What can the FMA use section 25 for?

The Financial Markets Authority (FMA) has extensive information gathering powers under section 25 of the Financial Markets Authority Act (FMA Act). The FMA can request information to monitor regulatory compliance or undertake investigations into conduct that may breach financial markets legislation. Those powers are not limited to seeking information from the individuals or organisations it is investigating.

The ‘information’ requested can be in various forms – section 25 allows the FMA to, by written notice, require any person to supply information, produce documents, or reproduce or assist in reproducing information stored in a document. The FMA can also request a person to appear before it. 

The FMA can make information requests in relation to a broad range of statutes. This includes the obvious pieces of legislation such as the Financial Markets Conduct Act, but also extends to the Companies Act and Secret Commissions Act, amongst others. 

Necessary or desirable?

The FMA’s use of section 25 must be ‘necessary or desirable’ in the performance of its powers and functions. The FMA should not be using a section 25 notice to gather information it would ordinarily expect to request and receive in the course of its supervisory activities. That is, as part of day-to-day monitoring, it is implied that the FMA can engage with licensees and other market participants to seek information about the entity’s activities without reflexively reaching for a section 25 notice. 

Further, the FMA cannot use a section 25 notice to conduct a fishing expedition in the hopes of uncovering some contravention. There must be valid grounds underpinning the use of section 25 to request information, such as a tip-off from NZ RegCo that some trading activity looks amiss. NZ RegCo makes around 35 referrals per year to the FMA. 

What do the numbers say?

The FMA has indicated that as the Financial Markets Conduct regime is now mature in many respects, it will move from an educative role to a position of enforcement where it considers action is necessary. In 2023 the FMA released statistics on its use of section 25 notices. The stats showed an increase from 140 notices issued in 2019 to 222 notices issued in 2022. Overall, there was a steady uptick in notices issued each year across the period.

The upside of a section 25 notice

The numbers, as always, do not give the full picture. In some circumstances an entity on the receiving end of a request for information from the FMA will ask that the FMA set out that request in the form of a section 25 notice. 

This is because there is a real risk in simply releasing information about third parties to the FMA off the back of an informal request. Such a release of information – without formal notice from the regulator to do so – raises privacy and confidentiality concerns. This includes potential breach of contractual arrangements where the release of another party’s information may not be allowed unless it is accompanied by a formal regulatory request under statute. 

Proactively seeking the protection of a section 25 notice to compel the release of information allows the entity to respond without fear of breaching client confidentiality or triggering privacy concerns.

Standard operating procedure

The FMA also issues a number of section 25 notices to third parties that do not have a direct interest in the matter at hand, primarily to telcos but also to banks.

In the case of telcos – Spark, 2degrees, One NZ – the FMA regularly issues requests for text message and call records in order to look at potential insider trading. Such requests are often made urgently as the telcos only tend to keep records of text messages for two or three months at best.

Banks may also receive a number of section 25 notices from the FMA simply because the FMA is trying to determine where a particular person or entity is banking. And, once the relevant bank or banks have been identified, the FMA may request account transaction information to see if anything untoward is happening within those accounts.

Confidentiality orders

Requests to telcos and banks are not generally accompanied by a confidentiality order. In fact, a large number of FMA information requests are not accompanied by confidentiality orders; they are not issued as a matter of course.

The FMA tends to issue confidentiality orders in specific circumstances. The first is when the FMA is undertaking a large scale investigation that could lead to litigation. Such investigations are run by the FMA’s investigation team with the involvement of its  enforcement team and external litigators.

Confidentiality orders for such investigations are generic, that is the order applies to the investigation or inquiry as a whole and is not tailored to the particular recipient of the order and related section 25 notice. In some cases the order will be several years old and could well be signed by an FMA director or staff member that no longer works at the FMA. This lag in time and lack of individual tailoring can be particularly confusing for those on the receiving end of such orders.

The other type of confidentiality order is one made in relation to particular individuals. These are often made in the initial phase of insider trading referrals. The frontline or response team dealing with the matter will seek to engage with the individuals suspected of insider trading or supplying inside information and will place an order on each individual to stop them from communicating with each other or further afield. Since these orders are made on specific individuals they are usually more readily understood.

AML/CFT information requests

One quirk of section 25 is that the FMA can utilise that power to require information in relation to any provision of financial markets legislation, including the Anti-Money Laundering and Countering Financing of Terrorism Act (AML/CFT Act). As such, the FMA seemingly has broader powers in relation to AML matters than the other two AML/CFT supervisors (DIA and RBNZ).

The FMA’s use of section 25 in relation to AML/CFT information requests may, in some situations, be unnecessary. Under section 132 of the AML/CFT Act the FMA may, on notice, require information relevant to its supervision and monitoring of AML/CFT reporting entities. In our view, when requesting information from an AML/CFT reporting entity it supervises, the FMA’s first option should be to use section 132 of the AML/CFT Act. That is the appropriate power. Using that mechanism also reduces the possible penalties the recipient of the notice may face if they fail to comply with the request.

The FMA can still use its confidentiality powers in relation to requests made under the AML/CFT Act and any other relevant legislation. Confidentiality orders made under section 44 of the FMA Act can be made in relation to any inquiry, investigation, or other proceeding of the FMA under the FMA Act or any other enactment. They aren’t reliant on the issue of a section 25 notice.

What do I do when I receive a section 25 notice or confidentiality order?

If the FMA sends you a section 25 notice the first step is to check whether the notice is accompanied by a confidentiality order and, if so, how that order applies to you and your organisation – including practical constraints on your ability to readily respond to the information request. Note the scope of a confidentiality order will generally extend to all aspects of the section 25 notice, including the fact that you have even received one.

It is best to promptly review the scope of the request and make an early call as to who else may need to be involved in responding to the request, both within your organisation or externally (such as legal counsel). This includes those persons who will need to be involved in tracking down the relevant information and collating the response. 

Extend the order?

If you are subject to a confidentiality order and you need others to help you access information or respond to the request, you may need the FMA’s consent to do this.

Ordinarily a confidentiality order – one that prohibits you from publicising or communicating any information, document, or evidence to others – prevents you from getting help with the response until the order is expressly extended to cover any additional people.

Under section 45 of the FMA Act, the FMA can consent to the publication or disclosure of any information, document, or evidence – essentially extending the order so others can be brought within the ‘cone of silence’. Importantly, such consent cannot be unreasonably withheld.

Unfortunately, the FMA’s information sheet that accompanies section 25 notices does not refer to the section 45 requirements or set out practical steps for extending confidentiality orders.

In practice, the FMA will readily consider any reasonable extension request. We would usually expect the FMA to provide its consent, unless it has concerns that doing so may prejudice its inquiry.

To extend the order the FMA will ask you to forward the confidentiality order to those additional persons to be brought within the cone of silence and to then share the section 25 notice. You may need to confirm to the FMA that you have ‘served’ the order on those additional persons.

Is the request necessary or desirable?

Before doing too much work on your response, it is a good idea asses whether the request is ‘necessary’ or ‘desirable’. Is the FMA acting within the scope of its powers and not otherwise unlawfully making a request? If in doubt, this is definitely the time to pick up the phone to your lawyer – you can seek legal advice even if you are subject to a confidentiality order!

Push out the deadline

Another important step to take is to consider the extent of the request and the timeframe provided to respond. If you have not been given enough time to respond, based on the extent or nature of the request, you can request that the FMA extend the deadline. In our experience the FMA is fairly pragmatic in accommodating any reasonable requests.

Is the request reasonable?

It is also important that the FMA’s request is not unreasonable. In the same way Official Information Act requests going the other way are not allowed to unnecessarily tie up internal FMA resources, FMA requests for information should not be unreasonably burdensome, both in time and scale, on the recipient or respondent entity.

In an early case regarding section 25 notices – Perpetual Trust Ltd v Financial Markets Authority (No 3) [2012] NZHC 2307 – the High Court held that a section 25 notice requiring the recipient to provide information ‘immediately’ was unlawful as it failed to specify the time within which the information or documents needed to be produced. Heath J noted that section 25 does not envisage the FMA:

“participating in the sifting of information and documents. Rather, it contemplates the recipient of the notice taking responsibility for ensuring that all relevant documents and information required are supplied or produced, within the time specified.”

Discussion in the judgment also suggests that where the FMA is concerned about possible concealment or destruction of documents it can readily seek to use its search warrant powers (under section 29 of the FMA Act).

Heath J held that the intention behind section 25 was to ensure that the recipient of a notice was provided enough information to make clear:

• what information or documents were to be produced or supplied;
• how the information was to be supplied or produced; and
• by what time.

Therefore, implicitly, section 25 anticipates that the time for compliance is fixed by reference to the nature and quantity of information or documents required by the FMA.

Is the information available?

Heath J also makes the point that it is unnecessary for the FMA to request information which is publicly available. That should also extend to information the FMA already has on file. And the information or documents requested also need to exist in some form.

Clarify the request

If in doubt, it is important that you clarify with the FMA precisely what it is requesting. In many cases, the framing of the questions can be unclear. You can always ask the FMA questions about the section 25 notice, including what specific period of time they are referring to and what type of documents they are after.

This is particularly important if you feel the FMA has misconstrued the nature of your business or activities. It may well be that the FMA is asking for information and documents that do not exist. If that is the case then all you can do is tell the FMA, in writing, that there is nothing you can provide, either as a whole or in relation to a particular line of questioning.

Is it the correct power?

Finally, if the request relates solely to your status as an AML/CFT reporting entity, and information regarding compliance with the AML/CFT Act, then you should consider asking the FMA to rescind its section 25 FMA Act notice and reissue the request under section 132 of the AML/CFT Act (being the appropriate legislative tool for that particular purpose). Use of section 25 in such cases is ‘unnecessary’, and exposes the recipient to a higher level of potential penalty.

What can you do now?

Receiving a section 25 notice and confidentiality order can seem daunting at first. In order to be prepared we suggest organisations, at the very least, implement a fairly high level section 25 ‘policy’ so everyone knows the go before an information request is received from the FMA.

The key is that those on the receiving end of a request have someone readily available they can talk to – this could be an internal or external lawyer. Support is a must in providing a considered response to information requests, given the rather confronting nature of the wording used for confidentiality orders.

Following the steps outlined in this Financial Law Fact Sheet will also mean you are well placed to readily deal with a request from the regulator without too much fuss.