Other elements of legislative design
7.2All of the civil pecuniary penalties covered in this review are imposed by the High Court. New Zealand, Australia and to a degree, the United States differ from many other common law countries in this regard. Where similarly large civil pecuniary penalties are provided for in other jurisdictions, there is often provision for them to be imposed by the regulator itself, with subsequent court oversight on appeal.
7.3The New Zealand model means that there is judicial oversight of their imposition and the ability for penalty levels to be set with open and due consideration of any aggravating or mitigating factors. Judicial imposition provides protection against possible abuses, or the appearance of abuse, of regulators’ powers. There can be no criticism that an enforcement body is both complainant and judge of an alleged breach.
7.4Savings might be obtained by regulator imposition of such penalties, with an appeal route to the court. Under such a model it is possible that fewer cases would make it to court, with resulting savings in judge and court time and lower costs for regulators and the accused in cases where the latter opts not to appeal. There may also be an argument that the deterrent effect of such a model would be greater as more penalties might be imposed where the regulator does not have to weigh up the risks of taking a case to court.
7.5However, for the reasons set out in paragraph 7.3 we are not attracted to this model. The combined factors of the discretion as to penalty level, very high maximum penalties and relative novelty of civil pecuniary penalties means that High Court imposition is both desirable and warranted.
7.6Notwithstanding the above, there are existing exceptions to the standard judicially imposed civil pecuniary penalties in New Zealand. Under the Gas Act 1992 and Electricity Industry Act 2010 variable civil penalties of a maximum of, respectively, $20,000 and $200,000 may be imposed by Rulings Panels. The panels are made up of members appointed for up to five years by the Minister. In both cases, the members must have the necessary knowledge, skills, and experience to sit on the panel. However, neither Act requires that any of the members should have legal experience.
7.7Both panels undertake quasi-judicial functions in determining complaints and deciding upon and issuing orders, including civil penalty and compensation orders, in relation to complaints. The imposition of civil pecuniary penalties by such bodies may in very rare circumstances be warranted because of the specialist nature of the field at hand: expert knowledge may be necessary for the effective oversight of the activity. However, in our view such a model should only be adopted where specialist knowledge is absolutely essential to the resolution of disputes and to decisions on breach and liability. Furthermore, tribunals exercising such a role would benefit from a statutory requirement for legal expertise. All are involved to some extent in applying standards to facts and all need to apply the principles of natural justice. Such a model should also be accompanied by an adequate appeal and review process. The Law Commission has previously written about the appropriate powers and functions of administrative tribunals and that discussion is relevant to these bodies.
7.8In two cases, variable civil penalties are imposed by the regulator itself. The Overseas Investment Regulations 2005 provide for the chief executive of the regulating department to impose a penalty of not more than $20,000 for the retrospective filing of a consent. In determining the amount of the penalty, the regulator must consider whether “requiring the applicant to pay that amount would be unduly harsh or oppressive given (a) the value of the consideration for the asset that was acquired under the relevant overseas investment transaction; or (b) the nature of, and the reasons for, the retrospective consent. Under the Tax Administration Act 1994, “shortfall penalties” can be sizeable and require the exercise of discretion by the Commissioner of Inland as to the errant taxpayer’s level of intent. A taxpayer is liable for a penalty of 20 per cent of the shortfall where they did not take reasonable care; 40 per cent where there is gross carelessness; 100 per cent where they take an “abusive tax position”; and 150 per cent where there is tax evasion.
7.9Under both these schemes there may be concern about the regulator being both complainant and judge. Such a concern may arise with any regulator-imposed penalty, but is exacerbated where the penalty is not a fixed one – that is where the regulator can exercise discretion about the level of the penalty in any given case. With such regimes, there may also be a perception that such penalties are used for revenue-gathering purposes. These concerns create an elevated need for adequate appeal and review processes.
7.10We consider the Overseas Investment Regulations and tax regime penalties to be anomalies. They are not repeated elsewhere in New Zealand legislation. And, while we anticipate that there may be a desire for enforcement bodies increasingly to be given the power to impose penalties themselves, practice suggests that these will be in the form of infringement offences. It may have been preferable, for example, for the Overseas Investment Regulations penalty to have been an infringement offence, and so to operate within the confines of the infringement offence procedure. Generally, we suggest that the imposition of variable monetary penalties by non-judicial bodies should be discouraged.
Q27Do you agree that the imposition of variable monetary penalties by non-judicial bodies should be discouraged?
Enforceable undertakings and settlements
7.11If enacted, the Financial Markets Conduct Bill will introduce a new s 46A to the Financial Markets Authority Act 2011. The change will make it possible for the Financial Markets Authority (FMA) to accept undertakings which may include requirements as to compensation or penalties. Draft s 46A provides:
(1) An undertaking under s 46 may include—
(a) an undertaking to pay compensation to any person or otherwise to take action to avoid, remedy, or mitigate any actual or likely adverse effects arising from a contravention or possible contravention of any provision of the financial markets legislation:
(b) an undertaking to pay to the FMA an amount in lieu of a pecuniary penalty.
(2) The FMA must ensure that each amount paid under subsection (1)(b) is paid into a Crown Bank Account (after deducting the FMA’s actual costs incurred in connection with the matter) …
This will enable the FMA effectively to “settle” with parties whom it would otherwise seek civil pecuniary penalties from. At present it is not expressly possible for any enforcement agency to settle with a defendant out of court because civil pecuniary penalties must be imposed by the High Court.
What happens in practice is that enforcement bodies come to an agreement as to the level of a civil pecuniary penalty with a party which has admitted a breach. The parties then go to Court for its approval of the recommended penalty. This has happened frequently under the Commerce Act 1986.
The Court then goes through a process of assessing the agreed penalty and deciding whether to make the requested order, or vary the quantum.
7.13On one view, this process is cumbersome. Where a party is content to admit a breach and s/he or it has settled on an agreed penalty with the enforcement body, there is an argument that it is unnecessary to involve the Court. The ability to enter into a formal settlement without the need for Court sign off will save costs for both the enforcement body and defendant. From this perspective, the proposed s 46A seems desirable.
7.14On the other hand, there may be concerns about civil pecuniary penalty settlements taking place behind closed doors. First, agreed penalties may be lower than those imposed by a Court because a discount is likely to be applied in recognition of the defendant’s cooperation. There may therefore be a risk of innocent defendants feeling pressured into accepting liability and agreeing to a penalty to avoid the risks of litigation and the possibility of a higher penalty. This echoes the traditional concerns about plea bargaining in the criminal context. There is now acceptance that plea negotiations may serve a useful purpose in preventing a contested criminal trial. However, there are protections for the defendant around how these may be commenced and undertaken. Furthermore, sentence negotiation – whereby a prosecutor and defendant agree on a proposed sentence in return for a guilty plea – is not permitted in New Zealand.
7.15A second concern is that if settlements are taking place behind closed doors there will be no public scrutiny of the penalties that are being imposed. The general public and victims of civil pecuniary penalty provision breaches may be concerned about well-resourced defendants negotiating low penalties with an enforcement body. The more private nature of settlements may also give rise to a risk that penalties will be imposed inconsistently. Transparency not only assists in ensuring that the power invested in the enforcement body is exercised in a legitimate manner, but also helps to uphold public confidence in the administration of justice.
7.16Thirdly, there is an argument that the novel nature of civil pecuniary penalties favours Court oversight of penalty setting. There are relatively few reported cases. Courts are still developing their approach to the imposition and setting of penalties. No penalties at all have been imposed under a number of the regimes. The development of a body of case law and principles is important for providing guidance to Courts, alerting the public to the boundaries and extent of their potential liability and to assisting those accused of breaches to make educated decisions about whether and how to defend themselves.
7.17There is a question, then, as to whether provisions such as the proposed s 46A are warranted. Alternatively, if they are to be employed, should there be protections around their use? For example, should any such provision be accompanied by a legislative requirement to publicise details of (a) the agreed circumstances and nature of the breach and (b) the quantum of the compensation or payment? This is achieved to some extent by draft s 46A(3), which provides “[i]f an undertaking referred to in sub-s (1)(b) is given, the FMA must give notice of that undertaking on its Internet site …” Also, should enforcement bodies with such a power make public their own policy for approaching settlement negotiations with accused parties?
Q28 Should enforcement agencies be able to “settle” with parties that they would otherwise seek to have civil pecuniary penalties imposed upon?
Q29 If so, should there be a requirement to publicise details of the settlement, including (a) the agreed circumstances and nature of the breach and (b) the quantum of the agreed penalty?
Q30 Should enforcement bodies with such a power make public their policy for approaching settlement negotiations?