Introduction

In its supervisory capacity, Trustees Executors is obliged by law to notify the relevant regulator of actual or potential legislatively-defined breaches by itself as the supervisor or by the entities it supervises.  Such breaches could occur under applicable legislation, regulations derived therefrom, a governing document (eg., investment trust deed), or ancillary documents (eg., statement of investment policy and objectives, or SIPO).  Depending on which legislation applies to the case at hand, the regulator to report to could be either the Financial Markets Authority (FMA), or the Reserve Bank of New Zealand (RBNZ), or possibly both at the same time, or the Registrar of Retirement Villages (Registrar).  There are variations in the obligations to report and the consequential actions arising, depending upon the applicable legislation.  The table below provides a summary listing of the relevant sections in the legislation that cover reportable breaches.

Table 1: Breach reporting obligations of supervisors

​Self-reporting a supervisor’s own breaches

Under the Financial Markets Supervisors Act, the FMA is the regulating entity responsible for granting licenses for supervisors to operate under the Financial Markets Conduct Act, the Retirement Villages Act, and the Non-bank Deposit Takers Act, effectively functioning as the “supervisor of supervisors”.  A substantial part of the Financial Markets Supervisors Act, namely Subpart 2—Monitoring and enforcement, containing sections 25-43, is concerned with how the FMA oversees and enforces the compliance of supervisors with the terms and conditions of supervisory licenses it has granted them.  Penalties for gross license breaches can be severe, right up to cancellation of a supervisor’s license to operate (section 35), and imposition of heavy fines and investor compensation orders by the High Court (sections 41-43).  In less serious cases, the FMA’s intervention would more likely entail instructing the errant supervisor to draw up and implement a written remedial action plan on restoring compliance with its license (sections 27-29).  The FMA would then closely monitor the supervisor’s efforts to effect the action plan and issue additional directives as it saw fit.  

Section 26(1)(a) of the Act requires that a supervisor “must report” itself to the FMA if it believes that it has or may have breached its own license.  The principle grounds for self-reporting are listed in the Act as:

1. the licensee has, or may have, breached a licensee obligation;
2. a material change of circumstances has occurred, may have occurred, or is likely to occur in relation to the licensee;
3. the information on which the FMA based the decision to issue or vary the licence was, or may have been, wrong, misleading, or incomplete.

If a licensed supervisor like Trustees Executors came to believe that it had breached section 26(1)(a), it would consequently be obliged to report itself in writing to the FMA “as soon as practicable” thereafter.

Reporting breaches by supervised entities

Matters become more complicated when a supervisor is obliged to report to a regulator if a supervised entity has contravened or is likely to contravene its obligations under the relevant legislation (as discussed below), regulations, or governing documents in a material respect.   Both the supervisor and supervised entity are drawn into the processes that then follow.

Reporting breaches by debt issuers or registered schemes

If the supervised entity in breach is a debt issuer or a registered scheme, then the Financial Markets Conduct Act covers such matters under Subpart 3—Intervention in debt securities offered under regulated offer or registered schemes, Provisions assisting supervisor or FMA to intervene.  Subpart 3 provides that the supervisor has a “duty” to report the debt issuer or registered scheme to the FMA under either of the Act’s section 203 (contravention or possible contravention of issuer obligations in a material respect) or section 204 (serious financial problems such as risk of insolvency).  It should be noted that these sections do not require actual breach by the supervised entity to have already occurred before reporting by the supervisor becomes obligatory.  The mere likelihood or possibility of a serious or material breach is legally sufficient to compel the supervisor to act.

Reporting to the FMA under sections 203 or 204 is required from the supervisor “as soon as practicable”.  A range of interventions can then be triggered, such as the FMA issuing detailed written directions to the supervisor as to what is required of the supervisor and/or supervised entity in breach (Section 205), or either the supervisor or the FMA applying to the High Court for orders (Section 207).  Failure to comply with these orders or directions can lead to a supervisor or issuer of a debt security or registered scheme liable for substantial fines.  Sections 197 – 213 contained within Subpart 3 set out the options for enforcing remedy of breaches, including wind up of the errant issuer or scheme.  Depending on the scale of breaches reported under sections 203 and 204, the remedial reactions required could quickly escalate into highly complex activities on the part of the supervisor.

Reporting breaches by a non-bank deposit taker (NBDT)

If a breach has been committed by a debt issuer that is also classified as a non-bank deposit taker, then, in addition to the supervisor’s obligation to report it to the FMA under either section 203 or section 204 of the Financial Markets Conduct Act, the relevant legislation is the Non-bank Deposit Takers Act, with the RBNZ as regulator.  Under the NBDT Act’s heading Additional obligations of trustees to Bank, sections 44 - 46 are very broadly worded to capture even “suspected non-compliance by the licensed NBDT” (section 44).  For example, section 45 of the Act is written in sweeping language: “Every trustee must, as soon as practicable, report to the Bank if it has reasonable grounds to believe that a licensed NBDT is failing, has failed, or is likely to fail, to comply in a material respect with this Act or the regulations.”  Section 46 of the same Act is even wider in its scope of writing.  The language of these sections requires that the trustee “must” comply “at a time and in a manner specified by the Bank” (section 44), or “as soon as practicable” (sections 45 and 46).

All three sections provide that, “A trustee that breaches this section commits an offence and is liable on conviction to a level 1 penalty.”  It is evident that the Act provides strong incentives for trustees (meaning licensed supervisors as defined under the Financial Markets Conduct Act) to report breaches of sections 44-46 to the RBNZ.  Part 3, Monitoring and enforcement of the Act contains sections 47- 69 on the extensive powers of the RBNZ to act in respect of reported breaches, including a penalties regime.

Reporting breaches by a retirement village operator

A breach by an operator of a supervised retirement village falls under the Retirement Villages Act, of which the Registrar of Retirement Villages (“Registrar”) is the regulator.  The statutory supervisor, as the licensed supervisor is known under the Act, has wide powers to enforce obligations of retirement village operators, including authority to give the operator directions (section 43), and the right to apply for orders and injunctions from the High Court (sections 43A, 80-2).  Alternatively, the statutory supervisor can opt to report breaches by village operators directly to the Registrar for the latter to act upon, although this is not mandatory under the Act.  It appears presupposed that the statutory supervisor will do most of the heavy lifting with respect to dealing with breaches, as the Act simply requires that the supervisor “must … report annually to the Registrar and residents on the performance of its duties and the exercise of its powers” (section 42(c)).

The Registrar has powers over and above the supervisor’s, such as suspending the registration of the retirement village (section 18), which would prevent the operator from offering, advertising or entering into occupation right agreements (ORAs) with potential village residents while the suspension was in force.  Additionally, the Registrar can “authorise the statutory supervisor to make a public statement concerning the financial position, security of the interests of residents, or management of the retirement village” (section 44), which could be adverse for the village operator.  The statutory supervisor has limited liability for loss caused to other parties (including, by implication, the village operator) in respect of a section 44 statement made at the instigation of the Registrar (section 45).  Like the statutory supervisor, the Registrar can apply to the High Court for remedies and penalties, including fines (section 79).

Conclusions

The law concerning supervisors reporting legislative breaches either by themselves or their supervised entities to regulators imposes compelling incentives in favour of acting sooner rather than later, of speaking up rather than staying silent.  Imperative words like “must”, “duty” and “as soon as practicable” characterise the urgency and timeliness of actions expected of supervisors.  The legislative sections applicable are written to incorporate wide ambits and low thresholds for supervisors to respond to, encouraging the conservative approach of erring on the side of reporting at first discovery an actual or potential breach rather than waiting for more information or further developments.  The pressures on supervisors to report themselves are at least as great as those for reporting others.  This state of affairs is no doubt how the framers of the applicable legislation intended the breach reporting regime to operate.

“Trustees Executors as a licensed supervisor of many corporate entities is keenly aware of multiple breach reporting provisions to be found across relevant legislation,” said Corporate Trustee Services General Manager Matthew Band.   “We understand how breach reporting obligations apply directly to Trustees Executors in our own supervisory activities and that knowledge informs how we conduct our business at every level on a daily basis.  We also understand how these obligations operate in respect of the clients we supervise.  Trustees Executors strives to work very closely with our supervised clients to help reduce the likelihood of a material or serious breach occurring that we would be obliged by law to report to regulators.  Aiding our supervised clients to achieve consistent legal compliance and ongoing avoidance of committing reportable legislative breaches is part-and-parcel of the corporate risk management services we deliver as a professional supervisor,” said Matthew.

Matthew Band
General Manager, Corporate Trustee Services
+64 21 645 014