Financial Markets Authority v Kiwibank Limited

[2023] NZHC 2856

IN THE HIGH COURT OF NEW ZEALAND WELLINGTON REGISTRY

I TE KŌTI MATUA O AOTEAROA TE WHANGANUI-A-TARA ROHE

CIV-2021-485-601

[2023] NZHC 2856

UNDER

the Financial Markets Conduct Act 2013

BETWEEN

FINANCIAL MARKETS AUTHORITY

Plaintiff

AND

KIWIBANK LIMITED

Defendant

Hearing:

9 October 2023

Appearances:

N F Flanagan and A D Luck for the Plaintiff

E J Rushbrook and T J Cooksley for the Defendant

Judgment:

11 October 2023

JUDGMENT OF COOKE J

(Penalty)

[1]Kiwibank Ltd (Kiwibank) has admitted that it has breached of s 22(f) and/or

(h) of the Financial Markets Conduct Act 2013 (the Act) through its failure to waive fees as promised for certain of its customers. Kiwibank and the Financial Markets Authority (FMA) have agreed to recommend to the Court that a penalty of $812,500 should be imposed for the contraventions in accordance with s 489(2)(c) of the Act. Having reviewed the position I agree that this is the appropriate penalty for the reasons set out below.

Factual background

[2]        Kiwibank is a registered bank. It was incorporated in 2001 and is 100 per cent New Zealand owned. It is significantly smaller than the four largest Australian owned banks operating in New Zealand. It offers personal banking services such as home

FINANCIAL MARKETS AUTHORITY v KIWIBANK LIMITED [2023] NZHC 2856 [11 October 2023]

loans and credit cards, and business banking services such as business loans and overdrafts.

[3]        Kiwibank provides customers with transactional banking services in the ordinary course of business. Those services include the provision of bank accounts for personal and business banking purposes. Kiwibank has charged fees on its accounts including transaction fees and service fees. The transaction fees included an account management fee and withdrawal fees. The service fees included account access fees, ATM, EFTPOS card and Visa debit card fees.

[4]        From 1 September 2005 to 31 May 2022 Kiwibank provided customers with accounts on terms that were set out in its general terms and conditions and in brochures. These detailed the transaction and service fees applicable to the accounts.

[5]        The admitted contraventions arise in three areas where Kiwibank promised to waive fees where that promise was not honoured, and where those fees were charged. Kiwibank prepared account statements for customers that recorded the transactions undertaken on their accounts. Within those statements were line items recording that the fees charged to each customer within the period covered by the statement. Kiwibank’s breach arose from representations made in those account statements. In each case by rendering the account statements Kiwibank represented:

(a)that the relevant fees were the proper fees for the relevant banking service when that was not the case; and/or

(b)that is had a right to charge those fees when it did not.

[6]        The contraventions involved various system and process deficiencies at Kiwibank which persisted for extended periods of time. These misrepresentations occurred in relation to three categories of fees to customers where waivers had been promised — home loan fees, set-up fees, and everyday account fees.

Home loan fees

[7]        Between 1 September 2005 and 31 March 2020 Kiwibank’s service fee terms provided that personal banking customers would not pay transaction fees on their personal bank accounts if they also had a home loan from Kiwibank.

[8]        For a significant number of customers Kiwibank staff did not manually apply this fee waiver. That meant that the fees were charged to those customers as a matter of course. The waiver should have been applied to the customers’ everyday and savings accounts. This issue persisted, undetected, across a near 14-year period. It resulted in 35,613 customers being charged transaction fees on their everyday and savings accounts when they should not have been. The charges involved totalled approximately $1,172,465.85. In the period from 1 April 2014, when the relevant part of the Act came into effect, this issue affected 19,245 customers who were overcharged a total of approximately $575,107.68. The contraventions involved approximately 25 per cent of Kiwibank’s home loan customers.

Set-up fees

[9]        A second category was a fee waiver available to personal and business banking customers, and customers who held home loans with a Kiwibank subsidiary. Kiwibank’s fees included fees to set-up or change an automatic payment/recurring transfer fee. Kiwibank’s terms provided that it would waive such fees for eligible customers. This involved an automatic payment fee waiver, and a set-up fee waiver.

[10]      These waivers were not automatically applied. Instead, Kiwibank staff were required to manually enter the fact that the customer was entitled to an automatic payment fee waiver or set-up fee waiver in Kiwibank’s systems, and they failed to do so. When this did not occur the fees were automatically applied and charged as a matter of course. Kiwibank also had no quality assurance checks in place to see if either waiver had been correctly applied.

[11]      This continued to have a financial impact on a number of Kiwibank customers for an extended period of time. The issue with the automatic payment fee waiver was

identified by Kiwibank in September 2020. In the course of investigating that issue Kiwibank identified the issue with the set-up fee waiver. In particular:

(a)From 18 September 2014, 29,095 customers did not have the automatic payment fee waiver applied and were overcharged by a total of

$282,440 as a result.

(b)From 1 April 2014 (when the Act came into effect) 155 customers did not have the set-up fee waiver applied and were overcharged by a total of approximately $1,110 as a result.

Everyday Account fees

[12]      Kiwibank’s terms and marketing material stated that certain transaction fees and service fees on its everyday accounts would be waived for eligible customers who held a “member package”. This membership benefit was made available to tertiary and graduate students, members of the PSA Union, and staff of certain organisations.

[13]      Coding errors in Kiwibank’s systems meant that customers who should not have had to pay such fees were in fact charged them. This issue persisted for an extended period of time and impacted a considerable number of customers. In particular:

(a)From 1 July 2011 until 31 May 2022 there were approximately 15,376 affected customers who were overcharged by a total of approximately

$163,542.48.

(b)From 1 April 2014 there were approximately 9,481 customers who were overcharged a total of approximately $95,566.69.

Steps taken by Kiwibank

[14]      Kiwibank self-reported all these issues to the FMA. The set-up fees and everyday account fees issues were disclosed while the FMA was investigating the home loan fee issue.

[15]      Kiwibank’s conduct resulted in total losses to customers of $1,619,483.33. Across all three issues the average overcharge for each Kiwibank customer was approximately $16.45. Kiwibank has compensated all customers who were so overcharged. This has included the payment of use of money interest.

[16]      Kiwibank has also made improvements to its systems to identify issues faster in the future. It has also engaged in a product simplification process to reduce the number of products and the range of fee waiver reductions. It has also engaged in a multi-year project to transform its core banking technology and associated systems.

Approach to agreed penalties

[17]      The parties have presented an agreed position on the appropriate penalty to the Court. This is reasonably common with contraventions of the Act addressed by the FMA, and also with contraventions of the Commerce Act 1986 addressed by the Commerce Commission.

[18]      The approach that the Court should adopt in both these situations is well established.1 The Court should consider whether the proposed penalty is within the appropriate range rather than embarking on its own independent inquiry. The Court must be satisfied that the final figure proposed meets the objectives of the Act in the circumstances of the case before it. It is not necessary that each step of the proposed methodology is accepted by the Court so long as it is satisfied that the recommended penalty is appropriate. This recognises the significant public benefit when parties acknowledge wrongdoing, thereby avoiding time-consuming and costly investigation and litigation. The Court should play its part in promoting responsible resolutions of proceedings under the Act.

1      See Financial Markets Authority v ANZ Bank New Zealand Ltd [2021] NZHC 399; Financial Markets Authority v Cigna Life Insurance New Zealand Ltd [2022] NZHC 3610 at [47]; Commerce Commission v Hutt and City Taxis Ltd [2021] NZHC 2543 at [12]; Commerce Commission v Ronovation [2019] NZHC 2303 at [23]–[26]; and Commerce Commission v Alstom Holdings SA [2009] NZCCLR 22 (HC) at [18].

[19]Section 489 of the Act provides:

489     When court may make pecuniary penalty orders

(1)The FMA may apply for a pecuniary penalty order against a person under this Act.

(2)If the FMA applies for a pecuniary penalty order against a person under this Act, the court—

(a)must determine whether the person has contravened, or been involved in a contravention of, a civil liability provision; and

(b)must make a declaration of contravention if it is satisfied that the person has contravened, or been involved in a contravention of, a civil liability provision; and

(c)may order the person to pay to the Crown a pecuniary penalty that the court considers appropriate if it is satisfied that the person has contravened, or been involved in a contravention of, a civil liability provision.

…

[20]      In Financial Markets Authority v ANZ Bank New Zealand Ltd the High Court confirmed that the setting of penalties under s 489(2)(c) involved a three stage framework. Muir J said:2

… there is no reason to consider that the general approach to setting penalties under the Act should be any different to that under its predecessor the Securities Markets Act 1988, in which context this Court has held that the principles applicable to imposition of penalty under the Commerce Act 1986 are, in turn, engaged.3 So, the Court should first determine the maximum penalty, secondly set a starting point having regard to the relevant statutory criteria and thirdly adjust that starting point by applying an uplift or a discount on the basis of circumstances personal to the individual defendant.4

2      Financial Markets Authority v ANZ Bank New Zealand Ltd, above n 1, at [37].

3      See Financial Markets Authority v Warminger [2017] NZHC 1471 at [13]; and Financial Markets Authority v Henry [2014] NZHC 1853 at [34].

4      As such the approach is broadly reflective of that applicable to criminal sentencing. In Department of Internal Affairs v Ping An Finance (Group) New Zealand Co Ltd [2017] NZHC 2363, [2018] 2 NZLR 552 at [90], Toogood J recognised that this analogy has its limitations, particularly in respect of penalties for “a number of different types of civil liability act[s]” where the totality principles adopted in the criminal law cannot be “easily adopt[ed]. However, despite these limitations, the approach remains well supported in the authorities and in my view useful.

Maximum penalty

[21]      Sections 38(2) and 490 of the Act provide that the maximum amount of a pecuniary penalty for a breach of s 22 by a body corporate is, effectively, the greater of:

(a)the consideration for the relevant transaction;

(b)if it can be readily ascertained, three times the amount of the gain made or the loss avoided by the person who contravened the provision; or

(c)$5 million.

[22]      Kiwibank has admitted breaching s 22(f) and/or (h) of the Act on three occasions by issuing customer account statements with misleading representations. In terms of the above provisions the maximum penalty for each of those breaches is $5 million so that the maximum pecuniary penalty available is said by the FMA to be $15 million.

[23]      To some extent this maximum penalty involves a degree of artificiality, however. The three admitted contraventions are representative of a number of contraventions that occurred with respect to a number of customers over a number of years. For that reason, whilst the maximum penalty provided for should not be ignored, the more important step in the sentencing process will involve the Court’s assessment of the appropriate starting point for a penalty for the admitted contraventions.

[24]      The FMA drew the Court’s attention to an interpretation issue concerning s 506 of the Act in this context. This provides:

506     Only 1 pecuniary penalty order may be made for same conduct

If conduct by a person constitutes a contravention, or the involvement in the contravention, of 2 or more civil liability provisions, proceedings may be brought against that person for the contravention, or involvement in the contravention, of any 1 or more of the provisions, but no person is liable to more than 1 pecuniary penalty order for the same conduct.

[25]      There is a degree of ambiguity concerning the effect of this provision. In Financial Markets Authority v AIA New Zealand Ltd the Court appeared to interpret the “conduct” referred to in the section in a broad way encompassing all the systemic failures that had led to the contraventions so that a single maximum penalty applied for all of that conduct.5 To the extent that the Court was adopting that interpretation I agree that it may not accurately reflect the true meaning of the provision. I consider that the “conduct” being referred to is limited to the acts or omissions which comprise the elements of the relevant contravention. It does not encompass wider conduct that may have caused that contravention. Moreover the limitation in s 506 only applies when two or more provisions are contravened by the conduct. It is accordingly not addressing multiple contraventions of the same provision, such as those arising in this kind of case. As I read it, s 506 is directed to a narrow issue — when particular conduct involves a contravention of more than one civil liability provision there should be only one penalty imposed for that conduct.

[26]      This means that the real work to be done to establish the appropriate starting point for the penalty for any particular conduct, and to avoid over-penalising conduct involving multiple breaches, is done by the Court, rather than by s 506 for this kind of case. In Financial Markets Authority v ANZ Bank New Zealand Ltd, Muir J said:6

The FMA submits, and I agree, that the two breaches occurred over substantially the same period of time and resulted from similar deficiencies in ANZ’s processes and systems and that, for this reason, although the notional maximum penalty for the two breaches might be $10 million, the starting point should realistically be assessed against the maximum penalty for a single breach.

[27]      I agree with that approach, and for that reason consider that the realistic starting point in the present case is $5 million even though the maximum penalty for each admitted contravention totals $15 million.

5      Financial Markets Authority v AIA New Zealand Ltd [2022] NZHC 2444 at [58].

6      Financial Markets Authority v ANZ Bank New Zealand Ltd, above n 1, at [42]. This passage was also cited with approval in Financial Markets Authority v AIA New Zealand Ltd, above n 5, at [58]–[59].

Starting point

[28]      It follows from the above that the more important step in this kind of case is to identify the starting point in light of the realistic maximum penalty. The FMA submits, and Kiwibank agrees, that the appropriate starting point is $1,250,000.

[29]Section 492 of the Act provides:

492     Considerations for court in determining pecuniary penalty

In determining an appropriate pecuniary penalty, the court must have regard to all relevant matters, including—

(a)the purposes stated in sections 3 and 4 and any other purpose stated in this Act that applies to the civil liability provision; and

(b)the nature and extent of the contravention or involvement in the contravention; and

(c)the nature and extent of any loss or damage suffered by any person, or gains made or losses avoided by the person in contravention or who was involved in the contravention, because of the contravention or involvement in the contravention; and

(d)whether or not a person has paid an amount of compensation, reparation, or restitution, or taken other steps to avoid or mitigate any actual or potential adverse effects of the contravention; and

(e)the circumstances in which the contravention, or involvement in the contravention, took place; and

(f)whether or not the person in contravention, or who was involved in the contravention, has previously been found by the court in proceedings under this Act, or any other enactment, to have engaged in any similar conduct; and

(g)in the case of section 534 (directors treated as having contravened), the circumstances connected with the director’s appointment (for example, whether the director is a non- executive or an independent director); and

(h)the relationship of the parties to the transaction constituting the contravention.

[30]      The parties’ submissions addressed each of the listed factors, and in the context of s 492(a) each of the purposes of the Act in ss 3 and 4. Although it is ultimately a matter of judicial technique it seems to me that the Court should focus on the

considerations that are of particular significance in arriving at the starting point for the penalty in the case at hand. I see no requirement to methodically address each of the factors referred to in s 492, particularly in circumstances where the Court is addressing an agreed penalty where its ultimate function is to assess whether the penalty is within range. There will also be considerations beyond the mandated list, such as deterrence.7 Guidance will also arise from other decisions involving similar, or comparable contraventions. Indeed it is generally appropriate for the Court to be consistent when setting penalties for contraventions of the kind arising here. I do not agree with the view that “great care” needs to be taken in relation to previous authorities when they have involved an agreed penalty as has been suggested in Australia.8 Given that the Court is required to assess whether the agreed penalty is within range such determinations provide a helpful guide for subsequent cases.

[31]      In terms of the factors identified in s 492 I see the following to be of greatest significance:

(a)The contraventions occurred over a long period of time and affected a large number and proportion of customers. It involved systemic failures of different kinds within Kiwibank. The failures were not earlier identified by any auditing or checking processes. This suggests a reasonably fundamental systemic problem with Kiwibank’s processes.

(b)Such failures potentially have important market consequences. Banking customers can rightly assume that their bank has good systems, and have accurately calculated and applied financial entitlements.9 They cannot be expected to cross-check every item on their bank statements, and there would be adverse market implications if any such expectation existed. This is particularly so when the

7      See Financial Markets Authority v ANZ Bank New Zealand Ltd, above n 1, at [45]; Financial Markets Authority v Cigna Life Insurance New Zealand Ltd, above n 1, at [58]; and Financial Markets Authority v AIA New Zealand Ltd, above n 5, at [91].

8      Australian Securities and Investments Commission v National Australia Bank Ltd [2022] FCA 1324 at [292]; and Australian Securities and Investments Commission v Commonwealth Bank of Australia [2022] FCA 1422 at [129]–[135].

9      Financial Markets Authority v ANZ Bank New Zealand Ltd, above n 1, at [49].

financial impact for each individual customer is low, but where the financial benefit for the institution is higher because of the number of affected customers.

(c)The relevant conduct here involved negligence, and no intention to deprive customers of their entitlements. Once identified Kiwibank also bought the contraventions to the FMA’s attention, and at embarked upon a process of remedying their error, and addressing its systemic failures.

(d)The financial implications of the contraventions — I address this further below.

[32]      Against that background the conduct is similar to that arising in Financial Markets Authority v ANZ New Zealand Ltd and Financial Markets Authority v AIA New Zealand Ltd.10 The most comparable of those two cases is Financial Markets Authority v ANZ New Zealand Ltd. There are the following differences in the present case:

(a)In ANZ the affected customers were charged a total of $190,120.76 as a result of the bank’s errors, from which ANZ’s gain was $20,587.26. By comparison the amount overcharged to Kiwibank’s customers is higher at $954,224.37, which represents Kiwibank’s gain (before repayment).

(b)Kiwibank’s errors affected a larger number and proportion of customers. The number of affected customers in the case of ANZ Bank was in the mid-hundreds (as it was in the case of AIA Insurance). Having said that the adverse financial impact for each customer was lower, however.

10     Financial Markets Authority v ANZ New Zealand Ltd, above n 1; and Financial Markets Authority v AIA New Zealand Ltd, above n 5.

(c)Perhaps most importantly Kiwibank’s failures, whilst also systematic, appear to be more widespread and not limited to a narrower failure of processes.

[33]      Notwithstanding these differences, the cases are of the same general kind. For that reason the starting points are comparable. The starting point here should be higher, however, for the above reasons. The Court adopted a starting point in the range of $400,000–$500,000 in Financial Markets Authority v ANZ Bank New Zealand Ltd.11 In Financial Markets Authority v AIA New Zealand Ltd the starting point was

$1 million–$1.2 million.12

[34]      It is not suggested that specific deterrence of Kiwibank is relevant to the assessment of penalty. But general deterrence is relevant. In Financial Markets Authority v Cigna Life Insurance New Zealand Ltd the High Court observed that to achieve deterrence it is appropriate for the starting point to be significantly above the net gain.13 In that context it is relevant that Kiwibank has paid back all the affected customers, and also included interest on that repayment. The net gain before such repayment will remain significant, however, and it may be that the starting point should be higher than that figure for reasons of deterrence when dealing with a well- resourced party, although that should not be regarded as an inflexible rule in my view.

[35]      Given the above factors and the comparable cases I accept that the starting point of $1.25 million agreed to by the parties, is appropriate.

Mitigating and aggravating circumstances

[36]      The final step in the sentencing process is to uplift or discount the penalty because of circumstances personal to the contravening party. The FMA has acknowledged there are no aggravating circumstances. In terms of mitigating circumstances the parties have agreed on the following discounts:

11     Financial Markets Authority v ANZ Bank New Zealand Ltd, above n 1, at [85].

12     Financial Markets Authority v AIA New Zealand Ltd, above n 5, at [99].

13     Financial Markets Authority v Cigna Life Insurance New Zealand Ltd, above n 1, at [58].

(a)A five per cent discount for self-reporting. I agree that this is appropriate, and that credit should be allowed when a contravening party identifies its contraventions to the relevant regulator.

(b)A five per cent discount for cooperation. Again this can be appropriate when the contravening party not only brings its contravention to the attention of the regulator, but then cooperates with the regulator’s enquiries as in this case.

(c)A 25 per cent discount for early admissions in the context of full remediation of the customers. I agree with that discount, which is consistent with the kind of discounts that the Court provides in criminal proceedings for guilty pleas.

[37]      That is a total discount of 35 per cent. I accept that that total discount is appropriate. From the starting point identified above this leads to a final penalty of

$812,500.

Conclusion

[38]      For the above reasons I agree with the penalty that has been proposed by the parties, and I make the following determinations:

(a)I declare that Kiwibank contravened s 22(f) and/or (h) of the Act by issuing statements in relation to home loan fees, set-up fees and everyday account fees.

(b)A penalty of $812,500 is imposed.

(c)An order is made under s 493 of the Act that the penalty be applied first to FMA’s costs in bringing these proceedings.

Cooke J

Solicitors:

MC, Auckland for the Plaintiff

Russell McVeagh, Wellington for the Defendant