Three recent cases, between the Financial Markets Authority (‘FMA’) and separate banks and insurers – regarding false and misleading representations and conduct – highlight the extent to which penalties for such conduct may vary, depending on the nature of the breaches and subsequent conduct by the entity concerned.

This Fact Sheet discusses the differences in the monetary penalties imposed and the approach taken by the High Court in setting the quantum for penalties. We also discuss situations where entities have entered into enforceable undertakings with the FMA.

Pecuniary penalty decisions

The three High Court judgments in question are:

• Financial Markets Authority v ANZ Bank New Zealand Limited [2021] NZHC 399 (‘ANZ case’) which concerned misleading representations made in relation to the supply of credit card repayment insurance.
• Financial Markets Authority v AIA New Zealand Limited [2022] NZHC 2444 (‘AIA case’) which involved a misrepresentation of benefits available, the charging of premiums beyond termination, ceasing cover whilst polices were still in force, and the incorrect application of inflation adjustments resulting in excess premiums being charged. 
• Financial Markets Authority v Cigna Life Insurance New Zealand Limited [2022] NZHC 3610 (‘Cigna case’) which concerned making false and misleading representations relating to indexation inflation increases for life insurance policies. 

All three cases involved conduct that constituted ‘false or misleading representations’ to affected customers, in breach of section 22 of the FMC Act. 

Contravention of section 22 is a breach of a civil liability ‘fair dealing provision’ under the FMC Act and can give rise to a pecuniary penalty that is the greatest of:

• the consideration for the relevant transaction; 
• 3 times the amount of the gain made or loss avoided;
• NZ$1 million in the case of an individual or NZ$5 million in any other case.

What were the pecuniary penalties imposed?

In all three cases, the defendant entities accepted that their conduct amounted to false and misleading representations. The key issue was therefore the quantum of pecuniary penalty to be imposed. Ultimately, the penalties were:

• NZ$280 thousand for ANZ;
• NZ$700 thousand for AIA; and
• NZ$3,575 million for Cigna.

How were the penalties calculated?

The assessment of applicable penalties was guided by the three-prong test established in the ANZ case:

1. What is the maximum penalty?
2. What is the appropriate starting point, having regard to the FMC Act?
3. Can the starting point be adjusted, by applying an uplift or discount on the basis of the circumstances relevant to the defendant?

In calculating the starting point for penalties the FMC Act directs the courts to assess a range of factors including:

• deterrence; 
• the nature and extent of the contravention; 
• the nature and extent of any loss, damage, or gains; 
• compensation, reparation, or restitution already paid;
• steps taken to avoid or mitigate the adverse effects of the contravention; and 
• knowledge of the breaches and the circumstances of self-reporting.

Maximum penalties 

In the Cigna case, Mallon J determined that the maximum applicable penalty was NZ$100 million. This was based on the consideration for the transactions that constituted the contravention – being the total premiums charged on the affected policies over the period 1 April 2014 to 21 November 2019. 

Cigna had submitted that the maximum penalty should be NZ$21 million by limiting the assessment to the incremental increase in annual premiums. Mallon J stated that such an approach was artificial. Instead, the penalty must be determined by reference to the transactions as a whole and not a portion of the transactions.

In the ANZ case the maximum possible penalty was set at NZ$5 million as the relevant transactions only amounted to NZ$200 thousand. Robinson J, in the AIA case, did not make a clear determination. AIA submitted the maximum penalty should be NZ$5 million for the breach, while the FMA contended that the maximum penalty was NZ$15 million on the grounds there were three separate beaches. Robinson J stated that whether the maximum penalty was NZ$5 million or NZ$15 million would not ultimately be determinative.

Penalty starting points

In all three cases the impact of the conduct was given most weight when assessing the starting point. In the Cigna case, the company’s conduct affected a large number of customers who each individually incurred unnecessary costs, hence Cigna’s penalty starting point was NZ$5.5 million. In the ANZ and AIA cases, the starting points were NZ$400 thousand and NZ$1 million, respectively.

Cigna’s starting point was significantly higher than for ANZ and AIA due to one key factor that heavily influenced the calculation – the circumstances in which the contravention took place. 

In the ANZ and AIA cases the conduct was inadvertent or resulted from process and system errors that were difficult to detect. In contrast, Cigna’s conduct was not the result of a systems error. It was the result of decisions made by senior management. While Cigna sought and followed external advice it did not review or amend policy wording nor review the indexation rates applied to premiums each year to maintain relativity with inflation and instead continued to apply flat rates.

Mallon J, in the Cigna case, also considered that several further factors were relevant to setting the starting point. These were:

• the inaccurate nature of the customer communications; 
• the significant timeframe involved; and 
• the fact some consumers were significantly disadvantaged (one customer paid over NZ$30 thousand in additional premiums). 

Mallon J also reiterated that insurers have a relationship of special trust with customers which requires clear and transparent communications.

In the ANZ and AIA cases – while the conduct extended over similar, if not longer, periods than the Cigna case – the customer impact was reduced, there were far fewer customers involved, and the net gain made was considerably less.

Interestingly, the Cigna and AIA cases both referenced the ANZ case and used its starting point as a means to ensure some proportionality when setting subsequent starting points. The relative maximum penalty available and deterrence element were also important factors in setting the penalty starting points.

Mitigating factors and adjustments

Once a starting point is set, mitigating factors are then considered to determine whether any adjustments can be made to that figure. Key factors that may lead to a reduction include early admission, self-reporting, cooperation, remediation of losses, and subsequent improvement of internal systems. 

In all three cases, ‘back of the envelope’ percentage reductions were applied to the starting point figures. ANZ received a 30% discount for self reporting so the NZ$400 thousand starting point was reduced to a final penalty of NZ$280 thousand.

In the AIA case, the substantial changes made to prevent further contraventions and remediation of all customers impacted meant AIA also received a 30% penalty discount. This discount was broken down to discrete amounts: 5% for self-reporting; 5% for cooperation during the ‘investigation’; and 20% for early admission. The final penalty of NZ$700 thousand was reduced from the NZ$1 million starting point.

Cigna also received a discount for self-reporting and  fully cooperating throughout the ‘investigation’, accepting it contravened, agreeing to settle, and undertaking a substantial programme of remediation. In that case, Mallon J accepted that there was not a 30% cap on discounts. Rather, a discount in the range of 30% to 40% was available.

Cigna received a 5% discount for prompt self-reporting. Full cooperation and acceptance of responsibility also meant a discount of not less than 25% was available. Overall, Mallon J determined that Cigna should receive a 35% discount so the NZ$5.5 million starting point was reduced to a final penalty of Nz$3,575 million.

Larger discounts may still be available, but the 30% to 35% range already seems to be fairly entrenched for self-reporting matters. A discount of 40% or more could be available in situations where an entity has readily identified and promptly self-reported contravening conduct and embarked on a substantial remediation and compensation programme. However, the courts will still need to provide sufficient deterrence. As the FMA has noted, self-reporting does not provide immunity. The nature of the underlying misconduct will always be the driving factor.

Enforceable undertakings

Aside from seeking a declaration of contravention and pecuniary penalty, the FMA can accept enforceable undertakings offered by those that have breached financial markets legislation. The Financial Markets Authority Act 2011 allows the FMA to accept undertakings to pay compensation to persons affected by the contravention and/or to pay the FMA in lieu of a penalty. 

Westpac

In August 2019, the FMA and Westpac agreed for Westpac to refund fees to approximately 93,000 customers who had been overcharged NZ$7 million. Concerns were also raised regarding consumer credit contract requirements under the Fair Trading Act 1986. 

The enforceable undertaking resulted from Westpac reporting errors regarding the discounting of fees for customers. The first report was made in December 2017, when Westpac disclosed that 61,000 customers were impacted to a value of NZ$1.28 million. A second report was made in 2018 when Westpac identified a further 32,000 customers had been inappropriately charged NZ$5.7 million.

OnePath Life (NZ) and Cigna Life Insurance

In June 2022, OnePath and Cigna agreed to jointly make a penalty payment of NZ$180 thousand to the FMA for misleading representations made, via ANZ, to customers with credit card repayment insurance policies. The penalty resulted from OnePath and Cigna not having proper oversight of their products when they were sold and administered by a third party. This included representations that the policies had certain benefits when they did not.

How does the FMA decide what approach to take?

The FMA is more readily seeking pecuniary penalties to be imposed by the courts. However, in all three cases discussed above the parties readily accepted that there had been breaches of the FMC Act’s fair dealing obligations. In other words, the cases were not contentious. They simply involved some form of approval or determination being sought from the courts regarding the penalty to be imposed. 

Further, all the cases to date have involved self reporting stemming from the FMA and Reserve Bank of New Zealand’s Conduct and Culture reviews of registered banks and licensed insurers. Medical Assurance Society and AA Insurance are the next cabs off the rank in this respect. In contentious cases or those where an entity did not self-report it seems unlikely any discount from the penalty starting point would apply. 

It appears the FMA may consider an enforceable undertaking to be appropriate where the entity was not directly involved in the contravention. The ANZ case related to the same conduct as the joint OnePath and Cigna undertaking, yet ANZ’s penalty was imposed via the High Court as it was seen to have had primary responsibility for the conduct that led to the breaches.  

In light of the FMA’s recent activity it seems, on first glance, that Westpac simply got the timing right. And that an enforceable undertaking, with no penalty payable, should now be viewed as an outlier. 

An important point, however, is the fact that Westpac never accepted it had breached the FMC Act. The enforceable undertaking it entered into with the FMA simply states that Westpac ‘may’ have breached the FMC Act. In other words, the onus would have been placed on the FMA to prove a breach by seeking a declaration of contravention and, if proved, to move to an assessment of the appropriate penalty. Whether an enforceable undertaking would have been accepted now, should similar circumstances arise, is questionable. 

Regulatory response guidelines

Published in August 2016, the FMA’s Regulatory Response Guidelines (‘Guidelines’) are slightly ambiguous as to what circumstances may lead to the FMA accepting enforceable undertakings rather than moving to civil proceedings (including imposing pecuniary penalties). 

According to the Guidelines, civil proceedings will result when there has been a serious contravention, regardless of whether the contravention was reckless or intentional. Enforceable undertakings – including to make a payment in lieu of a penalty or compensation – can be accepted where there has been moderate to serious contravention. 

The aims of each approach – proceedings and undertakings – are strikingly similar. The FMA purports that both civil proceedings and enforceable undertakings are designed to stop the behavior in question, compensate or provide redress, penalise or hold the participant to account, denounce and deter, and educate or inform participants. 

Ultimately, rather than gleaning any useful insight from the Guidelines as to the FMA’s preferred approach, it might simply be time for those Guidelines to be updated to reflect the FMA’s current approach to enforcement activity.

Co-operation policy

Usefully, also in August 2016, the FMA published a Co operation Policy (‘Policy’). That Policy sets out several factors that inform the FMA’s decision-making when it comes to determining what regulatory or enforcement action it will take. A key point is that the FMA has a broad discretion to take a lower level regulatory response or to decide to take no action at all. This can include a settlement or even a submission by the FMA, on behalf of the participant, to the court for a reduced penalty.

Key factors considered under the Policy are the prompt notification of misconduct along with subsequent action taken by the participant to rectify the breach. The involvement of senior management in addressing the misconduct – and the likelihood of the misconduct reoccurring – are also relevant.

In the ANZ case, the approach to notification by ANZ likely influenced the FMA’s enforcement approach – disclosure was made some time after the Conduct and Culture reviews. This can be contrasted with the joint undertaking by OnePath and Cigna, where both insurers notified the FMA during the Life Insurance limb of the Conduct and Culture reviews. Westpac’s enforceable undertaking was also accepted by the FMA relatively soon after Westpac’s prompt self reporting upon discovering the issue.

When does the clock start ticking?

Promptness of response was a point of contention in the AIA case. While AIA advised the FMA of the relevant issues during the June 2018 Conduct and Culture reviews, the FMA challenged the timing of that reporting by arguing that a lengthy period had passed between AIA learning of the breaches – three years prior – and subsequently reporting them to the FMA. 

AIA disagreed, arguing that the breaches were of such a nature that it was required to conduct an extensive internal investigation upon ascertaining that earlier attempts to remediate them had not been entirely successful. Unfortunately, only limited evidence was presented on these competing views as to timing. In the circumstances, Robinson J held that the opposing submissions could not be readily assessed. 

Closing thoughts

In practice, any entity facing a potential breach of fair dealing obligations must balance the possible need to report against the need to make a proper assessment as to whether there has been a breach, the extent of the breach, and what remedial action might be required. 

Reporting too soon to the FMA may add an additional layer of regulatory questioning and involvement that hampers internal efforts to deal with the error or breach. In the worst case, an entity may report a matter to the FMA that is later found not to have been a breach at all, wasting both its time and resources and the time and resources of the regulator. As well as blotting its copy book in the process. 

Of course, the best case scenario is that prompt reporting of a clear breach – accompanied by a plan for remediation or even having compensatory activity underway – could result in a significant discount come penalty time.

Start a conversation 

If you would like to discuss any aspect of the FMA’s approach to enforcement and penalties, please contact Catriona Grover on +64 4 498 0816, David Ireland on +64 4 498 0840, Mark Schroder on +64 9 375 1120, or email the team at bankingandfinancialmarkets.nz@dentons.com.