facilitate and pursue potential legal claims against financial industry participants, and the prioritisation of those interests over the confidentiality of documents provided to it during the course of an investigation. The FMA’s stance is unsurprising given the increasing pressure on regulators to take enforcement action to protect consumers of financial services. This reflects increasing focus in New Zealand and Australia on the enforcement activity of our regulators, particularly in light of the Australian Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry and the Hayne Report which found that ASIC should use its enforcement powers more often, and start from the perspective of “Why not litigate?” rather than “How can this be resolved by agreement?”.

Looking forward, it follows that we are likely to see more regulatory enforcement activity. The Court of Appeal considers it is within the scope of the FMA’s powers and consistent with purpose of the financial regulatory regime for it to engage in a collaborative process with potentially affected parties to determine who is best placed to pursue any litigation.

As mentioned earlier, the Court of Appeal expressly overturned the High Court’s finding of a public/private divide between the FMA’s public functions and private rights of redress. This is a fundamental blurring of the lines, albeit one that the Court of Appeal considers to be supported by Parliament’s intentions and the purpose and functions of the FMA. It also appears to be supported by growing public expectations of regulatory enforcement.

This decision gives potential claimants a faster and more cost effective route to obtain documents for the purpose of deciding whether to pursue proceedings, in circumstances where the matter has been under investigation by the FMA. This places claimants at an advantage to ordinary litigants given the broad scope of the FMA’s information gathering powers.

What next?

The Supreme Court has declined leave to appeal so the Court of Appeal’s decision is final.  The FMA issued a press release on 12 April 2019 stating:

“The FMA is pleased with the Supreme Court decision in the matter between ANZ and the FMA, released this morning.

Now that the restrictions on confidentiality over these matters has been lifted, the FMA will be able to engage with the liquidation committee of Ross Asset Management  (as a proxy for RAM investors) and the liquidators of RAM on the substantive matters at the heart of this case.

The FMA at this point has made no decision on the use of its section 34 powers under the FMA Act. A significant part of our consideration of our Section 34 powers involves engaging with the appropriate representatives of impacted investors first.”

We will watch further developments on this case, including any use of the FMA’s section 34 powers with interest.  In the meantime, we recommend seeking legal advice if you receive a section 25 notice.

Get in touch!

Lucy Scott is a Senior Associate at Anthony Harper, where she specialises in litigation and dispute resolution across the private and public sectors.

[1] [2018] NZCA 590.

[2] [2018] NZCA 590 at [24], citing the Ministry of Economic Development Regulatory Impact Statement: A power for the FMA to exercise an investor’s right of action (14 September 2010).

[3] [2018] NZCA 590 at [51].

[4] ANZ Bank New Zealand Ltd v Financial Markets Authority [2018] NZHC 691, [2018] 3 NZLR 377 at [80]).

[5] [2018] NZCA 590 at [66].