13.1In New Zealand, pecuniary penalties are generally imposed by a court. Along with Australia and, to a degree, the United States, New Zealand differs from some other countries in this regard. Where similarly large monetary penalties are provided for in other jurisdictions, there is sometimes provision for them to be imposed by the regulator itself, with subsequent court oversight on appeal. Section 46A of the Financial Markets Conduct Act 2013 introduces a process by which the Financial Markets Authority (FMA) can, in essence, impose penalties on defendants to pecuniary penalty actions. However, this can only happen with the consent of the defendant, and where the two parties have agreed on liability and the amount of the penalty. We discuss this further below, but for the most part, the New Zealand model is one of court imposition.
13.2Our model means that a judge must make a determination about liability and the amount of the penalty. The level of the penalty is set with open and due consideration of any aggravating or mitigating factors. Judicial imposition provides protection against possible abuse, or the appearance of abuse, of regulators’ powers. No one can level the criticism that an enforcement body is both complainant and judge of an alleged breach.
13.3The approach adopted in some countries, where regulators impose penalties and an appeal route is available, could result in savings here. Under such a model, it is likely that fewer cases would make it to court, with resultant savings in judge and court time, and lower costs for regulators and defendants in cases where the latter opts not to appeal. It may also be argued that such a model would have a greater deterrent effect. Regulators may be likely to impose penalties more frequently, since they would not have to weigh up the risks of taking a case to court.
13.4However, for the reasons set out in [13.2], we do not favour this model. The combined factors of discretion as to penalty level, very high maximum penalties and the relative novelty of pecuniary penalties means that court imposition is both desirable and warranted.
13.5A small number of substantial penalties in New Zealand are imposed by non-judicial bodies. Under the Gas Act 1992 and Electricity Industry Act 2010, variable pecuniary 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.
13.6Both panels undertake quasi-judicial functions by determining complaints and making orders, including for penalties and compensation. The Law Commission accepts that there may be an argument that the imposition of 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 effective oversight of the activity. This view met with some approval by submitters. The New Zealand Law Society, New Zealand Bar Association, Meredith Connell and the Parliamentary Counsel Office (Commercial Team) (PCO) all felt that the option could not be ruled out.
13.7As we note, however, this should be done extremely rarely. Such penalties should only be adopted where specialist knowledge is absolutely essential to making decisions on breach and liability; and/or where there is a particular and justified need for a fast and efficient enforcement system. In this context – where a body is tasked with imposing a potentially substantial penalty and must apply law to facts – it would be preferable to have a statutory requirement that the chair of the tribunal has legal expertise. Such models should also have an appeal and review process. The Commission has previously made recommendations about the appropriate powers and functions of administrative tribunals and that discussion is relevant to these bodies.
13.8Two New Zealand statutes provide for variable monetary penalties to be imposed by a regulator itself. The Overseas Investment Regulations 2005 provide for the chief executive of the regulating department to impose a penalty of up to $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” are imposed by the Commissioner of Inland Revenue. They can be sizeable, and require the exercise of discretion by the Commissioner 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.
13.9Under both these schemes, concern may be raised about the regulator being, in effect, 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 as to the level of the penalty in any given case. There may also be a perception that such penalties are used for revenue-gathering purposes. These concerns increase the need for appeal and review processes.
13.10We consider the provision under the Overseas Investment Regulations to be an anomaly. It is not repeated elsewhere in New Zealand legislation. While we anticipate that there may be a desire for enforcement bodies increasingly to have 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.