FXBTG Financial Limited v Financial Markets Authority
[2019] NZHC 2775
•30 October 2019
IN THE HIGH COURT OF NEW ZEALAND WELLINGTON REGISTRY
I TE KŌTI MATUA O AOTEAROA TE WHANGANUI-A-TARA ROHE
CIV-2019-485-391
[2019] NZHC 2775
IN THE MATTER of an appeal under section 42 of the
Financial Service Providers (Registration and Dispute Resolution) Act 2008
BETWEEN
FXBTG FINANCIAL LIMITED
Appellant
AND
FINANCIAL MARKETS AUTHORITY
Respondent
Hearing: 16 September 2019 Appearances:
M A Keil for Appellant
R S May and C E Clayton for Respondent
Judgment:
30 October 2019
JUDGMENT OF COOKE J
Table of Contents
Background[2]
Evidence received on appeal[7]
The overall scheme of the Act[11]
Not providing any financial services[21]
First ground of appeal: FMA erred in concluding FXBTG was not conducting financial
services[28]
Inconsistency of treatment[29]
Erroneous assessment of the evidence[33]
Second ground of appeal: No false or misleading appearance[47]
The FMA’s approach[48]
Analysis[51]
Conclusion[59]
FXBTG FINANCIAL LTD v FINANCIAL MARKETS AUTHORITY [2019] NZHC 2775 [30 October 2019]
[1] By decision dated 24 June 2019 the Financial Markets Authority (FMA) decided that the appellant, FXBTG Financial Limited (FXBTG), should be deregistered from the Financial Service Providers Register pursuant to s 18B of the Financial Service Providers (Registration and Dispute Resolution) Act 2008 (the Act). FXBTG appeals against the decision of the FMA in accordance with the right of appeal to the High Court from such a decision under s 42 of the Act.
Background
[2] FXBTG was incorporated in 2012. It says that it provides general financial advisory services, and operates an online foreign currency exchange service in Auckland to its customers in China. The company was duly registered in November 2013.
[3] On 22 March 2019 FMA staff prepared a recommendation that FXBTG be issued with a notice of intention to direct deregistration. The recommendation was made on the grounds that:
(a)the services FXBTG provided did not constitute “financial services” within the meaning of the Act;
(b)their foreign exchange service was being provided to customers primarily in China;
(c)FXBTG did not have any New Zealand resident customers;
(d)two overseas regulators had published warnings regarding the company; and
(e)FXBTG had previously made misleading claims about New Zealand supervision and regulation on their website.
[4] The recommendation assessed that continued registration would have the effect of damaging the reputation of New Zealand’s financial markets and regulation of those markets. That recommendation was accepted by the FMA, and written notice
of intent to deregister setting out the reasons for the decision was issued to FXBTG the same day.1
[5] In response, FXBTG’s solicitors sent a letter to the FMA containing submissions in response to the FMA’s proposed direction.2 On 14 June 2019 the FMA’s Director of Regulation, Mr Mason, accepted a recommendation prepared by FMA staff that FXBTG be deregistered as a financial services provider.3 By letter to FXBTG dated 24 June 2019 the FMA set out the reasons for the decision.
[6] The Act provides for a right of appeal to the High Court from a decision of the FMA. The appeal proceeds as a general appeal.4 FXBTG appeals the decision on the grounds that:
(a)FXBTG is in the business of providing financial services from a place of business in New Zealand within the meaning of ss 5 and 8A of the Act, and it is generating financial activity from the provision of such services;
(b)FXBTG’s registration does not create a false or misleading appearance as to the extent it is regulated by New Zealand law for the purpose of s 18A of the Act; and
(c)the FMA took into account irrelevant considerations, and failed to apply mandatory considerations in reaching its decision.
Evidence received on appeal
[7] The appeal is supported by an affidavit from the sole director of FXBTG, Xiaomin Li, sworn on 26 July 2019. The affidavit was initially filed in support of an interlocutory application for an interim injunction. On 12 August 2019 that
1 Financial Service Providers (Registration and Dispute Resolution) Act 2008, s 18B(3)(a).
2 Section 18B(3)(b).
3 Section 18B(3)(c)(i).
4 See Financial Markets Authority v Vivier and Company Ltd [2016] NZCA 197, [2016] 3 NZLR 70 at [42]–[46]; and Austin, Nichols & Co Inc v Stitchting Lodestar [2007] NZSC 103, [2008] NZLR 141.
application was called before Ellis J, and it was agreed that the best course was to work towards an expedited hearing of the substantive appeal. Timetable directions were given which included provision for the FMA to file affidavit evidence in response.
[8] At the hearing of the appeal before me Mr May objected to the Court receiving the affidavit evidence of Xiaomin Li, and pointed out that no leave to file that evidence had been sought by the appellant. This is an appeal under Part 20 of the High Court Rules 2016. Under r 20.16 further evidence is only received with leave of the Court.
[9] The FMA has also filed evidence in accordance with the timetable. It comes from Mr Mason who was the decision maker, and the author of the letter of 24 June 2019 which advised FXBTG of the decision. He described the purpose of his affidavit was to “outline the background, context and reasons for the decision to issue the direction that is subject to this appeal”. No leave was sought by the FMA to file this affidavit. Ms Li also then filed a short affidavit in reply sworn 29 August 2019.
[10] The appeal accordingly comes before the Court in a slightly irregular way. For the future, it seems to me that any need to provide material beyond the reasons for the decision contemplated by s 18B(3)(d) is better provided in the form of a report of the decision-maker under r 20.15 in accordance with a direction from the Court.5 That report can provide the record of the materials relevant to the decision, such as the preliminary decision, advice papers, and submissions on the preliminary decision. In my view that is the better way for the record to be before the Court. If parties wish to file affidavits in relation to such an appeal, leave will be required. In the present case I granted leave to both parties for the provision of the affidavits filed.
The overall scheme of the Act
[11] Before addressing the specific arguments advanced on appeal, it is appropriate to outline the statutory scheme, including the relevant deregistration powers.
5 Note, however, there is authority to the effect that such reports cannot be used to supplement the reasons for a judgment of a court — see Maungaharuru-Tangitū Trust v Hastings District Council [2018] NZHC 3261.
[12] There are two particular factors that are important to understanding how the sections are designed to operate. The first is that the Act forms part of an overall system of securities regulation in New Zealand with the total system found in a number of different enactments. Together they operate as a regime. The Act sets up a system for the registration of financial service providers. The substantive obligations or controls relating to such providers, and securities regulation generally, is found in other legislation, including the Financial Markets Conduct Act 2013, and the Financial Advisers Act 2008. It is accordingly appropriate to interpret and apply the Act in light of the other legislative enactments. This is more likely to correspond with Parliament’s overall intention.
[13] Secondly it is apparent that the legislation that was enacted from 2008 to reform New Zealand’s securities regime arose out of wider international initiative relating to securities regulation. An International Monetary Fund review in 2003 led to a greater international concern for the monitoring and regulation of financial services.6 Given the cross-border nature of securities trading, a greater degree of international coordination was appropriate. These initiatives help to explain the scheme and purpose of New Zealand’s legislation.
[14] As enacted the Act did not have any provision that specified its territorial scope. However, as a consequence of amendments first made in 2010 by the Financial Service Providers (Registration and Dispute Resolution) Amendment Act 2010 a broad territorial reach was introduced. Section 8A provides:
8A Territorial scope
This Act applies to a person who—
(a)is ordinarily resident in New Zealand (within the meaning of section 4 of the Crimes Act 1961) or has a place of business in New Zealand, regardless of where the financial service is provided; or
(b)is, or is required to be, a licensed provider under a licensing enactment; or
(c)is required to be registered under this Act by any other enactment.
6 International Monetary Fund Financial Sector Assessment Program – Review, Lessons, and Issues Going Forward (International Monetary Fund, 24 February 2003).
[15] Importantly any persons having a place of business in New Zealand are covered by the Act even if the financial services they were providing are not provided to persons within New Zealand, or in relation to New Zealand investments. In other words, the financial services could be provided from New Zealand to persons based entirely overseas in relation to entirely overseas investments.
[16] That territorial scope does not appear to match to the other legislation regulating financial services, in particular the Financial Markets Conduct Act 2013. Part Two of that Act deals with what is described as fair dealing. The relevant territorial scope of that legislation is prescribed by s 33 of that Act in the following terms:
33 Territorial scope of sections 19 to 23
(1)Sections 19 to 23 apply to—
(a)conduct in New Zealand; and
(b)conduct outside New Zealand by any person resident, incorporated, registered, or carrying on business in New Zealand to the extent that that conduct relates to dealing in financial products, or the supply of a financial service, that occurs (in part or otherwise) within New Zealand.
…
(4)In this section, registered means registered under the Financial Service Providers (Registration and Dispute Resolution) Act 2008.
[17] It is arguable that s 33 does not cover services provided to entirely overseas clients in relation to overseas investments.7 It may be that the potentially greater territorial reach of s 8A of the Act is to ensure that the providers of financial services across territorial boundaries are appropriately registered in New Zealand — and form part of the regulatory regime when they are based here, even though they may be providing services to overseas clients.
[18] But the potentially broad territorial reach of the Act led to overseas financial service entities establishing places of business within New Zealand purely in order to obtain registration in New Zealand. The fact of registration is then promoted to add
7 The alternative view is that this still can involve “conduct in New Zealand” under s 33(1)(a). I make no findings on this point.
credibility to their offerings. In reality the entities were not regulated by the New Zealand securities law regime at all. This has been referred to as the problem of “flag of convenience” registrations. It was this that led to the enactment of ss 18A and 18B (as well as ss 15A and 15B) by the Financial Service Providers (Registration and Dispute Resolution) Amendment Act 2014. When the Select Committee reported on this proposed legislation, it stated:8
We recommend inserting new sections 15AA and 18AA (clauses 80 and 84) to clarify the extent of the Financial Market Authority’s powers. This amendment would allow, for examp1e, the authority to prevent overseas financial service providers registering in New Zealand solely to bolster their reputation; we consider this would strengthen New Zealand’s financial regulation regime. We recommend allowing the FMA to act on its own discretion when considering deregistration of a financial service provider; this has resulted in a proposed amendment to section 18A ( clause 84).
[19]The present case turns on ss 18A and 18B. Section 18A provides:
18A Purpose of FMA’s powers relating to deregistration
The purpose of section 18B is to provide for the deregistration of a person (A) if A’s registration has, will have, or is likely to have the effect of—
(a)creating, or causing the creation of, a false or misleading appearance with respect to the extent to which A—
(i) provides, or will provide, financial services in New Zealand; or
(ii) provides, or will provide, financial services from a place of business in New Zealand; or
(iii) is, or will be, regulated by New Zealand law in relation to a financial service; or
(b)otherwise damaging the integrity or reputation of—
(i) New Zealand’s financial markets; or
(ii) New Zealand’s law or regulatory arrangements for regulating those markets.
[20] If, after considering s 18A the FMA considers it is necessary or desirable for the provider to be deregistered, it must give the provider written notice, together with
8 Credit Contracts and Financial Services Law Reform Bill 2014 (104–2) (Commerce Committee report) at 15.
reasons, of its intention to give the direction.9 The provider may respond with submissions in relation to the proposed direction. If, after considering the submissions, the FMA remains of the view that the provider should be deregistered, then it may direct the Registrar to do so.
Not providing any financial services
[21] There is an initial issue that is appropriately addressed before assessing FXBTG’s arguments on its grounds of appeal. It is particularly relevant to the first ground of appeal addressed below. It relates to whether ss 18A and 18B are directed, or primarily directed, to financial services providers who are not providing financial services covered by the Act at all.
[22] In Financial Markets Authority v Vivier and Company Ltd the Court of Appeal outlined the approach that should be adopted in respect of ss 18A and 18B.10 The Court summarised the position in the following way:
[56] Drawing these points together, what is far more material than incorporation or possession of a place of business in New Zealand is whether the FSP is providing financial services in or from New Zealand, and whether it is generating any associated financial activity in New Zealand. If it is not doing so, or cannot demonstrate any intention of doing so, alarm bells should sound.
[57] We accept bona fide FSPs with a place of business in New Zealand, but no relevant financial service activity in New Zealand, may seek registration notwithstanding. In such a case we would expect that registration (and continued registration) might reasonably depend on:
(a)reliable information being given as to the manner in which the FSP was to promote itself. For instance, either not promoting itself at all, or promoting itself on the basis that it states clearly that it is neither providing financial services in or from New Zealand nor is regulated by New Zealand law in relation to the financial services it provides in other jurisdictions;
(b)evidence of compliance with the requirements of a relevant offshore regulator would also be relevant to the FMA’s assessment; and
(c)other relevant information including, for instance, that the FSP is substantial and reliable.
9 Financial Service Providers (Registration and Dispute Resolution) Act 2008, s 18B(3)(a).
10 Financial Markets Authority v Vivier and Company Ltd, above n 4.
[23] One of the features of this passage is that it appears to be directed to a financial service provider that is not undertaking financial services conduct in New Zealand at all. All three of the cases that have come before the Court in relation to these provisions appear to have involved entities which have been similarly assessed.11 As I read ss 18A and 18B, however, they are directed to entities that are conducting financial services activities in New Zealand, but “the extent” that they are doing so leads to the conclusion that the New Zealand registration is being used to create a false or misleading appearance of their connection with New Zealand or regulation by the New Zealand regime.
[24] I say this because ss 18A and 18B deal with entities that would otherwise be registered, and it is necessary to be registered only when an entity is undertaking financial services covered by the Act. The legislation as it stood prior to its amendment already contemplated that entities who were not engaged in conducting financial services in New Zealand at all would not be registered, or would be deregistered. Under s 18(1)(b) the Registrar was required to deregister a financial service provider if it was “not in the business of providing a financial service (at any time after the expiry of three months after registration)”.12 So the new provisions were not directed at deregistering entities that were not providing any financial services covered by the Act at all. Section 18A addresses a different issue — when an entity that is conducting financial service activities in New Zealand but “the extent” to which it is doing so results in a misleading appearance given how things are portrayed.
[25] I nevertheless accept that ss 18A and 18B (and ss 15A and 15B) can still apply to an entity not conducting financial services in New Zealand at all. Whilst the sections appear to have been directed to entities that do conduct services, it is also apparent that an entity who engages in no such activity, but has New Zealand registration, would still be potentially caught by the provisions. Such a registration could still create a misleading appearance with respect to “the extent” of the existence of services being provided in or from New Zealand, or the New Zealand supervision.
11 See also Excelsior Markets Ltd v Financial Markets Authority [2015] NZHC 3334, [2016] NZCCLR 14; and Innovative Securities Ltd v Financial Markets Authority [2017] NZHC 1187, [2017] NZCCLR 25.
12 Given s 8A, that would include consideration of financial services provided from New Zealand to purely overseas clients in relation to purely overseas investments.
A registration in those circumstances could be seen to be even more obviously misleading. Put another way, s 18(1)(b) and ss 18A and 18B can legitimately overlap. This point is reiterated by s 18C which provides:
18CFMA may direct deregistration regardless of whether section 18(1) applies
The FMA may give a direction under section 18B in relation to a person regardless of whether any of paragraphs (a) to (d) of section 18(1) apply.
[26] The observations from Vivier outlined above are understandable against that background. But the references at [56] and [57(a)] of that judgment to the entity not providing financial services in or from New Zealand at all should not be understood to be a requirement for the application of ss 18A and 18B.
[27] My only other observation about Vivier is that, whilst it speaks of an entity “seeking” registration in New Zealand, the framework of the Act actually requires registration if a person wants to provide financial services covered by the Act, including its broad territorial scope. Under s 11 a person potentially commits an offence if it is in the business of providing a financial service without a registration.13 This also means that when a person is undertaking such a service but has been deregistered under s 18B, such services will need to be discontinued.
First ground of appeal: FMA erred in concluding FXBTG was not conducting financial services
[28] FXBTG’s first ground of appeal is that the FMA erred in concluding that FXBTG was not providing any financial services at all.14 In advancing that argument there were two related points put forward by Ms Keil.
Inconsistency of treatment
[29] The first point is that FXBTG contends that the decision of the FMA was inconsistent with an earlier decision of Registrar of Financial Service Providers appointed under s 35(1) of the Act.
13 Provided the person knowingly breaches s 11(1) (s 11(2)).
14 This covers points (a) and (b) of the point of appeal dated 14 August 2019.
[30] The factual background to this is that the Registrar conducted an enquiry into FXBTG in the manner contemplated by s 18(1)(a) of the Act, and formed the view that FXBTG should be deregistered in October 2018. This was on the basis that it was not in the business of providing financial services. FXBTG objected. The Registrar subsequently described what occurred in the following way:
FXBTG commenced proceedings to appeal the deregistration initiated by the Registrar. Information provided with the appeal documents were sufficient to show that the FSP was in the business of providing financial services at the time it was deregistered. The Registrar therefore reregistered FXBTG on the grounds that the Registrar was satisfied that FXBTG was still in the business of providing a financial service at the time of deregistration (section 22 of Act). FXBTG was reregistered on the FSPR on 21 November 2018. As a result of the reregistration, FXBTG ceased proceedings.
[31] FXBTG argues on this appeal that the decision of the FMA on 24 June 2019 is inconsistent with the decision of the Registrar, and the decision of the FMA is accordingly wrong in law. Ms Keil put it in the following way in her written submissions:15
In this context, a duty on the Crown to act consistently has substantive as well as procedural application. Where the factual situation cannot be distinguished, the duty will include the need for consistency of outcome in the absence of a reasoned explanation to justify different treatments by the co-regulators under the FSP Act.
[32] The answer to this argument is found in s 18C of the Act. It directly addresses the potential overlap between s 18(1)(b) and s 18B. The two provisions, and two decision-making processes, are independent of one another. The decisions are made by different statutory officers. The decision of the FMA leads to a direction to the Registrar (s 18B(3)(c)(i)). The legislation accordingly contemplates potential inconsistency. The FMA can legitimately conclude that a provider is not providing financial services even if the Registrar has earlier accepted that it is. As Mr May submitted, s 18B(2) sets out the mandatory considerations for this decision by the FMA. The FMA must simply address the facts, and the mandatory considerations, for itself. For that reason I see no error in the FMA's approach.
15 Counsel for the FMA argued that this point was not squarely within the grounds of appeal, but it seems to me to be sufficiently close to mean that formal amendment to those grounds was not necessary.
Erroneous assessment of the evidence
[33] The second point advanced for FXBTG was that the FMA was simply wrong to conclude that it was not in the business of providing financial services within the meaning of the Act. The letter advising of the decision of 24 June 2019 outlined the FMA’s approach as follows:
5. The term ‘financial services’ is defined in section 5 of the FSP Act and contains a list of services that fall within its definition. Having considered the nature of the services undertaken in New Zealand by FXBTG, the FMA is of the view that the services provided are principally in the nature of market commentary, compliance and administrative and are not ‘financial services’ in terms of section 5 of the FSP Act. In particular, we note the ‘financial advisory’ services described in FXBTG’s submissions is, in our view, general market commentary by way of trend analysis that does not fall within the definition of ‘financial adviser service’ under the FSP Act and consequently the Financial Advisors Act 2008.
[34] I accept that the FMA decision proceeds on the basis that FXBTG was not providing any financial services at all. Challenging this conclusion involves mixed questions of fact and law. Given that this is a general appeal I accept that if FXBTG satisfied this Court that this conclusion was wrong, there would be an error that could result in the appeal being allowed.
[35] The activities FXBTG undertakes were summarised by its solicitors in the following way by a letter sent on 26 April 2019 to the FMA:
FXBTG does not dispute that it only has overseas clients at this stage in its development and that it is not regulated in New Zealand for the financial services it offers. However, FXBTG has had a presence in New Zealand since 25 June 2012. It employs a staff member in New Zealand at its Auckland office responsible for accounting, compliance, financial advisory services and foreign exchange services enabling its customers which are primarily based in China to exchange foreign currency via the company’s on line platform which is operated from Auckland.
[36] The further evidence received on appeal, including from Mr Mason, is that the office is located in the living room of an apartment in Mount Roskill where there is a computer. The relevant staff member is Xiaomin Li, who has recently obtained a Master’s degree in Professional Accounting from Auckland University of Technology. She is the sole staff member, and sole director of FXBTG. The relevant facts
demonstrate that FXBTG has what can fairly be seen as a relatively rudimentary office set-up.
[37] The relevant issue is whether the tasks undertaken from this place of business amount to financial services as defined by the Act. A number of statutory provisions need to be considered in order to understand the definition of “financial services” in a complete way. There is a list of financial services in s 5 of the Act, one of which is “a financial adviser service” (s 5(1)(a)) which is defined to have the meaning contained in s 9 of the Financial Advisers Act 2008. There are descriptions of such services in s 9 (and exceptions in s 10) in the Financial Advisers Act 2008. That includes giving an opinion or recommendation in relation to acquiring or disposing of a financial product. A “financial product” is defined in that Act in a way that ultimately includes giving advice about acquiring or disposing of “a derivative” which may have potential relevance in this case.16
[38] The evidence provided by FXBTG to support its argument is that it provides daily financial analysis and consulting services to Chinese customers in respect of trading in foreign exchange, gold and oil. It put forward agreements it has with other institutions to provide such services, and a list of 19 customers.
[39] The FMA assessed this material as FXBTG providing only generic financial advice regarding market trends. Notwithstanding Ms Keil’s arguments I do not accept that this finding was wrong. In particular I am not satisfied that FXBTG has demonstrated the FMA was wrong to conclude that none of FXBTG’s advisory services amounted to financial services. FXBTG has not provided clear evidence that it has engaged in financial advisory services in relation to particular investments, or proposed investments by specific clients. It seems to me that it would be relatively easy for it to do so if it was indeed engaged in such activities. All that Ms Li has said in her affidavit is that FXBTG “has been undertaking general financial advisor services to Chinese customers”.
16 Financial Advisers Act 2008, s 5, definition of “Category 1 product” and “FMCA financial product”.
[40] A more complex issue arises in relation to FXBTG’s operation of the foreign exchange platform, which it operates under licence at the apartment in Auckland where a computer is located. Whilst the server is located in Hong Kong, foreign exchange platform activities are undertaken in New Zealand. Ms Li explained a number of contracts that FXBTG has entered for the purposes of its business, including a contract with MetaQuotes Software Corp which allows it to operate an online broking business. She explains that “I direct the business of FXBTG from Auckland, ensuring the financial platform is operational and suiting our customers’ needs from Auckland as well as all other day to day operational requirements of the company from this office”.
[41]These activities led Mr May to say in his submissions:
54.2 While FXBTG also provided foreign exchange broking – a “financial service” for the purposes of s 5 – this was provided to customers based exclusively in China, and the services provided from New Zealand were, as in Innovative Securities, not the core business of a financial provider.17
[42] This activity involves engaging with customers in relation to their decisions to buy and sell foreign exchange, which are then actioned in Auckland using the platform. I agree that these activities likely amount to foreign exchange broking services, and that a foreign exchange broker service is within the meaning of a financial service as set out in s 5 of the Act (see s 5(1)(ab)).
[43] Mr May’s point that all the customers were based in China, that the business is provided from New Zealand and that such activities were not the core business of a financial service provider does not ultimately matter. Section 8A of the Act makes it plain that such overseas related activities can still be financial services within the territorial reach of the Act. Mr May’s reliance on Innovative Securities Ltd seems to me to be misplaced. There the Court concluded that the tasks in New Zealand were broadly administrative and compliance related, and could not individually or collectively be regarded as financial services for the purposes of s 5 of the Act.18 But here FXBTG is undertaking foreign exchange brokering from a place of business in
17 Innovative Securities Ltd v Financial Markets Authority, above n 11.
18 At [92]–[93].
Auckland, and whilst those services are provided only to overseas customers in relation to investments outside New Zealand, such services are still captured by the Act as a consequence of s 8A.19
[44] This means that, technically at least, the FMA was wrong to conclude that FXBTG was not conducting any financial services at all. In my view FXBTG provided financial services as defined by the Act, albeit it in a very rudimentary way, by the tasks being undertaken by Xiaomin Li at the computer in the living room at the Mount Roskill apartment.
[45] But as I have already outlined this error is not of significance. This debate has somewhat eclipsed the real issue. When a provider is technically, or notionally engaged in what is defined as a financial service because of the Act’s extended territorial reach, but its substantive activities are overseas, ss 18A and 18B potentially apply. Those sections apply to providers that do conduct some financial service activity covered by the Act, but where the registration under the Act is used to create a misleading impression as to the extent to which it is providing financial services in New Zealand, providing financial services from New Zealand, or is regulated by New Zealand law, as identified in s 18A. That seems to me to be the focus, rather than the more technical question relating to whether the rudimentary activities qualify as financial services at all.
[46] So even though the facts demonstrate that FXBTG does technically undertake financial services, that does not seem to me to lead to the conclusion that the FMA’s decision should be overturned on appeal. What seems to me to be more important is whether the FMA’s decision under s 18B(2) is wrong. That question really turns on the other grounds of appeal addressed below.
Second ground of appeal: No false or misleading appearance
[47] FXBTG’s second ground of appeal challenges the FMA’s findings that it was necessary or desirable to deregister it in order to address a false or misleading
19 Ms Keil also relied on s 215 of the Contract and Commercial Law Act 2017 in support of the argument that relevant financial service activities occurred within New Zealand. I do not see this provision adds much given the territorial scope of the Act under s 8A.
appearance.20 For the reasons that I have outlined, this goes to the focus of ss 18A and 18B.
The FMA’s approach
[48] The false or misleading appearance contemplated by s 18A(a) relates to the extent to which the relevant provider provides or will provide financial services in or from New Zealand, or is or will be regulated by New Zealand law. In the letter finally advising of the FMA’s decision dated 29 June 2019 there is no analysis of the facts relevant to the s 18A(a) criteria. The reason for this is that the final letter primarily responds to the submissions advanced by to FXBTG on the earlier notice of intention to deregister dated 22 March 2019. That notice set out the FMA’s views on the nature of the business being undertaken by FXBTG and advised:
· FXBTG has previously made misleading claims about supervision, regulation and government accreditation on its websites. While the misleading statements were removed following our correspondence with FXBTG, we saw that a new statement in Chinese on ‘ as translated (by Google Translate) stated that FXBTG is a ‘New Zealand Government accredited financial service provider’ (copy attached).
In such circumstances, when a company is registered on the FSPR, we believe it is likely that the registration will create a misleading impression as to the extent that the entity provides financial services in New Zealand and is subject to regulation in New Zealand. We also believe that registration on the FSPR in such circumstances is likely to have the effect of damaging the integrity and reputation of New Zealand’s financial markets and New Zealand’s law and regulatory arrangements for regulating those markets.
[49] FXBTG’s submissions responding to the notice focused on the FMA’s conclusions that it was not undertaking financial services at all. It also drew upon authorities under the Fair Trading Act 1986 in relation to what amounted to false or misleading conduct.21 The only submission of significance in relation to the factual position was that there had been confusion in relation to translation, and that all changes required by the FMA were immediately made by FXBTG. Whilst the final letter of 24 June 2019 did not address that point, the recommendation leading to the letter addressed essentially maintained the view expressed in the earlier notice.
20 This includes the matters set out in paragraph (c)–(f) of the points of appeal dated 14 August 2019.
21 In its decision the FMA did not accept that those authorities were relevant. This is not challenged on appeal.
[50] On appeal Ms Keil relies on an internal harm assessment dated 10 September 2018 conducted by the FMA. This assessment concluded that the harm of FXBTG’s activities was minimal. She further submitted that in order to consider whether it was necessary or desirable to deregister the financial service provider under s 18B(2) the FMA needed to engage in a harm or proportionality assessment, and that the FMA had failed to show a good reason to close down FXBTG’s business. In response Mr May explained that the harm assessment was undertaken only in relation to an initial anonymous complaint received by the FMA, and that the approach advocated by FXBTG would amount to an unnecessary gloss on s 18A which would be inconsistent with the approach that had been advocated by the Court of Appeal in Vivier.22 He submitted it was not necessary for the FMA to prove likelihood of harm.
Analysis
[51] This ground of appeal concerns the legal requirements set out in ss 18A and 18B, and the scope of the discretion given to the FMA. In Vivier the Court of Appeal stated:23
[45] … If one breaks the inquiry under s 18B into the two logical stages identified by Nation J [in Excelsior Markets Ltd v Financial Markets Authority24], the following points may be observed:
(a)The first stage is to assess whether one of the grounds in s 18A is made out. That is, whether registration is misleading or damaging to financial markets. That requires an assessment, … Although in terms of s 18B(2) the FMA is only required to take into account s 18A, statutory powers must be used in accordance with their purpose, here stated to be to provide for deregistration in the circumstances envisaged by s 18A.25 It follows that a direction to deregister in the absence of either of the considerations in s 18A would be beyond the scope of the statutory provision.
(b)The second stage is to assess whether deregistration is necessary or desirable. That too requires an assessment based on the factors in s 18A and whether there is any mitigation. …
[52]And then later:
22 Financial Markets Authority v Vivier and Company Ltd, above n 4.
23 Financial Markets Authority v Vivier and Company Ltd, above n 4.
24 Excelsior Markets Ltd v Financial Markets Authority, above n 11.
25 AstraZeneca Ltd v Commerce Commission [2009] NZSC 92, [2010] 1 NZLR 297 at [29].
[61] … in acting under s 18B(2) the FMA must take into account the mandatory considerations in s 18A, to decide whether, at a minimum, registration will likely have the effects prescribed in that provision. Secondly, in doing so it may have regard to its expert knowledge and experience of financial markets in New Zealand and overseas. Thirdly, it is not required to have evidence specific to the conduct of the particular FSP if inferences as to effect can reasonably be drawn from generic information (such as the absence of any, or any material, financial services in or from its New Zealand place of business).
[53] Section 18B(2) accordingly requires the FMA to form opinions. It may exercise the powers where it considers it “necessary” or “desirable” to do so. Desirability is a lesser standard than necessity. Section 18A stipulates that the purpose of these powers concerns damage to the integrity of New Zealand’s financial markets or the regulation of them. Whilst s 18B(2) only requires the FMA to take s 18A into account, the FMA must still conclude that deregistration is necessary or desirable given the purposes that are to be achieved as set out in s 18A. This involves the FMA applying its experience and expertise.
[54] I see no error in the FMA’s assessment of the present case. The exercise of the power was properly directed to achieve the purpose set out in s 18A. It is apparent what kind of operation the sections are directed to. FXBTG’s registration seems to me to fall within the class of registration contemplated by Parliament in ss 18A and 18B. The financial services undertaken by FXBTG in New Zealand are almost entirely notional — a single person operating a computer from an apartment in Auckland. The clients and their investments are entirely overseas. FXBTG accepts that the New Zealand securities law does not substantively regulate what it does. The obvious question is why such a business would want to have a physical presence in New Zealand at all. The answer is that it does so to claim the reputation benefit of New Zealand registration. This is effectively confirmed in the affidavit of Xiaomin Li who said:
36. There are significant advantages to FXBTG in being located in New Zealand as it is the first financial market to open on each day, given its time zone. New Zealand is also socially and politically stable, and rates as the second highest nation in the world for being the least politically corrupt, behind Denmark by only 1 point (out of 100). New Zealand’s registered banks stability will also improve given recently proposed moves by the Reserve Bank to gradually raise bank capital requirements to lessen the risk of defaults in the banking system. Access to consumers for dispute resolution and the Courts will also improve with a focus by
the Ministry of Justice on increasing accessibility to justice. New Zealand is perfectly placed to promote its reputation for being a safe place from which to conduct a financial service business.
[55] The fact that the New Zealand markets open first does not seem to me to be relevant given that none of the relevant investments here are actually made on the New Zealand markets, and those who wish to trade on the international markets are quite capable of doing so at all hours of the day and night. Otherwise the paragraph overtly refers to the benefits of New Zealand’s good reputation. This illustrates that obtaining registration here is good for FXBTG’s reputation. Given the entirely notional connection with New Zealand, seeking to take advantage of that reputation by referring to it in its online material is misleading. Yet that is what FXBTG has done.
[56] Ms Keil contended that there was substance to FXBTG’s registration, including because its profit and loss statements showed that its business had grown substantially in the last three years with trading income rising from $50,000 in 2016 to $1.4 million in 2019. Expanding into New Zealand is said to be part of the growth plans. What the profit and loss statement actually shows, however, is that the $1.4 million in 2019 was attributed to what is called a “service fee”, and that it was offset by significant operating expenses including approximately $1 million in “marketing”. In the absence of any further explanation, this material does not suggest to me that there were financial services undertaken in Auckland of a different character to that described above. And given that there are no New Zealand investments or customers at all, the claimed future expansion into the New Zealand markets plans have little substance.
[57] I accept Mr May’s submission that the harm assessment conducted by the FMA related to a complaint that had been made to the FMA about FXBTG, rather than its operations more broadly. I also accept his submission that no additional harm assessment is required by the provisions. The word “otherwise” in s 18A(b) suggests that the misleading appearances referred to in s 18A(a) are seen by Parliament as inherently damaging to the integrity and reputation of New Zealand’s markets and the regulation of them. An additional harm assessment is not required.
[58]For these reasons I see no error in the decision reached by the FMA.
Conclusion
[59] Sections 18A and 18B of the Act were inserted to deal with entities who sought registration under the Act to artificially claim a reputational benefit by association with the financial services regime operated under New Zealand law. This case appears to me to be the classic situation the provisions were enacted to address. FXBTG technically engages in financial services within the meaning of the Act, but only in an entirely notional way. It has a single employee operating a computer in an apartment in Auckland, and on that basis it has represented it is regulated under New Zealand securities law. That creates a misleading impression.
[60] I accept that the FMA erred including that FXBTG was not technically engaged in financial services covered by the Act at all, but I nevertheless accept that it was right to conclude that s 18B applied, and that FXBTG should be deregistered.
[61]For those reasons the appeal is dismissed.
[62] The respondent is entitled to costs. If this cannot be agreed it may file a memorandum seeking costs within 20 working days, with any memorandum in response being provided 10 working days thereafter.
Cooke J
Solicitors:
Campbell Law, Auckland for Appellant
Luke Cunningham Clere, Wellington for Respondent
0
6
0