FINANCIAL MARKETS AUTHORITY v AIA NEW ZEALAND LIMITED [2022] NZHC 2444

FINANCIAL MARKETS AUTHORITY v AIA NEW ZEALAND LIMITED [2022] NZHC 2444 [23 September2022]PUBLICATION OF THIS JUDGMENT OR ANY OF ITS SUBSTANCE ISEMBARGOED UNTIL 5:00PM ON THURSDAY, 29 SEPTEMBER 2022IN THE HIGH COURT OF NEW ZEALANDAUCKLAND REGISTRYI TE KŌTI MATUA O AOTEAROATĀMAKI MAKAURAU ROHECIV 2021-404-1222[2022] NZHC 2444UNDER The Financial Markets Conduct Act 2013BETWEEN FINANCIAL MARKETS AUTHORITYPlaintiffAND AIA NEW ZEALAND LIMITEDFirst DefendantAIA INTERNATIONAL LIMITEDSecond DefendantHearing: 3 February 2022Counsel: N F Flanagan and C M Fleming for the plaintiffS P Pope and B N White for the defendantsJudgment: 23 September 2022JUDGMENT OF ROBINSON JThis judgment was delivered by me on 23 September 2022 at 4:00pmpursuant to Rule 11.5 of the High Court RulesRegistrar/Deputy RegistrarSolicitors: Meredith Connell, AucklandRussell McVeagh, AucklandIntroduction [1]Background [5]Annual Review [11]Automated Policy Administration [12]Three Causes of Action [15]Summary [15]First Cause of Action – Passback Benefits [17]Second Cause of Action – Age Termination [24]Third Cause of Action – Inflation Adjustments [34]AIA's knowledge of the issues [45]Legal Principles [49]Court's approach to recommended penalties [49]The approach to fixing pecuniary penalties under the FMCA [51]Stage 1: The maximum penalty [54]Stage 2: The starting point [60]Section 492(a): The purposes of the FMCA [64]Section 492(b): Nature and extent of the contravention [68]Section 492(c): Nature and extent of any loss, damage or gains [71]Section 492(d): Compensation [79]Section 492(e): Circumstances in which contravention occurred [83]Section 492(h): Relationship of the parties to the transaction [84]Other relevant considerations [86]Assessment of starting point [98]Pecuniary penalties under other regimes [101]Stage 3: Adjustments to the starting point [106]Aggravating factors [107]Mitigating factors [108]Result [115]Introduction[1] The Financial Markets Authority (FMA) alleges that the defendants (together,AIA) have breached section 22 of the Financial Markets Conduct Act 2013 (FMCA).On 27 October 2021 FMA filed an Amended Statement of Claim (ASoC) seekingdeclaratory relief and a pecuniary penalty in respect of three causes of action.[2] On 28 October 2021 AIA filed a notice admitting all the facts and causes ofaction alleged. AIA accepts the Court should make the declarations and impose apecuniary penalty.[3] The FMA and AIA agree that a penalty of $700,000 is in order. They ask theCourt to impose a penalty of that amount. However, the parties also correctlyacknowledge that the amount of any penalty is ultimately a matter to be determinedby the Court. In assessing the proposed penalty, the Court must be satisfied that it iswithin an appropriate range taking into account the objectives of the FMCA and theparticular circumstances of the case.1[4] For the reasons set out below I am satisfied that the penalty proposed by FMAand AIA is appropriate.Background[5] AIA admits the FMA's claim in its entirety. They filed a common bundle ofdocuments but no other evidence. There is no agreed statement of facts, but counsel'ssubmissions also reflect the high level of agreement between the parties. As such, thesummary of relevant facts set out below is taken largely from the ASoC and counsel'ssubmissions.2[6] AIA is New Zealand's largest life insurance company and part of one of thelargest insurance groups in the world. It enters into contracts of insurance (policies)1 Financial Markets Authority v ANZ Bank New Zealand Limited [2021] NZHC 399 [FMA v ANZ]at [32], citing Commerce Commission v Air New Zealand Limited [2013] NZHC 1414, (2013) 13TCLR 618 at [27]. See also Commerce Commission v Alstom Holdings SA [2009] NZCCLR 22(HC) at [18]; and Commerce Commission v Kuehne + Nagel International AG [2014] NZHC 705at [21].2 Defined terms used in this judgment are taken from the ASoC.with individual or corporate customers. Policies can include a number of benefits ortypes of cover, for example, trauma, total disability, life cover or income protection.[7] Under each benefit the customer is insured for a particular amount which is thecustomer's "cover". The customer pays premiums for that cover, usually in monthlyinstalments. Each benefit is renewed annually on the anniversary of the date on whichAIA first issued the customer's policy (the Anniversary Date).[8] Unless either AIA or the customer cancel the benefit it renews annually untilthe particular termination date specified in the policy (Termination Date); or on anyother termination event such as death.[9] For some income protection policies the Termination Date was the date thecustomer reached an upper age limit (that is on their 65th or 70th birthday)(Attainment Date). For some others it was the Anniversary Date immediately after theAttainment Date (that is after the customer's 65th or 70th birthday) (Final AnniversaryDate).[10] After the Termination Date a policy benefit is "mature". That means it nolonger confers any rights or benefits on the customer, either for new claims or inrespect of ongoing payments for claims AIA accepted before the Termination Date. Italso means the customer is no longer obliged to pay premiums.Annual Review[11] Before each Anniversary Date AIA recalculates the customer's cover andpremium for each benefit. AIA then sends an anniversary letter to the customer settingout the cover and premiums for the next year, together with any amendments to thepolicy terms (Anniversary Letter). In these Anniversary Letters AIA represents to itscustomers that for the next year they have the cover and owe the premium in theamounts referred to in the Anniversary Letter; and that these have been calculated inaccordance with the terms of the customer's Policy.Automated Policy Administration[12] AIA uses a computer-based policy administration system. This storesinformation about customer policies and undertakes some automated actions in respectof them; for example, calculating premiums and cover, and providing a trigger forAnniversary Letters to be sent to customers.[13] AIA sent some Anniversary Letters that made false and/or misleadingrepresentations in connection with customer policies. AIA sent some of the lettersbefore and some after 1 April 2014 when s 22 of the FMCA came into force. Theletters sent after 1 April 2014 contravened s 22.[14] The parties agree that these contraventions arose inadvertently as a result ofprocess and systems errors. They also agree that only a very small proportion of AIA'scustomers were affected.Three Causes of ActionSummary[15] There are three causes of action. In summary:(a) First cause of action – Passback Benefits: Between 23 January 2013and 20 February 2015, AIA sent Anniversary Letters advisingapproximately 2800 customers that certain benefits had beenautomatically added to their policies (Passback Benefits) when in factthey had not.(b) Second Cause of Action – Age Termination: Since at least 2009 AIAsent Anniversary Letters to some customers making false and/ormisleading representations concerning the Termination Date of theirincome protection benefits. As a result of the representations in someof those letters, certain customers continued paying premiums aftertheir benefits had terminated. Other customers stopped receivingongoing payments to which they remained entitled. These issues arosebecause AIA's system did not in all instances distinguish correctlybetween policies that terminated on the Attainment Date and those thatterminated on the Final Anniversary Date.(c) Third Cause of Action – Inflation Adjustments: Between December2014 and October 2015 AIA made false and/or misleadingrepresentations to some customers that their cover and premiums hadbeen adjusted for inflation in accordance with their policy terms. Insome instances AIA miscalculated this inflation adjustment. As a resultthese customers paid higher premiums than their policy terms required.They also received more cover.[16] I deal with each cause of action in more detail below.First Cause of Action – Passback Benefits[17] A Passback Benefit is a change made to the terms of an existing policy whichenhances the customer's cover under it. Between 23 January 2013 and 20 February2015 AIA sent Anniversary Letters to customers holding trauma policies representingthat AIA had automatically added certain Passback Benefits to those policies(Passback Letters). The Passback Benefits related to cover for conditions such ascritical cancer, Alzheimer's disease, intensive care treatment and heart valvereplacement. AIA represented that the Passback Benefits applied retrospectively toclaimable events occurring after either 1 February 2012 or 12 November 2012.[18] In fact, approximately 2,800 customers whose trauma policies predated 1January 2003 did not have these Passback Benefits added automatically to their policy.But AIA's systems did not correctly distinguish between pre- and post-2003 traumapolicies when preparing and sending the Passback Letters. As a result, 2,800customers with policies predating 1 January 2003 received Passback Letters sayingthey had received Passback Benefits which they had not.[19] At least five of those 2,800 customers made claims for the Passback Benefitsdescribed in the Passback Letters. AIA wholly or partially declined on the basis thattheir policies did not include the Passback Benefits. This was contractually correctbut contrary to the representations set out in the Passback Letters.[20] Four of these five customers received at least one Passback Letter after theFMCA came into force on 1 April 2014. AIA would have paid those four customers acombined total of $125,414.55 in Passback Benefits had those benefits applied. Twoof these four Customers received at least one Passback Letter before making a claimfor Passback Benefits.[21] Since discovering this issue AIA has provided those customers the cover towhich they would have been entitled if the Passback Benefits had applied. AIA hasalso compensated those customers for the late payment. Moreover, AIA has extendedthe Passback Benefits to all customers holding the relevant trauma policies. So AIAhas effectively honoured the representations made in the Passback Letters.[22] However, there is no dispute that by issuing the Passback Letters dated on orafter 1 April 2014, AIA made false and/or misleading representations that:(a) customers were entitled to certain Passback Benefits under the relevantpolicies, in breach of s 22(d) of the FMCA; and(b) customers had the right to claim cover in relation to those PassbackBenefits, in breach of s 22(h) of the FMCA.[23] The parties agree that the Court should make declarations accordingly andimpose a pecuniary penalty.Second Cause of Action – Age Termination[24] The second cause of action relates to correspondence AIA sent to customerswhose income protection benefits were due to terminate in the following year, eitheron the customer's Attainment Date, or on the Final Anniversary Date.Incorrect Penultimate Anniversary Letters[25] For some customers, the last Anniversary Letter issued by AIA before theAttainment Date (Penultimate Anniversary Letter) wrongly represented that theirpolicies would continue in force until the Final Anniversary Date. In fact, the termsof those customers' policies provided that they each terminated on the customer'sAttainment Date.[26] By using these Penultimate Anniversary Letters, AIA wrongly represented tocustomers that after the Attainment Date and until the Final Anniversary Date: thepolicy benefits would continue to be in force; the Customer had cover under the policy;and the Customer was required to pay the annual premium stated.[27] Since 1 April 2014, when the FMCA came into force, AIA issued incorrect andmisleading Penultimate Anniversary Letters to at least 137 customers. As a result ofthe misrepresentation in those letters, those 137 customers paid a total of $184,272 inpremiums after their policies had terminated and their cover was no longer in force.3[28] AIA has returned these premiums to customers. AIA's review has alsoidentified that any claims made by these customers during the period between therelevant Attainment Date and the Final Anniversary Date have been met.[29] There is no dispute that by issuing the Penultimate Anniversary Letters datedon or after 1 April 2014, AIA made false and/or misleading representations:(a) that Customers had agreed to acquire cover under the relevant policiesuntil the Final Anniversary Dates of those policies, in breach of s 22(c)of the FMCA;(b) that Customers were entitled to certain benefits under the relevantpolicies until the Final Anniversary Dates of those policies, in breachof s 22(d) of the FMCA;(c) as to the price of those Policies, in breach of s 22(f) of the FMCA;3 At least 111 incorrect Penultimate Anniversary Letters were issued prior to 1 April 2014 as a resultof which customers paid premiums of $121,149 in respect of policies that had terminated.(d) that Customers had the right to Cover under the relevant Policies untilthe Final Anniversary Dates of those Policies, in breach of s 22(h) ofthe FMCA; or(e) that AIA had the right to charge premiums under the relevant Policiesuntil the Final Anniversary Dates of those Policies in breach of s 22(h)of the FMCA.[30] The parties agree that the Court should make declarations accordingly andimpose a pecuniary penalty.Cover Cessation Letters[31] Conversely, between 11 December 2015 and 2 December 2019 AIA sent lettersto three customers misrepresenting that their ongoing payments would cease on theAttainment Date (Cover Cessation Letters). In fact, pursuant to the terms of thosecustomers' policies, their benefits remained in force until the Final Anniversary Date.As a result, AIA underpaid these three customers a total of $87,173.02.4[32] AIA has remediated these customers and compensated them for the delayedpayment. However, AIA accepts that by issuing the Cover Cessation Letters on orafter 1 April 2014, AIA made false and/or misleading representations that Customersno longer had the right to claim or receive ongoing payments under the relevantPolicies, in breach of s 22(h) of the FMCA.[33] The parties agree that the Court should make declarations accordingly andimpose a pecuniary penalty.Third Cause of Action – Inflation AdjustmentsInflation Adjustments[34] For some insurance policies customers elect to have their cover adjustedannually for inflation. For customers who make that election, AIA incorporates the4 AIA also issued Cover Cessation Letters on 17 January 2014 and 24 January 2014 as a result ofwhich it underpaid benefits of $55,317.89.Consumer Price Index (CPI) increase into its annual recalculation of the customer'scover (Inflation Adjustment). The amount of a customer's cover is one of the factorsin a formula AIA uses to recalculate a Customer's premium annually. So, if theCustomer's cover incorporates an Inflation Adjustment, that adjustment will also bereflected in the recalculated premium.[35] Relevant policy documents set out that if a Customer elects to have an InflationAdjustment:(a) the Customer's cover will increase on each Anniversary Date by anamount equal to the CPI increase for the previous year; and(b) there will be a corresponding increase in the Customer's annualpremium.[36] Anniversary Letters sent to Customers who have elected an InflationAdjustment advise customers that their cover has been adjusted in line with the CPIincrease for that year. Also, that changes to premiums may be due to an InflationAdjustment. However, AIA does not otherwise inform Customers of the dollar valueof the Inflation Adjustment, or the proportion of any premium increase that isattributable to an Inflation Adjustment.Incorrect Inflation Adjustments[37] In December 2014 a change made by AIA caused its policy administrationsystem to apply the Inflation Adjustment incorrectly, rather than in accordance withthe terms of the customers' policies (CPI Error).[38] As a result of the CPI error, between December 2014 and October 2015 certaincustomers received Anniversary Letters which misrepresented that the amount ofcover and premium stated in the Anniversary Letters had been calculated inaccordance with the customer's policy and thus set by application of the CPI (IncorrectInflation Adjustment Notifications). Customers who received Incorrect InflationAdjustment Notifications had no way of knowing that the CPI Error had occurred andthat their cover and premiums had not been calculated in accordance with the terms oftheir Policy.[39] AIA became aware of the CPI Error in February 2015 and corrected the causeof the CPI Error in October 2015. However, in March 2018 AIA discovered that somecustomers impacted by the CPI Error may not have been remediated by the steps AIAtook in October 2015. For those customers, the original 2014 error had compounded.[40] Between March 2018 and March 2020 AIA reviewed in-force policies andlapsed policies to identify Customers who had not been properly remediated inOctober 2015. By May 2019, AIA had identified that a total of 520 in-force Policieshad been impacted by the CPI Error, 357 of which it had remediated in October 2015.AIA later identified that 92 lapsed Policies had also been impacted by the CPI Error.[41] AIA identified that a total of 239 customers impacted by the CPI Error had notbeen remediated by the remedies AIA applied in October 2015. For those customers,their cover and premiums had not been returned to the correct level. Between October2015 and 1 February 2020 these customers received Anniversary Letters recordingamounts of cover and premium that were not calculated in accordance with the termsof the customer's policy because of the CPI Error (Subsequent Incorrect InflationAdjustment Notifications).[42] These 239 customers were overcharged premiums approximately $21,606because of the CPI Error (an average of $90.40 per customer).[43] AIA has refunded these customers the overcharged premium. However, AIAaccepts that by issuing the Incorrect Inflation Adjustment Notifications and theSubsequent Inflation Adjustment Notifications, AIA made false and/or misleadingrepresentations:(a) as to price (being the premiums), in breach of s 22(f) of the FMCA;and/or(b) that AIA was entitled to charge the premiums specified in the InflationAdjustment Notifications, in breach of s 22(h) of the FMCA.[44] The parties agree that the Court should make declarations accordingly andimpose a pecuniary penalty.AIA's knowledge of the issues[45] AIA first identified:(a) the Passback Letters issues in around May 2019;(b) the Termination Date issues in around February 2011; and(c) the Inflation Adjustment issues in around February 2015.[46] In June 2018, the FMA and the Reserve Bank of New Zealand (RBNZ)commenced a joint review into the conduct and culture of (amongst others) lifeinsurance providers, including AIA (Conduct and Culture Review). During theConduct and Culture Review, AIA advised the FMA of the Passback Letters issue, theTermination Dates issue and the Inflation Adjustment issue.[47] Since around April 2019 AIA has actively engaged with the FMA on the issues,including the remediation of affected customers.[48] On or around 4 August 2020 AIA advised the FMA that it had completed itsinvestigations into and remediations of the Passback Letters issue and the InflationAdjustment issue. On or around 14 June 2021, AIA advised the FMA that it hadcompleted its investigations into and remediations of the Termination Date issue.Legal PrinciplesCourt's approach to recommended penalties[49] In FMA v ANZ Muir J noted the significant public interest in bringing aboutthe prompt and efficient resolution of penalty proceedings.5 Muir J referred toRodney Hanson J's judgment in Commerce Commission v Alstom Holdings SA:6Finally, in discussing the general approach to fixing penalty, I acknowledgethe submission that the task of the Court in cases where penalty has beenagreed between the parties is not to embark on its own enquiry of what wouldbe an appropriate figure but to consider whether the proposed penalty is in theproper range – see the judgment of the full Federal Court in NW Frozen Foodsv ACCC. As noted by the Court in that case and by Williams J in CommerceCommission v Koppers, there is a significant public benefit when corporationsacknowledge wrongdoing, thereby avoiding time-consuming and costlyinvestigation and litigation. The Court should play its part in promoting suchresolutions by accepting a penalty within the proposed range. A defendantshould not be deterred from a negotiated resolution by fears that a settlementwill be rejected on insubstantial grounds or because the proposed penalty doesnot precisely coincide with the penalty the Court might have imposed.[50] In assessing whether a proposed penalty is within the appropriate range, theCourt need not accept each step of the methodology proposed. It is the final figurethat matters.7The approach to fixing pecuniary penalties under the FMCA[51] Section 489 of the FMCA provides that the FMA may apply for pecuniarypenalty where a person has contravened a civil liability provision such as s 22.8Section 489 relevantly provides:489 When Court may make pecuniary penalty orders(1) The FMA may apply for a pecuniary order against a person under thisAct.5 FMA v ANZ, above n 1, at [30].6 Commerce Commission v Alstom Holdings, above n 1, at [18] (citations omitted). Rodney HansonJ's comments were endorsed by Allan J in Commerce Commission v New Zealand DiagnosticGroup Ltd HC Auckland CIV-2008-404-4321, 19 July 2010 at [45]–[46]; and again in CommerceCommission v Whirlpool SA HC Auckland CIV-2011-404-6392, 19 December 2011 at [15].7 FMA v ANZ, above n 1, at [32]; and Commerce Commission v Air New Zealand Ltd [2013] NZHC1414, (2013) 13 TCLR 618 at [27].8 Financial Markets Conduct Act 2013, s 485.(2) If the FMA applies for a pecuniary penalty order against a person underthis Act, the Court –(a) Must determine whether the person has contravened, or beeninvolved in a contravention of, a civil liability provision; and(b) Must make a declaration of contravention if it is satisfied that theperson has contravened, or been involved in a contravention of, acivil liability provision; and(c) May order the person to pay to the Crown a pecuniary penalty thatthe Court considers appropriate if it is satisfied that the person hascontravened, or been involved in a contravention of a civil liabilityprovision.[52] In FMA v ANZ Muir J held that the general approach to setting penalties underthe FMCA involves a three-stage test:9(a) first the Court determine the maximum penalty (in accordance with ss38(2) and 490 of the FMCA);(b) secondly the Court must set a starting point having regard to therelevant statutory criteria (which are set out at s 492 of the FMCA); and(c) finally, the Court should adjust that starting point by applying an upliftor a discount on the basis of circumstances personal to the individualdefendant.[53] I consider each stage in turn.Stage 1: The maximum penalty[54] Section 490(1) of the FMCA provides that the maximum amount of a pecuniarypenalty for a contravention of a civil liability provision such as s 22 by a corporatedefendant is the greater of:(a) the consideration for the transaction that constituted the contravention(if any); and9 FMA v ANZ, above n 1, at [37]. Muir J noted that this was also the approach taken when settingpenalties under the Securities Markets Act 1988 and the principles applied under the CommerceAct 1986.(b) if it can be readily ascertained, 3 times the amount of the gain made, orthe loss avoided, by the person who contravened the civil liabilityprovision; and(c) $1,000,000 in the case of a contravention, or involvement in acontravention, by an individual or $5,000,000 in any other case.[55] However, section 506 provides that "no person is liable to more than 1pecuniary penalty order for the same conduct". So, if several breaches arise from thesame conduct, the maximum penalty will be that which applies to a single breach.[56] The parties agree that s 490(1)(c) applies in this case, so the maximum penaltyfor a single contravention of s 22 is $5,000,000. However, the parties disagree as tohow s 490(1)(c) and s 506 of the FMCA apply together in this case. Mr Flanagan forthe FMA submits there were three separate breaches and as such the maximum penaltyshould be $15,000,000. Counsel submits that although AIA's breaches were allunderpinned by a disconnect between the relevant customers' policy terms and AIA'spolicy administration systems, nevertheless there were three distinct systems failureswith distinct causes and effects. He says that although the breaches overlapped in timethis was not necessarily because they were related in any way (beyond being the resultof AIA's generally inadequate systems and processes).[57] On the other hand, Ms Pope for AIA relies on FMA v ANZ in which the Courtfound that although there were two breaches of the FMCA the starting point should berealistically assessed against the maximum penalty for a single breach.10 The Courtheld (and the parties agreed) that was appropriate because the two contraventionsresulted from similar deficiencies in ANZ's processes and systems and occurred oversubstantially the same period.[58] On the material before me I agree with Ms Pope that the Court's reasoning inFMA v ANZ applies. The parties agree that AIA's contraventions arose out of systemissues that led it to send Anniversary Letters containing incorrect informationconcerning a customer's cover and/or premiums. The timeframes overlapped.10 At [42].Beyond that, there is insufficient evidence before me to resolve any dispute there maybe as to whether or not those contraventions arose out of "the same conduct" for thepurposes of s 506.[59] In reaching this conclusion, I also note the FMA's submission (albeit in relationto setting the starting point) that the appropriate approach is to assess one penalty intotality, comparing AIA's conduct overall with that in ANZ overall. I agree. As such,whether the maximum penalty in the present case is $5,000,000 or $15,000,000 willnot ultimately be determinative. The Court's assessment of what constitutes "the sameconduct" for the purposes of s 506 should be left for a case in which that is a materialissue in dispute between the parties and relevant evidence is available to enable theCourt to resolve that dispute.Stage 2: The starting point[60] In FMA v ANZ the Court adopted a starting point of $400,000, which was8 per cent of the $5,000,000 maximum.11[61] In the present case the FMA submits that a starting point of $1,000,000 -$1,200,000 million is appropriate. Counsel for AIA submits that a starting point of$800,000 - $1,200,000 is appropriate, taking into account the $400,000 starting pointin FMA v ANZ.[62] For the reasons set out below I find that a starting point of $1,000,000 isappropriate. That is 20% of a maximum penalty of $5,000,000. In my view is anappropriate relativity to the $400,000 starting point adopted in FMA v ANZ.12[63] When setting the appropriate starting point the Court must have regard to "allrelevant matters", including the statutory criteria set out at s 492 of the FMCA.13 Aswell as the statutory criteria, in FMA v ANZ the Court also took into account both11 FMA v ANZ, above n 1, at [85].12 A $1,000,000 starting point would be 6.67% of a $15,000,000 maximum. That would be too low.Conversely, 20% of a $15,000,000 maximum would give a starting point of $3,000,000. Thatwould be too high.13 Financial Markets Conduct Act 2013, s 492.deterrence and ANZ's knowledge of the breaches and the circumstances of its self-report.Section 492(a): The purposes of the FMCA[64] Section 492(a) requires the Court to take into account the purposes of theFMCA when determining the appropriate penalty. These are set out in ss 3 and 4 ofthe FMCA. Counsel submits that the following purposes are particularly relevant:(a) promoting the confident and informed participation of consumers infinancial markets;14(b) promoting and facilitating the development of fair, efficient andtransparent financial markets;15(c) providing for accurate and understandable information to be providedto persons to assist them to make decisions about financial products orfinancial services;16 and(d) ensuring that appropriate governance arrangements apply allowing foreffective monitoring of financial products and services.17[65] FMA submits that AIA's conduct undermined the first three of these purposesbut accepts that this was no more (or less) so than will be the case with most breachesof s 22. It accepts that AIA's size and the nature of its products increase the risk ofdamage to the reputation of New Zealand's insurance market, and therefore theconfident and informed participation of consumers in the market. However, FMAaccepts that only seven customers had claims declined as a result of the breaches.[66] AIA accepts that any contravention of s 22 of the FMCA may undermineconfidence in the financial markets. However, AIA submits that the issues arising in14 Section 3(a).15 Section 3(b).16 Section 4(a).17 Section 4(b).this case are not likely to undermine public confidence and the facilitation of fair,efficient and transparent financial markets in any substantial way.[67] I agree that AIA's conduct has undermined these statutory purposes as anybreach of s 22 necessarily will here. AIA told some customers that Passback wouldbe automatically added to their policies, but they were not. AIA changed somecustomers premiums for policies after they had been terminated. A few customers –seven after 1 April 2014 – were declined cover to which they were entitled.Section 492(b): Nature and extent of the contravention[68] AIA's breaches (like ANZ's) arose inadvertently and as a result of system andprocess errors. But FMA submits that ANZ's contravention was more limited. ANZ'sbreaches resulted from two similar system deficiencies and affected 307 customerswho were overcharged (on average) $648.60 each.18 On the other hand, since 1 April2014 AIA's breaches affected 383 of AIA's customers who were overchargedpremiums or underpaid cover since 1 April 2014. The average financial harm percustomer was $1,092.60, but seven of these 383 customers were underpaid cover inamounts between $19,104.36 and $46,044. This would have been significant for thosecustomers and is an aggravating factor. On the other hand, the 239 customers whowere overcharged premium as a result of the CPI Error paid additional premiums of$90.40 each as a result but they also received additional cover. That is less significant.[69] I agree with counsel for AIA it is relevant that only a very small percentage ofpolicy holders have been affected. As Muir J held in FMA v ANZ this means that theproblem may have been less likely to be identified earlier. Also, for the overwhelmingmajority of AIA's policy holders the systems proved sufficiently robust.19[70] Counsel for AIA points out that FMA v ANZ involved inadvertently sellingpolicies that provided no benefit to customers, either because they were alreadycovered or were ineligible for cover. Conversely, AIA's customers still received somebenefit under their policy, albeit that they initially received less than their entitlement18 FMA v ANZ, above n 1, at [54].19 At [59].or paid more for it. Overall, I am not convinced that is a relevant distinction. It mayapply to the 239 customers who were overcharged approximately $90.00 each but forCPI adjusted cover. It does not apply to the seven customers who were underpaidbetween $19,104 and $46,044 in cover.Section 492(c): Nature and extent of any loss, damage or gains[71] 383 customers were financially impacted by AIA's contraventions in the periodafter the FMA came into force on 1 April 2014.[72] The total financial harm arising from each issue was as follows:(a) Passback Letters: Four customers who received Passback Lettersafter 1 April 2014 initially had claims declined for Benefits thePassback Letters represented they would receive. The four claimsranged between $26,882.05 and $36,052.68 and were for a total of$125,414.55. Those claims have since been met.(b) Termination Date Issues: Since 1 April 2014:(i) AIA underpaid three customers a total of around $87,173.02 inincome protection payments. The underpayments were for$19,104.36 (disability income protection cover), $22,024.66(disability income cover), and $46,044 (income protectioncover); and(ii) 137 customers overpaid $184,272 in premiums after theirpolicies had terminated (or $1,345 each on average).(c) CPI Error Issues: AIA overcharged around 239 customers a total of$21,606.33 in premiums ($90.40 each on average) because of the CPIerror which first arose in December 2014.[73] The average financial harm per customer in this case ($1,092.60) is larger thanin FMA v ANZ ($648.60). AIA submits that this reflects the nature of its insuranceproducts; and also, that for seven customers their loss relates not to overchargedpremiums but to significant benefit payments to which they were entitled (or, in thecase of Passback Benefits, had been told they were entitled).[74] AIA also acknowledges that Passback Letters were sent to 2,800 customers,not just the four customers that made claims for Passback Benefits. Although thosecustomers did not suffer direct financial harm, AIA responsibly acknowledges that itis appropriate for the Court to have regard to this group of customers in assessing theextent of customer impact.[75] The FMA submits that for some customers AIA's conduct will likely havecaused emotional harm as well as direct financial harm, particularly those fewcustomers who were declined cover or whose cover ceased prematurely. Thosecustomers were declined disability, income replacement and other health-related coverwhich is only available in inherently stressful circumstances. The wrongfuldeclinature or premature cessation of cover would exacerbate that stress. And thosefour customers who were denied cover for Passback Benefits they were told theywould receive were making decisions in relation to angioplasty.[76] I agree with the FMA that these are aggravating factors. For these customers,the harm suffered was worse than that suffered by the customers in FMA v ANZ, whowere charged premiums for Benefits they did not need or to which they were neverentitled.[77] On the other hand, the damage caused by the CPI adjustment issue was lessserious than in ANZ. 239 customers paid a total of $21,606.33 in extra premiums.This was outside scope of policy, but those customers also received extra cover.Nevertheless, the increased premiums and increased cover were outside the scope ofthose customers' contractual arrangements with AIA, and to that extent the customerswere misled.[78] In terms of timeframe, I accept AIA's submission that the relevant time periodsin this case are significantly shorter than the period that applied in FMA v ANZ.Section 492(d): Compensation[79] AIA has fully investigated and successfully remediated all of the problems.The FMA acknowledges that AIA should be given substantial credit for its significantinvestment and comprehensive approach to remediation and investing significantresources into it. In particular, it should be noted that AIA has paid out on the claimedPassback Benefits even though it did not have any contractual obligation to do so.[80] The FMA nevertheless takes issue with some of the delay in the remediationprocess. It points out that in FMA v ANZ, ANZ had completed its remediation processwithin two - three years of discovering the relevant issues. In the present case, AIAdid not complete remediation for all of the termination date issues until more than tenyears after it discovered them, and six years after the commencement of Part 2 of theFMCA. AIA took more than five years to remediate all customers effected by the CPIadjustment error.[81] FMA says this delay illustrates the extent of AIA's systems failures. AIAdisagrees. AIA says its remediation process was more thorough and complex thanANZ's so took more time.[82] The evidence before me does not permit a meaningful comparison of therelative complexity of ANZ's and AIA's remediation process. In any event, I agreewith the parties that AIA is entitled to a substantial credit for its thorough and completeremediation process which included compensating customers for delays inremediation as well as for the original breach.Section 492(e): Circumstances in which contravention occurred[83] As noted, the contraventions arose out of process and system deficiencies. AIAresponsibly acknowledges that these system failures should not have occurred andshould have been remedied more promptly. AIA has now made significant investmentto ensure these issues do not reoccur. FMA accept the improvements AIA has madeto its systems and culture to ensure future compliance. These improvements can betaken into account in setting the starting point.Section 492(h): Relationship of the parties to the transaction[84] FMA submits that the insurer/customer relationship between the parties is anaggravating factor in this case. There is merit in that submission. AIA is a majorinsurer. Its contraventions went to the essential scope of cover and amount ofpremiums. These are essential terms in any insurance contract.[85] AIA responsibly acknowledges that an insurer's customers are entitled to trustthat the insurer will: accurately calculate and communicate above cover andpremiums; fix any errors promptly; and stop collecting premiums when policiesterminate. AIA also accepts that its customers should be able to rely on the robustnessof their insurer's systems.Other relevant considerations[86] As in FMA v ANZ the FMA identifies two other relevant considerations inaddition to those identified expressly in s 492. These are deterrence and AIA'sknowledge of the breaches and the circumstances of its self-report.Deterrence[87] In FMA v ANZ Muir J made clear that in the context of pecuniary penaltiesdeterrence will always be a relevant consideration and perhaps "the overridingobjective".20[88] FMA refers to the explanatory note to the Financial Markets Conduct Bill 2011recording that "the level of pecuniary penalties needs to be set at a significantly highlevel to deter non-compliance, encourage voluntary compliance, and punish non-compliance".21[89] Deterrence can be both specific (in relation to particular defendants) andgeneral (in relation to other market participants). The relevance of each will dependon the facts of each case.20 At [45], citing Department of Internal Affairs v Ping An Finance (Group) New Zealand Co Ltd,above n 12.21 Financial Markets Conduct Bill 2011 (342 – 1) (Explanatory note) at 39-40.[90] There is no particular need for specific deterrence in this case. AIA's breacheswere inadvertent, and its remediation process was thorough. Counsel advises therehave also been relevant organisational improvements that will help ensure furthercompliance.[91] The parties agree that general deterrence is relevant. Counsel for AIA submitsthat the penalty does not need to be set at a level that deters other market participantsfrom engaging in intentional conduct that breaches the FMCA, because AIA's ownconduct was unintentional. I accept that submission as far as it goes; but I agree withcounsel for the FMA that where breaches arise from deficient processes or systems thepenalty should deter other market participants from risking similar deficiencies.Knowledge of the breaches and circumstances of any self-report[92] AIA first identified:(a) the Passback Letters issue in around May 2019;(b) the Termination Date issues in February 2011; and(c) the CPI Error in February 2015.[93] In June 2018 the FMA and the Reserve Bank of New Zealand (RBNZ)commenced a joint review into the conduct and culture of life insurance providers,including AIA (Conduct and Culture Review). It was during this Conduct and CultureReview that AIA advised the FMA of the relevant issue giving rise to this proceeding.[94] The FMA submits that, with the exception of the Passback Letters issue, alengthy period passed between AIA learning of the relevant breaches and reportingthem to FMA. Moreover, FMA submits it is relevant that AIA only reported theseissues in response to direct questions from the FMA. So its self-reporting was notentirely voluntary.[95] AIA disagrees. It says its response to the regulators Conduct and CultureReview in 2018 was thorough and led it to identify that its earlier attempts to remediatethe Termination Date issues and the CPI Error issues had not been entirely successful.This is why AIA reported on those issues to the FMA in its response to the Conductand Culture Review. Moreover, AIA only became aware of the Passback Benefitsissue during the course of the Conduct and Culture Review.[96] Once again, the relatively limited evidence before the Court makes it difficultto fully assess these competing submissions. However, I accept AIA's submission thatits reporting is in contrast to FMA v ANZ where ANZ was aware of the relevant issuesfor over a year before reporting them to the FMA; and did not report them during theConduct and Culture Review despite two requests by the FMA to disclose suchissues.22[97] I also tend to agree with counsel for AIA that regulator expectations in relationto self-reporting have developed significantly since 2011 when the Termination Dateissues first arose. The Conduct and Culture Review in 2018 arose out of the AustralianRoyal Commission into Misconduct in the Banking, Superannuation FinancialServices Industry. As such it is important to avoid hindsight when considering thetiming of self-reporting in the context of assessing pecuniary penalties.Assessment of starting point[98] Although FMA v ANZ is the only direct comparator, it is a particularly helpfulcomparator due to its substantial similarities with the present case. In both cases:(a) The issues arose out of unintentional system and process errors.(b) Only a very small proportion of customers suffered financial loss.(c) The breaches were self-reported (noting the differences in [93] above).22 FMA v ANZ, above n 1, at [66].(d) ANZ and AIA both completed extensive remediation programmes andsystems upgrade to ensure the errors did not reoccur. For its part AIApaid Passback Benefits to customers to whom it was not contractuallyobliged to pay.(e) Both defendants are large corporates for whom deterrent penalties areappropriate to ensure proper investment in compliance, but specificdeterrence is not a factor.[99] In terms of an overall comparison with FMA v ANZ, FMA submits that astarting point of $1,000,000 - $1,200,000 is appropriate (being 2.5 - 3 x the $400,000the starting point imposed in FMA v ANZ). AIA submits that a starting point of 2-3 xhigher than the starting point in FMA v ANZ is appropriate ($800,000 - $1,200,000.)[100] I agree that this is an appropriate range and I set a starting point of $1,000,000.That is 2.5 x the starting point imposed in FMA v ANZ. In doing so I take into accountthe following points by way of comparison with FMA v ANZ:(a) The breaches in both proceedings were inadvertent and arose as a resultof systems and process deficiencies that appear to have been difficultto detect.(b) As stated above,23 as the facts were presented in this case, I agree withthe parties it is appropriate to assess one penalty in totality comparingAIA's conduct overall with that of ANZ overall. However, as AIAacknowledges, the three issues in this case have less in common thanthe two issues in FMA v ANZ.(c) The extent of the loss or damage to customers in this case was greaterthan in FMA v ANZ. Seven customers in particular were underpaidbetween (approximately) $19,000 and $46,000.23 At [59].(d) AIA and ANZ both fully remediated their customers, but it took AIAlonger to do so. AIA says that is because its remediation process wasmore complex. That may be so. This may also reflect the nature ofAIA's process and systems deficiencies. In any event, customers weregenerally out-of-pocket for longer.(e) Total losses to consumers in this case are a little over double those inANZ. ANZ overcharged effected customers a total of $199,120.76 asresult of its error.24 AIA's customers were overcharged $413,465.57.(f) More AIA customers were directly affected: 383 compared to 307 inANZ. 2800 misleading Passback Letters were sent between 23 January2013 and 20 February 2015, although only five customers made claimsthat were wholly or partially declined on the basis that their policies didnot include the Passback Benefits.25(g) In the present case some customers were denied cover that was due tothem, particularly in relation to Termination Date issues.(h) I accept the FMA's submission that customers who were declined coverto which they were entitled (in the case of the Termination Date issues)or to which they had been told they were entitled (in the case of thePassback Letters) would have suffered this harm at an inherentlydifficult time in their lives; that is, when they were making claims undertrauma, disability or income replacement policy, or receiving ongoingpayments in respect of income replacement policies.Pecuniary penalties under other regimes[101] The FMA suggest that in assessing the reasonableness of a proposed startingpoint the Court may be assisted by the starting points adopted in cases involvingsimilar conduct in breach of the Fair Trading Act 1986 (FTA); and breaches of New24 FMA v ANZ, above n 1, at [54].25 It is unclear how many of those letters were sent after part 2 of the FMCA came into force on 1April 2014.Zealand's anti-money laundering regime established under the Anti-MoneyLaundering and Countering Financing of Terrorism Act 2009 (AML-CFT Act).[102] In FMA v ANZ Muir J referred to three District Court sentencing decisionsinvolving breaches of the FTA by telecommunications companies.26 Each of thesecases dealt with system generated communications misrepresenting to customers whohad terminated their accounts part way through the month that they were obliged tomake a full monthly payment. In fact, adjustments were necessary to ensure customersonly paid until the date of termination.[103] Although Muir J agreed with the FMA that these cases could be usefullyconsidered, he promptly distinguished them. In those cases the problems weresubstantially more widespread (between 5,951 and 72,163 customers were affected).As such the opportunities for the defendants immediately to identify the problem weresignificantly greater than in ANZ's case where so few of its relevant customers hadbeen affected.27[104] There are other important differences. The breaches of the FMCA generallygive rise to civil liability while a breach of the FTA is a criminal offence. Moreover,the maximum pecuniary penalty for a corporate defendant in breach of the FMCA($5,000,000) is considerably higher than the maximum penalty for breach of the FTA($600,000). Parliament increased the maximum penalty for breaching the FTA from$200,000 to $600,000 in June 2014, shortly after the commencement of the FMCA. Iaccept the FMA's submission this tends to suggest that Parliament intended forpenalties under the FMCA to be higher than fines available under the FTA.26 FMA v ANZ, above n 1, at [77], citing Commerce Commission v Spark New Zealand Trading Ltd[2019] NZDC 7801; Commerce Commission v Vodafone New Zealand Ltd [2019] NZDC 15705;and Commerce Commission v CallPlus Services Ltd [2020] NZDC 2655.27 At [78].[105] FMA also refer me to pecuniary penalties imposed in recent cases involvingbreaches of the AML – CFT Act.28 Muir J considered those cases in FMA v ANZ.29Unsurprisingly, these cases demonstrate that the quantum of a pecuniary penalty as aproportion of the statutory maximum will reflect the seriousness of the breach and theextent to which it is deliberate or inadvertent. Beyond that, I do not consider thesecases are particularly helpful. The AML – CFT Act establishes a different regime thatis directed at different misconduct. The categorisation of that misconduct intodifferent bands of culpability for the purposes of assessing the starting point withreference to the maximum penalty may assist in other AML – CFT Act cases, but nothere.Stage 3: Adjustments to the starting point[106] Having identified an appropriate starting point of $1,000,000 I must adjust thathaving regard to factors specific to AIA.Aggravating factors[107] FMA acknowledges there are no aggravating factors specific to AIA. I agree.In particular I note that AIA has not previously been found to have acted in breach ofthe FMCA.Mitigating factors[108] FMA accepts that AIA's admissions were made at the first opportunity and thatAIA has cooperated fully throughout the FMA's investigation. FMA also accepts thatAIA has made substantial changes to prevent similar breaches recurring. And AIA hasfully remediated all affected customers and compensated them for delays.[109] FMA submits that discrete discounts should be applied for each stage of AIA'scooperation, that is: self-reporting; cooperation during the investigations; and28 See Department of Internal Affairs v Ping An Finance (Group) New Zealand Co Ltd, above n 12.See also Department of Internal Affairs v Jin Yuan Finance Ltd [2019] NZHC 2510; Departmentof Internal Affairs v OTT Trading Group Ltd [2020] NZHC 1663; Department of Internal Affairsv Qian Duoduo Ltd [2018] NZHC 1887; and Reserve Bank of New Zealand v TSB Bank Ltd [2021]NZHC 2241.29 FMA v ANZ, above n 1, at [80]. FMA v ANZ predated Reserve Bank of New Zealand v TSB BankLtd.admissions. FMA says this is consistent with the purpose of the FMCA to "ensure that'appropriate governance arrangements apply', 'that allow for effective monitoring' "and reduce governance risk.30[110] Counsel for AIA submits that the pecuniary penalty should recognise thebenefit of avoiding the costs and risks of a full hearing. I agree.[111] AIA and FMA agree that the total discount should be 30% comprising:(a) 5% for self-reporting;(b) 5% for cooperation (during the investigation); and(c) 20% for early admission.[112] I am prepared to proceed on that basis. In doing so, I note that in Reserve Bankof New Zealand v TSB Bank Ltd Mallon J considered that the appropriate discount forthe defendant's cooperation was not less than 25%, and higher than the 20% discountto which the parties had agreed.31[113] As noted at the outset, both parties recommend a final penalty of $700,000.For all the reasons set out above I accept that as being within the proper range.[114] I also note AIA's consent to the various declarations FMA seeks.Result[115] I make declarations that AIA:(a) contravened s 22(d) and/or (h) of the FMCA by issuing the PassbackLetters dated on or after 1 April 2014;30 FMA v ANZ, above n 1, at [69]. There Muir J emphasised this purpose in finding that ANZ's delayin self-reporting was an aggravating feature of its breaches, notwithstanding its subsequent co-operation.31 Reserve Bank of New Zealand v TSB Bank Ltd, above n 30, at [45]-[56], [78], [96] and [104].(b) contravened s 22(c), (d), (f), and/or (h) of the FMCA by issuing thePenultimate Anniversary Letters;(c) contravened s 22(h) of the FMCA by issuing the Cover CessationLetters; and(d) contravened s 22(f) and/or (h) of the FMCA by issuing the IncorrectInflation Adjustment Notification.[116] I impose a penalty of $700,000 on AIA for its contraventions of s 22 of theFMCA as identified.[117] I make an order under s 493 of the Act that the penalty be applied first to theFMA's costs in bringing this proceeding.____________________________Robinson J