Chapter 13

Enforceable undertakings and settlements

13.12Section 46A of the Financial Markets Authority Act 2011 was introduced by the Financial Markets (Repeals and Amendments) Act 2013.260 The change will make it possible for the FMA to accept undertakings, which may include a requirement to pay the Crown an amount in lieu of a penalty. Section 46A(1)–(4) provides:
46A Undertaking may include requirements as to compensation or penalties
(1) An undertaking under section 46 may include—
(a) an undertaking to pay compensation to any person or otherwise take action to avoid, remedy, or mitigate any actual or likely adverse effects arising from a contravention, involvement in a contravention, or possible contravention, or involvement in a 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).
(3) If an undertaking referred to in subsection (1)(b) is given, the FMA must give notice of that undertaking on its Internet site (whether or not it gives notification of other undertakings given in relation to the same matter).
(4) The notice under subsection (3) must include—
(a) a statement of the amount that has been undertaken to be paid; and
(b) a brief description of the circumstances and nature of the alleged contravention to which the undertaking relates.

13.13Section 46A will enable the FMA to effectively “settle” with parties whom it would otherwise seek pecuniary penalties against. With the exception of this regime, it is not possible for any enforcement agency to settle with a defendant out of court, because all other pecuniary penalties must be imposed by a court.

13.14Enforcement bodies have frequently come to an agreement with defendants who have admitted liability as to what level of pecuniary penalty they think should be imposed. However, the parties must still seek court approval of the penalty. This has happened frequently under the Commerce Act 1986.261 The court, then, retains discretion as to the level of penalty. It is in no way bound by the penalty agreed to by the parties.

13.15The ability to propose an agreed penalty to the court in this way is considered valuable by both enforcement agencies and those subject to regulation. It is one of the considerable benefits of pecuniary penalty regimes (as opposed to criminal offences). Since the court has generally adopted the proposed penalty, the process results in greater certainty for the defendant, and saves substantially on costs for both parties.

13.16On one view, the process of having to obtain court approval of such an agreed penalty is cumbersome. Where a party is content to admit a breach and has settled on a penalty with the enforcement body, it can be argued that it is unnecessary to involve the court. The ability to enter into a formal settlement without the need for court sign-off would save court time, result in greater cost savings and give complete certainty to the party in breach.

13.17In essence, this is made possible by section 46A. From this perspective, such provisions may be desirable.

13.18On the other hand, there are some valid concerns about pecuniary penalty settlements taking place without court oversight. First, court oversight protects against any risk of innocent defendants feeling pressured into accepting liability to avoid the cost and risk of litigation. This echoes the traditional concerns about plea bargaining in the criminal context.262 It is now accepted that plea negotiations may usefully serve to prevent a contested criminal trial, but there are protections for the defendant on how these may be commenced and undertaken.263 Sentence negotiation – where a prosecutor and defendant agree on a proposed sentence in return for a guilty plea – is not permitted in New Zealand.264
13.19A second concern is that if settlements take place without court oversight, there will be too little public scrutiny of the penalties being imposed. The general public and victims of pecuniary penalty breaches may be concerned about well-resourced defendants negotiating low penalties with an enforcement body. Alternatively, there may be a risk of agencies pressuring defendants to accept higher penalties than are warranted on the facts. The more private nature of settlements may also give rise to a risk that penalties will be imposed inconsistently. Transparency not only helps ensure 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.265

13.20Thirdly, there is an argument that the novel nature of pecuniary penalties alone 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.

13.21While giving a regulatory body the ability to effectively penalise breach of their statute outside of court provides substantial benefits, the reasons just given mean that the potential for provisions such as section 46A to appear on the statute book causes us some concern.

Court approval of agreed penalties

13.22A related issue is how the courts should assess the level of agreed penalty put to them after an enforcement agency and other party have reached an agreement on liability. There has been recent Australian litigation on this issue.

13.23Australian Securities and Investments Commission v Ingleby266 arose from the scandal involving payments by the Australian Wheat Board to Iraq under the United Nation’s oil for food programme. Mr Ingleby was the Chief Financial Officer of the Australian Wheat Board. The Australian Securities and Investments Commission (ASIC) took pecuniary penalty proceedings against him for breaches of the Corporations Act 2001 (Cth), arising from his involvement in the scheme. ASIC and Mr Ingleby reached an agreement whereby they filed a statement of agreed facts with the court, Mr Ingleby admitted the breaches, and they proposed an agreed penalty of $40,000 plus a period of disqualification as a director for 15 months. The Trial Court determined that, in light of the content of the statement of agreed facts, the proposed penalty was too harsh. The Judge reduced the penalty to $10,000 and the period of disqualification to approximately four and a half months.
13.24On appeal, the Victorian Court of Appeal raised concerns about judicial approaches to agreed penalties. It found that the statement of agreed facts in that case had understated Mr Ingleby’s involvement in, and culpability for, the breaches. The statement was “less than a desirably sound basis upon which to reach important decisions about appropriate penalties,”267 and did “not place the Court in a position from which it [could] properly discharge its constitutional responsibilities”.268 It also questioned ASIC’s decision not to pursue Mr Ingleby for wilful breach of the Corporations Act, which the Court considered was “clearly open” to ASIC and would have led to a more substantial penalty.269 The Court of Appeal indicated that, had it not felt bound not to increase the agreed penalty, it would have done so.270

13.25The case highlights the concerns set out above about agreed penalties. They risk accurate detail of the breaches being suppressed by enforcement agencies and defendants in the interests of reaching a settlement. And, where settlements do come before the court, there is a risk that judges will not properly undertake their role in assessing for themselves the evidence, and coming to their own assessment of an appropriate penalty.

13.26These risks have implications for the integrity of regulatory systems as a whole and their ability to effectively deter non-compliance. We doubt that it is in any enforcement agency’s interest to limit the general deterrent effect of their regime by underplaying breach or under-sanctioning. However, pressure to understate conduct or agree to a lower penalty in the interests of reaching agreement may always be there.

13.27The Court in Ingleby itself notes the need to be pragmatic about the considerable benefits offered by the parties approaching the court with an agreed proposed penalty, and for similar reasons we do not consider that the practice should stop. However, the case highlights the need for agencies to act responsibly, for transparent processes and for the court to approach such settlements with due caution.

13.28The Court in Ingleby criticised any suggestion that it might presumptively adopt a proposed penalty. The Judges in that case disagreed with what they understood to be the Federal Court of Australia’s approach in two cases (NW Frozen Foods Pty Ltd v Australian Competition and Consumer Commission271 and Minister for Industry, Tourism and Resources v Mobil Oil Australia Pty Ltd)272 that, if a judge was satisfied that the proposed pecuniary penalties were within “an appropriate range”, the court should uphold them. The Judges in Ingleby instead argued that agreed penalties should be treated no differently to any other submission by the parties. As Hargrave AJA put it:273

When a court is faced with a negotiated settlement in a pecuniary penalty case, the joint submission of the parties as to an “agreed penalty” is an important factor to be considered by the court in performing its judicial role of fixing the appropriate penalty in the circumstances of the case. The court’s discretion in such cases should not, however, be fettered by a principle requiring imposition of the agreed penalty if it is within “the permissible range in all the circumstances”.

13.29Subsequently, a decision of the Federal Court of Australia, which is expressed as concurring with NW Frozen Foods and Mobil Oil, spelt out the Australian approach as follows:274

… the principles to be applied may be simply stated. First, the question of an appropriate penalty for a proven contempt or an established breach of a statutory prohibition is a matter for, and function of, the Courts in the exercise of judicial power. Secondly, … the role of the Court in addressing an agreed penalty is not to exercise an “appellate” role. … The role of the trial judge is to give such weight to an agreed penalty as is appropriate and to treat the joint submission as it is – a joint submission – to be considered as a factor, an important factor, in the exercise of judicial power of fixing the appropriate penalty in the circumstances of the particular case. … The role of the Court is to assess what it would do itself based on the facts … [and] to impose a penalty that is proportionate to the gravity of the contravening conduct. Much of the current debate about the appropriate approach has descended into a debate about which goes first – the Court assessing the penalty having regard to the agreed penalty or assessing whether the agreed penalty is within the appropriate range. For my part, that debate is distracting. It is distracting because it ignores the important role of the fundamental principles of sentencing that must be considered by a trial judge.

13.30New Zealand courts have adopted the NW Frozen Foods and Mobil Oil approach to agreed penalties. Rodney Hansen J’s approach in Commerce Commission v Alstom Holdings SA275 is often relied upon:

Finally, in discussing the general approach to fixing penalty, I acknowledge the submission that the task of the court in cases where penalty has been agreed between the parties is not to embark on its own enquiry of what would be an appropriate figure but to consider whether the proposed penalty is within the proper range (see the judgment of the Full Federal Court in NW Frozen Foods v Australian Competition and Consumer Commission (1996) 71 FCR 285). As noted by the Court in that case and by Hugh Williams J in Commerce Commission v Koppers, there is a significant public benefit when corporations acknowledge wrongdoing, thereby avoiding time-consuming and costly investigation and litigation. The Court should play its part in promoting such resolutions by accepting a penalty within the proposed range. A defendant should not be deterred from a negotiated resolution by fears that a settlement will be rejected on insubstantial grounds or because the proposed penalty does not precisely coincide with the penalty the Court might have imposed.

13.31We do not dispute this approach. As stated above, we agree that negotiated agreements have substantial advantages, and that defendants need an appropriate level of certainty about the process. However, in light of Ingleby, we emphasise the need for the court to scrutinise the material presented to it carefully, and to satisfy itself that the information is sufficient to determine whether the proposed penalty is appropriate.276

What does this mean for provisions such as section 46A?Top

13.32The Ingleby case heightens our concern about agreed penalties being imposed entirely without court oversight. We acknowledge that often both the regulator and defendant may prefer the negotiated route because of the certainty and cost savings it offers. However, we are uncomfortable with the potential for penalties to effectively be imposed by enforcement agents without court oversight of penalty quantum.

13.33In general, the Commission’s view is that the imposition of pecuniary penalties is rightly the role of the courts. Courts are best positioned to assess independently the appropriate penalty. In addition, developing an authoritative source of case law to assist both courts and parties to pecuniary penalty proceedings has clear benefits. We think, therefore, that provisions such as section 46A should only be included in statutes in very rare circumstances, where there is no chance of oppression of abuse of the procedure by the enforcement agency. This may be because the actors in the field are exclusively well-resourced to such an extent that there is no imbalance of power.

13.34If such a provision is to be employed, it must be accompanied by two protections. First, there should be a legislative requirement to publicise details of: (a) the circumstances and nature of the breach; and (b) the quantum of the compensation or payment. We note that this approach has been adopted in the Financial Markets Authority Act 2011 for section 46A.

13.35Secondly, enforcement bodies with such a power should make public their policy for approaching settlement negotiations with parties suspected of breach. This is reflected in Recommendation 11 of this Report.277 We would expect any enforcement agency would recognise and emphasise internally the need to act honestly and with complete propriety, fairness and in accordance with the highest professional standards.278
260Section 46A will come into force on 1 April 2017 or an earlier date appointed by Order in Council: see Financial Markets (Repeals and Amendments) Act 2013, s 68.
261See also Chief Executive, Department of Internal Affairs v Atkinson HC Christchurch CIV-2008-409-2391, 19 December 2008.
262See Law Commission Criminal Prosecution (NZLC R66, 2000) at ch 9.
263See Crown Law Office Solicitor-General’s Prosecution Guidelines (2013) at ch 18.
264At [18.7.3].
265C Noonan “Of Arsenic, Antitrust and Agreed Penalties for Price Fixing” (2006) 12 NZBLQ 253 at 267.
266Australian Securities and Investment Commission v Ingleby [2013] VSCA 49 (CA).
267At [73].
268At [75].
269At [96].
270Mr Ingleby, knowing that ASIC sought only to have the agreed penalty imposed, chose not to participate in the appeal. The Court of Appeal considered that he was entitled to assume that, unless he were first given the right to be heard, it could not increase the penalty (at [98]).
271NW Frozen Foods Pty Ltd v Australian Competition and Consumer Commission [1996] FCA 1134, (1996) 71 FCR 285 at 290–291 per Burchett and Kiefel JJ.
272Minister for Industry, Tourism and Resources v Mobil Oil Australia Pty Ltd [2004] FCAFC 72, (2004) ATPR 41-993.
273Australian Securities and Investments Commission v Ingleby, above n 266, at [102].
274See Director of the Fair Work Building Industry Inspectorate v Construction, Forestry, Mining and Energy Union [2013] FCA 1014 at [8].
275Commerce Commission v Alstom Holdings SA [2009] NZCCLR 22 (HC) at [18].
276Australian Securities and Investments Commission v Ingleby, above n 266, at [8].
277See ch 20.
278See for example Financial Markets Authority Model Litigant Policy <>.