Financial Markets Authority v Vero Insurance New Zealand Ltd
[2023] NZHC 2837
•10 October 2023
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV-2022-404-002068
[2023] NZHC 2837
UNDER The Financial Markets Conduct Act 2013 BETWEEN
FINANCIAL MARKETS AUTHORITY
Plaintiff
AND
VERO INSURANCE NEW ZEALAND LIMITED
Defendant
Hearing: 10 October 2023 Appearances:
N Flanagan and Y Fu for Plaintiff
S Ladd and B Keown for Defendant
Judgment:
10 October 2023
ORAL JUDGMENT OF VENNING J
Solicitors: Meredith Connell, Auckland Counsel: Bell Gully, Auckland
FINANCIAL MARKETS AUTHORITY v VERO INSURANCE NEW ZEALAND LIMITED [2023] NZHC
2837 [10 October 2023]
Introduction
[1] Vero Insurance New Zealand Limited (Vero) has admitted making false and/or misleading representations in customer billing documents relating to its failure to apply a multi-policy discount to premiums charged to customers who were entitled to the discount. As a result Vero represented to customers that they were liable to pay amounts which they were not. It took payments it was not entitled to. Vero self- reported the issue to the Financial Markets Authority (FMA).
[2] Vero and the FMA now seek the imposition of an agreed pecuniary penalty for contraventions of ss 22(f) and/or (h) of the Financial Markets Conduct Act 2013 (FMCA). They jointly suggest the Court impose a pecuniary penalty of $3.9 million on Vero.
[3] The FMA also seeks declarations of breach under s 486 of the FMCA and an order under s 493 of the FMCA that the pecuniary penalty be applied first to pay the FMA’s actual costs in bringing this proceeding.
Background
[4] Vero is one of New Zealand’s largest insurers and is owned by Suncorp, one of Australia’s largest corporates. It is a major insurer in New Zealand. It offers, underwrites and administers a range of general and specialist insurance products to customers in New Zealand.
[5] Vero does not generally sell its insurance products direct to customers but rather promotes and distributes its products through brokers and distribution partners throughout New Zealand (Intermediaries). The Intermediaries are comprised of:
(a)ANZ Bank New Zealand Limited (ANZ);
(b)what Vero refer to as “channels” being:
(i)AMP Services (NZ) Limited (AMP) which, like ANZ, markets and sells AMP-branded insurance products; and
(ii)an expansive network of approximately 1,450 insurance brokers; and
(c)various organisations who advertise Vero-branded insurance to their members who contact Vero directly.
[6] Across all the Intermediaries the contracts of insurance ultimately are between Vero and the customers. The quoting, calculation of premiums payable and administration of the policies were the ultimate responsibility of Vero and its internal systems. Where the Intermediaries used their own systems to send invoices to customers they relied on information supplied by Vero for the pricing of premiums. Vero pays commissions and, in some circumstances, profit shares to the Intermediaries.
[7] From 2009 Vero offered a multi-policy discount. In broad terms the multi- party discount provided customers with a 10 to 15 per cent discount on the premiums if they had taken out insurance on more than one qualifying asset. From 2009 to May 2022 Vero failed, in some cases, to apply the multi-policy discount to customers’ premiums, even though the customers were otherwise entitled to it. Vero did not have any central audit or due diligence process in place to ensure that the multi-policy discount was being properly applied. Vero accepts that pursuant to s 536 of the FMCA the Intermediaries were acting on behalf of Vero in issuing affected invoices and their conduct is to be treated as conduct engaged in by Vero.
[8] In 2010 Vero identified an issue that a not insignificant number of customers (approximately 600) had been affected by the failure to apply the multi-policy discount to eligible customers. Despite that Vero did not undertake a wholesale review or investigation of the process. However, Vero says it did undertake a change to systems but nevertheless the underlying issue went undetected for almost a further decade.
[9] In March 2018, Vero identified the issue in relation to ANZ customers. Again a relatively small number of customers (150) were affected. However it was not until March 2019 Vero undertook a full review of the discount as it applied to all current and past ANZ customers. Between October and December 2019 Vero developed and
introduced daily exception reporting to identify the issue in new policies being sold to ANZ customers. The multi-party policy discount as it related to ANZ customers was reported to the FMA in December 2019. At the same time as reporting the ANZ issue Vero recognised the issue may have affected its Channel customers who comprised approximately half of its business. In February 2020 the FMA wrote to Vero requesting it make its investigation in relation to that issue a priority. Vero did so and in September 2020 daily exception reporting was introduced to address the issue across its Channel’s network as well.
[10] Between 1 April 2014 and May 2022, the period of contravening conduct covered by the FMCA, 42,256 customers were affected by the issue. The total premiums charged to those customers was approximately $88.1 million with approximately $9.9 million of that sum being charged to affected customers because Vero had failed to apply the multi-policy discount. Vero paid commissions and profit shares to Intermediaries based on the affected invoices. It is agreed that a substantial portion of those payments can be attributed to their overcharges. Vero has chosen not to seek to recover those payments.
[11] Vero has also chosen not to recover payments from customers who received the multi-party discount but were not entitled to it. Those underpayments amount to at least $16 million.
Penalty
[12] Under s 489(1) of the FMCA the FMA may apply for a pecuniary penalty order where a person has breached a civil liability provision such as s 22 as in this case. Under s 489(2) when the FMA makes such an application to the Court, 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 satisfied the person has contravened or been involved in a contravention of a civil liability provision; and
(c)may order the person to pay the Crown a pecuniary penalty that the Court considers appropriate if satisfied of the contravention.
[13] In FMA v ANZ the Court confirmed the general approach to setting penalties under the Securities Markets Act 1988 and the principles applicable to setting penalties under the Commerce Act 1986 are equally applicable to setting penalties under the FMCA.1
[14]The authorities establish a three-stage framework:2
(a)the Court should determine the maximum pecuniary penalty in accordance with s 490 of the FMCA;
(b)the Court sets a starting point having regard to the relevant statutory criteria in s 492 of the FMCA; and then
(c)the Court adjusts the starting point by applying an uplift or discount on the basis of relevant circumstances personal to the particular defendant.
Maximum penalty
[15] The maximum pecuniary penalty in the present case for Vero’s breach of s 22 is the greatest of:3
(a)the consideration for the relevant transaction(s);
(b)if readily ascertainable, three times the amount of the gain made or loss avoided; or
(c)$5 million.
1 FMA v ANZ [2021] NZHC 399.
2 FMA v ANZ; FMA v AIA New Zealand Ltd [2022] NZHC 2444; and FMA v Cigna Life Insurance New Zealand Ltd [2022] NZHC 3610.
3 Financial Markets Conduct Act 2013, ss 38(2) and 490(1)
[16] The transaction in the present case was the offer by Vero to customers to either buy or renew their policy on terms, including the multi-policy discount that ought to have applied. Accordingly the parties accept the maximum necessary penalty available is approximately $88.1 million, being the consideration for the relevant transactions.
[17] The Court is then required to have regard to the relevant statutory criteria set out in s 492(a)–(h) to fix the starting point.
Purposes of the FMCA
[18]In the present case the purposes of the FMCA that are particularly relevant are:
(a)promoting the confident and informed participation of consumers in financial markets;
(b)promoting and facilitating the development of fair, efficient and transparent financial markets; and
(c)providing for timely, accurate and understandable information to be provided to persons to assist them to make decisions relating to financial products or financial services.
[19] It is particularly relevant that customers were reliant on Vero’s systems as they could not verify the amounts charged were correct unless they contacted Vero directly on their own initiative to specifically inquire. As one of New Zealand’s largest insurers and being extremely well resourced via its parent company Vero could reasonably be expected to have appropriate systems in place to ensure the premiums charged were correct.
Nature and extent of the contravention
[20] I also accept the FMA’s submission that there was a basic failure on Vero’s behalf. Despite the system being a manual one Vero apparently made no or limited attempts to implement any checking or auditing to ensure the discounts were applied
as they should be. Particularly relevant is that the infringing conduct took place over a lengthy period of time. The FMA submits the issue had in fact existed from as early as 2009 when the multi-policy discount was introduced. The conduct affected a significant number of customers. From 1 April 2014 the issue has affected 42,256 customers and 47,992 policies. Approximately 12 to 15 per cent of the customers who were eligible to receive the multi-policy discount were affected by the issue over this time period.
Nature and extent of any loss, damages or gains
[21] As noted, when the issue did come to Vero’s notice in about 2010 in relation to the ANZ there was a change to the systems at that time, but that was insufficient to address the particular issue.
[22] In the period from 1 April 2014 the total harm to Vero customers has been in the region of $9.9 million. The impact on customers prior to 1 April 2014 remains unknown but would also have been significant. I note that in the compensation paid Vero has accepted responsibility for and paid compensation even where the failure was prior to the application of the Act.
[23]From 1 April 2014 the average overcharge per customer was approximately
$234.
[24] While $9.9 million was paid in premiums that should not have been, balanced against that, is the fact the overcharges were paid out at least in part as commissions and profit shares to Intermediaries so that Vero has not received that full $9.9 million. Vero has chosen not to seek to recover those sums, which could be assessed in the region of approximately $1.3 to $2 million. However, even on that basis Vero’s net commercial gain would still fall somewhere in the region of $7.9 million to $8.6 million.
Circumstances in which the contravention occurred
[25] I accept the submission that while the circumstances in which Vero’s failures occurred were not deliberate, Vero fell short of the standards expected of an entity of
its size. Its core business was invoicing to ensure customers were charged what they had agreed to pay. It failed in carrying out a key aspect of its bargain with customers, namely to price the premiums paid or charged accordingly. There is no adequate explanation given for its failure to detect the issue earlier.
Relationship of the parties to the transaction
[26] The relationship of the parties is relevant. The relationship of insurer and customer is essentially a relationship of trust.
Compensation
[27] As to compensation, the FMA also accepts Vero has taken a comprehensive approach to compensation. To date it has repaid $13.97 million to customers (including the use of money interest of $3.02 million). The compensation is, as noted, for all time periods, including the period pre-dating 1 April 2014 when the Act applied.
[28] Apart from the relevant mandatory considerations, there are a number of other relevant factors in this case.
[29] The FMA also submits that Vero’s response regarding the identification and escalation of the Channels’ issue was troubling. Vero knew there was a systematic issue with the ANZ customers in 2018, and should have been aware that the same issue would be even more problematic in relation to the Channels, but failed to take any steps to investigate the matter, even though it acknowledged the need for an investigation earlier. Vero’s response is that it decided to approach the issues sequentially and to address the remediation for ANZ customers first followed by the Channels’ customers. It says ultimately all customers’ positions were addressed. I accept the force of the submissions for Vero that it was necessary to develop a remediation approach that ensured affected customers had an accurate, well-run remediation exercise with appropriate support.
[30] The position in the present case is different to the case referred to by Mr Flanagan during oral submissions of Australian Securities and Investments
Commission v National Australia Bank Ltd (No 2),4 of a direct entity and client relationship. In the present case the position was complicated because of the position of the Intermediaries and the Intermediaries’ relationship with the Vero customers. I also accept as Mr Ladd submitted, there is room in this case for a judgment call as to how to best address the issue.
[31] I note that the FMA acknowledges that while Vero’s conduct may have failed to meet the standard expected of it, it was in part mitigated by Vero’s very co-operative approach following the self-reporting.
Deterrence
[32] While deterrence is not identified as a relevant factor in s 492, in the past the Court has accepted and confirmed that deterrence is always a relevant consideration.5 In relation to that I accept in general terms the submission for the FMA that the penalty must be at a level that creates an incentive for well-resourced financial institutions such as Vero to maintain adequate systems and processes.
[33] There are a number of relevant factors which support the proposed starting point in this case, in particular, the fact Vero has paid out the commissions and profit shares noted. While it could have chosen to seek to recover them the FMA has acknowledged that there would have been significant complexity and difficulty in doing so. Vero is simply out of pocket. Further, as a result of its errors Vero has paid out the multi-policy discount to some customers who were not entitled to it and has not attempted to recover those undercharges as it might have done. Finally, also relevant, as noted Vero has paid compensation in excess of the amounts overcharged, including the use of money interest.6
4 Australian Securities and Investments Commission v National Australia Bank Ltd (No 2) [2023] FCA 1118.
5 FMA v ANZ, above n 1.
6 The evidence of this is set out in the affidavit of Gail Saipani.
Starting point
[34] The FMA submits the most apt comparator in terms of magnitude of misconduct is FMA v Cigna Life Insurance New Zealand Ltd.7 In that case Cigna accepted it made false or misleading representations to its clients regarding certain benefits. However the FMA also acknowledges that, unlike Cigna, the breaches in this case were not deliberately made. As noted, the present case involves a systems failure.
[35]The net gain was significantly higher to Vero, approximately $3.37 million to
$4.05 million more than Cigna’s net gain. While the amounts improperly charged to customers was greater in Cigna’s case, (approximately $13.5 million compared to the
$9.9 million by Vero), in the former instance customers received a higher level of cover and some benefit payments. There was no corresponding benefit in the present case. In Cigna the starting point was $5.5 million.
[36] Having regard to the above, the FMA submits the conduct in this case would warrant a starting point of between $6–$7 million. The FMA accepts that on the particular facts of this case the starting point in that range would meet objectives of deterrence and seriousness of the conduct given that Vero has made its customers whole.
[37] Vero’s position is the appropriate starting point having regard to the matters referred to, is in the range of $5–$6 million. On my assessment the range fixed by counsel on behalf of the FMA and Vero is the applicable range and the $6 million suggested is a convenient mid-point to adopt.
Mitigating factors
[38] The FMA accepts that there are no aggravating features specific to Vero. In terms of mitigating factors the FMA accepts Vero should be entitled to discounts to reflect the timing of its admissions and the extent of its co-operation. The FMA accepts Vero’s admissions can be said to have been made at the first opportunity and
7 FMA v Cigna Life Insurance New Zealand Ltd, above n 2.
also that Vero fully co-operated throughout the FMA investigation. While the FMA is troubled by the delays in Vero starting to undertake investigation processes it acknowledges that Vero faced particular challenges in carrying out the remediation programme in relation to the Channels’ customers given the involvement of the Intermediaries, a point which I have also accepted. Overall the FMA submits a discount of five per cent for self-reporting, five per cent for co-operation, and 25 per cent for the early admissions and remediations leading to the overall discount of 35 per cent is appropriate. That supports the assessed final total penalty of $3.9 million. For its part Vero also accepts and supports a discount of 35 per cent, having regard to the above matters.
[39] Standing back and looking at the matter overall, having regard to the relevant considerations I accept a starting point of $6 million is appropriate as noted, and while the discount of 35 per cent is a substantial discount, on the balance of the information before the Court in relation to Vero’s breaches, the particular circumstances of this case, and having regard to the steps taken by Vero, I accept it is appropriate. I also note of course that there have been no previous breaches by Vero.
Result/orders
[40] As a result I declare that Vero contravened ss 22(f) and/or (h) of the FMCA by issuing the affected invoices.
[41]I impose a pecuniary penalty of $3.9 million on Vero.
[42] I make an order under s 493 of the FMCA that the penalty be applied first to the FMA’s costs in bringing the proceeding.
[43]I record that the FMA does not seek any further order as to costs.
Venning J
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