FINANCIAL MARKETS AUTHORITY v VERO INSURANCE NEW ZEALAND LIMITED [2023] NZHC 2837

FINANCIAL MARKETS AUTHORITY v VERO INSURANCE NEW ZEALAND LIMITED [2023] NZHC2837 [10 October 2023]IN THE HIGH COURT OF NEW ZEALANDAUCKLAND REGISTRYI TE KŌTI MATUA O AOTEAROATĀMAKI MAKAURAU ROHECIV-2022-404-002068[2023] NZHC 2837UNDER The Financial Markets Conduct Act 2013BETWEEN FINANCIAL MARKETS AUTHORITYPlaintiffAND VERO INSURANCE NEW ZEALANDLIMITEDDefendantHearing: 10 October 2023Appearances: N Flanagan and Y Fu for PlaintiffS Ladd and B Keown for DefendantJudgment: 10 October 2023ORAL JUDGMENT OF VENNING JSolicitors: Meredith Connell, AucklandCounsel: Bell Gully, AucklandIntroduction[1] Vero Insurance New Zealand Limited (Vero) has admitted making false and/ormisleading representations in customer billing documents relating to its failure toapply a multi-policy discount to premiums charged to customers who were entitled tothe discount. As a result Vero represented to customers that they were liable to payamounts which they were not. It took payments it was not entitled to. Vero self-reported the issue to the Financial Markets Authority (FMA).[2] Vero and the FMA now seek the imposition of an agreed pecuniary penalty forcontraventions of ss 22(f) and/or (h) of the Financial Markets Conduct Act 2013(FMCA). They jointly suggest the Court impose a pecuniary penalty of $3.9 millionon Vero.[3] The FMA also seeks declarations of breach under s 486 of the FMCA and anorder under s 493 of the FMCA that the pecuniary penalty be applied first to pay theFMA's actual costs in bringing this proceeding.Background[4] Vero is one of New Zealand's largest insurers and is owned by Suncorp, one ofAustralia's largest corporates. It is a major insurer in New Zealand. It offers,underwrites and administers a range of general and specialist insurance products tocustomers in New Zealand.[5] Vero does not generally sell its insurance products direct to customers butrather promotes and distributes its products through brokers and distribution partnersthroughout New Zealand (Intermediaries). The Intermediaries are comprised of:(a) ANZ Bank New Zealand Limited (ANZ);(b) what Vero refer to as "channels" being:(i) AMP Services (NZ) Limited (AMP) which, like ANZ, marketsand sells AMP-branded insurance products; and(ii) an expansive network of approximately 1,450 insurancebrokers; and(c) various organisations who advertise Vero-branded insurance to theirmembers who contact Vero directly.[6] Across all the Intermediaries the contracts of insurance ultimately are betweenVero and the customers. The quoting, calculation of premiums payable andadministration of the policies were the ultimate responsibility of Vero and its internalsystems. Where the Intermediaries used their own systems to send invoices tocustomers they relied on information supplied by Vero for the pricing of premiums.Vero pays commissions and, in some circumstances, profit shares to theIntermediaries.[7] From 2009 Vero offered a multi-policy discount. In broad terms the multi-party discount provided customers with a 10 to 15 per cent discount on the premiumsif they had taken out insurance on more than one qualifying asset. From 2009 to May2022 Vero failed, in some cases, to apply the multi-policy discount to customers'premiums, even though the customers were otherwise entitled to it. Vero did not haveany central audit or due diligence process in place to ensure that the multi-policydiscount was being properly applied. Vero accepts that pursuant to s 536 of the FMCAthe Intermediaries were acting on behalf of Vero in issuing affected invoices and theirconduct is to be treated as conduct engaged in by Vero.[8] In 2010 Vero identified an issue that a not insignificant number of customers(approximately 600) had been affected by the failure to apply the multi-policy discountto eligible customers. Despite that Vero did not undertake a wholesale review orinvestigation of the process. However, Vero says it did undertake a change to systemsbut nevertheless the underlying issue went undetected for almost a further decade.[9] In March 2018, Vero identified the issue in relation to ANZ customers. Againa relatively small number of customers (150) were affected. However it was not untilMarch 2019 Vero undertook a full review of the discount as it applied to all currentand past ANZ customers. Between October and December 2019 Vero developed andintroduced daily exception reporting to identify the issue in new policies being sold toANZ customers. The multi-party policy discount as it related to ANZ customers wasreported to the FMA in December 2019. At the same time as reporting the ANZ issueVero recognised the issue may have affected its Channel customers who comprisedapproximately half of its business. In February 2020 the FMA wrote to Verorequesting it make its investigation in relation to that issue a priority. Vero did so andin September 2020 daily exception reporting was introduced to address the issueacross its Channel's network as well.[10] Between 1 April 2014 and May 2022, the period of contravening conductcovered by the FMCA, 42,256 customers were affected by the issue. The totalpremiums charged to those customers was approximately $88.1 million withapproximately $9.9 million of that sum being charged to affected customers becauseVero had failed to apply the multi-policy discount. Vero paid commissions and profitshares to Intermediaries based on the affected invoices. It is agreed that a substantialportion of those payments can be attributed to their overcharges. Vero has chosen notto seek to recover those payments.[11] Vero has also chosen not to recover payments from customers who receivedthe multi-party discount but were not entitled to it. Those underpayments amount toat least $16 million.Penalty[12] Under s 489(1) of the FMCA the FMA may apply for a pecuniary penalty orderwhere a person has breached a civil liability provision such as s 22 as in this case.Under s 489(2) when the FMA makes such an application to the Court, the Court:(a) must determine whether the person has contravened or been involvedin a contravention of a civil liability provision; and(b) must make a declaration of contravention if satisfied the person hascontravened or been involved in a contravention of a civil liabilityprovision; and(c) may order the person to pay the Crown a pecuniary penalty that theCourt considers appropriate if satisfied of the contravention.[13] In FMA v ANZ the Court confirmed the general approach to setting penaltiesunder the Securities Markets Act 1988 and the principles applicable to setting penaltiesunder the Commerce Act 1986 are equally applicable to setting penalties under theFMCA.1[14] The authorities establish a three-stage framework:2(a) the Court should determine the maximum pecuniary penalty inaccordance with s 490 of the FMCA;(b) the Court sets a starting point having regard to the relevant statutorycriteria in s 492 of the FMCA; and then(c) the Court adjusts the starting point by applying an uplift or discount onthe basis of relevant circumstances personal to the particular defendant.Maximum penalty[15] The maximum pecuniary penalty in the present case for Vero's breach of s 22is the greatest of:3(a) the consideration for the relevant transaction(s);(b) if readily ascertainable, three times the amount of the gain made or lossavoided; or(c) $5 million.1 FMA v ANZ [2021] NZHC 399.2 FMA v ANZ; FMA v AIA New Zealand Ltd [2022] NZHC 2444; and FMA v Cigna Life InsuranceNew Zealand Ltd [2022] NZHC 3610.3 Financial Markets Conduct Act 2013, ss 38(2) and 490(1)[16] The transaction in the present case was the offer by Vero to customers to eitherbuy or renew their policy on terms, including the multi-policy discount that ought tohave applied. Accordingly the parties accept the maximum necessary penaltyavailable is approximately $88.1 million, being the consideration for the relevanttransactions.[17] The Court is then required to have regard to the relevant statutory criteria setout in s 492(a)–(h) to fix the starting point.Purposes of the FMCA[18] In the present case the purposes of the FMCA that are particularly relevant are:(a) promoting the confident and informed participation of consumers infinancial markets;(b) promoting and facilitating the development of fair, efficient andtransparent financial markets; and(c) providing for timely, accurate and understandable information to beprovided to persons to assist them to make decisions relating tofinancial products or financial services.[19] It is particularly relevant that customers were reliant on Vero's systems as theycould not verify the amounts charged were correct unless they contacted Vero directlyon their own initiative to specifically inquire. As one of New Zealand's largest insurersand being extremely well resourced via its parent company Vero could reasonably beexpected to have appropriate systems in place to ensure the premiums charged werecorrect.Nature and extent of the contravention[20] I also accept the FMA's submission that there was a basic failure on Vero'sbehalf. Despite the system being a manual one Vero apparently made no or limitedattempts to implement any checking or auditing to ensure the discounts were appliedas they should be. Particularly relevant is that the infringing conduct took place overa lengthy period of time. The FMA submits the issue had in fact existed from as earlyas 2009 when the multi-policy discount was introduced. The conduct affected asignificant number of customers. From 1 April 2014 the issue has affected 42,256customers and 47,992 policies. Approximately 12 to 15 per cent of the customers whowere eligible to receive the multi-policy discount were affected by the issue over thistime period.Nature and extent of any loss, damages or gains[21] As noted, when the issue did come to Vero's notice in about 2010 in relation tothe ANZ there was a change to the systems at that time, but that was insufficient toaddress the particular issue.[22] In the period from 1 April 2014 the total harm to Vero customers has been inthe region of $9.9 million. The impact on customers prior to 1 April 2014 remainsunknown but would also have been significant. I note that in the compensation paidVero has accepted responsibility for and paid compensation even where the failure wasprior to the application of the Act.[23] From 1 April 2014 the average overcharge per customer was approximately$234.[24] While $9.9 million was paid in premiums that should not have been, balancedagainst that, is the fact the overcharges were paid out at least in part as commissionsand profit shares to Intermediaries so that Vero has not received that full $9.9 million.Vero has chosen not to seek to recover those sums, which could be assessed in theregion of approximately $1.3 to $2 million. However, even on that basis Vero's netcommercial gain would still fall somewhere in the region of $7.9 million to $8.6million.Circumstances in which the contravention occurred[25] I accept the submission that while the circumstances in which Vero's failuresoccurred were not deliberate, Vero fell short of the standards expected of an entity ofits size. Its core business was invoicing to ensure customers were charged what theyhad agreed to pay. It failed in carrying out a key aspect of its bargain with customers,namely to price the premiums paid or charged accordingly. There is no adequateexplanation given for its failure to detect the issue earlier.Relationship of the parties to the transaction[26] The relationship of the parties is relevant. The relationship of insurer andcustomer is essentially a relationship of trust.Compensation[27] As to compensation, the FMA also accepts Vero has taken a comprehensiveapproach to compensation. To date it has repaid $13.97 million to customers(including the use of money interest of $3.02 million). The compensation is, as noted,for all time periods, including the period pre-dating 1 April 2014 when the Act applied.[28] Apart from the relevant mandatory considerations, there are a number of otherrelevant factors in this case.[29] The FMA also submits that Vero's response regarding the identification andescalation of the Channels' issue was troubling. Vero knew there was a systematicissue with the ANZ customers in 2018, and should have been aware that the same issuewould be even more problematic in relation to the Channels, but failed to take anysteps to investigate the matter, even though it acknowledged the need for aninvestigation earlier. Vero's response is that it decided to approach the issuessequentially and to address the remediation for ANZ customers first followed by theChannels' customers. It says ultimately all customers' positions were addressed. Iaccept the force of the submissions for Vero that it was necessary to develop aremediation approach that ensured affected customers had an accurate, well-runremediation exercise with appropriate support.[30] The position in the present case is different to the case referred to by MrFlanagan during oral submissions of Australian Securities and InvestmentsCommission v National Australia Bank Ltd (No 2),4 of a direct entity and clientrelationship. In the present case the position was complicated because of the positionof the Intermediaries and the Intermediaries' relationship with the Vero customers. Ialso accept as Mr Ladd submitted, there is room in this case for a judgment call as tohow to best address the issue.[31] I note that the FMA acknowledges that while Vero's conduct may have failedto meet the standard expected of it, it was in part mitigated by Vero's very co-operativeapproach following the self-reporting.Deterrence[32] While deterrence is not identified as a relevant factor in s 492, in the past theCourt has accepted and confirmed that deterrence is always a relevant consideration.5In relation to that I accept in general terms the submission for the FMA that the penaltymust be at a level that creates an incentive for well-resourced financial institutionssuch as Vero to maintain adequate systems and processes.[33] There are a number of relevant factors which support the proposed startingpoint in this case, in particular, the fact Vero has paid out the commissions and profitshares noted. While it could have chosen to seek to recover them the FMA hasacknowledged that there would have been significant complexity and difficulty indoing so. Vero is simply out of pocket. Further, as a result of its errors Vero has paidout the multi-policy discount to some customers who were not entitled to it and hasnot attempted to recover those undercharges as it might have done. Finally, alsorelevant, as noted Vero has paid compensation in excess of the amounts overcharged,including the use of money interest.64 Australian Securities and Investments Commission v National Australia Bank Ltd (No 2) [2023]FCA 1118.5 FMA v ANZ, above n 1.6 The evidence of this is set out in the affidavit of Gail Saipani.Starting point[34] The FMA submits the most apt comparator in terms of magnitude ofmisconduct is FMA v Cigna Life Insurance New Zealand Ltd.7 In that case Cignaaccepted it made false or misleading representations to its clients regarding certainbenefits. However the FMA also acknowledges that, unlike Cigna, the breaches inthis case were not deliberately made. As noted, the present case involves a systemsfailure.[35] The net gain was significantly higher to Vero, approximately $3.37 million to$4.05 million more than Cigna's net gain. While the amounts improperly charged tocustomers was greater in Cigna's case, (approximately $13.5 million compared to the$9.9 million by Vero), in the former instance customers received a higher level ofcover and some benefit payments. There was no corresponding benefit in the presentcase. In Cigna the starting point was $5.5 million.[36] Having regard to the above, the FMA submits the conduct in this case wouldwarrant a starting point of between $6–$7 million. The FMA accepts that on theparticular facts of this case the starting point in that range would meet objectives ofdeterrence and seriousness of the conduct given that Vero has made its customerswhole.[37] Vero's position is the appropriate starting point having regard to the mattersreferred to, is in the range of $5–$6 million. On my assessment the range fixed bycounsel on behalf of the FMA and Vero is the applicable range and the $6 millionsuggested is a convenient mid-point to adopt.Mitigating factors[38] The FMA accepts that there are no aggravating features specific to Vero. Interms of mitigating factors the FMA accepts Vero should be entitled to discounts toreflect the timing of its admissions and the extent of its co-operation. The FMAaccepts Vero's admissions can be said to have been made at the first opportunity and7 FMA v Cigna Life Insurance New Zealand Ltd, above n 2.also that Vero fully co-operated throughout the FMA investigation. While the FMA istroubled by the delays in Vero starting to undertake investigation processes itacknowledges that Vero faced particular challenges in carrying out the remediationprogramme in relation to the Channels' customers given the involvement of theIntermediaries, a point which I have also accepted. Overall the FMA submits adiscount of five per cent for self-reporting, five per cent for co-operation, and 25 percent for the early admissions and remediations leading to the overall discount of 35per cent is appropriate. That supports the assessed final total penalty of $3.9 million.For its part Vero also accepts and supports a discount of 35 per cent, having regard tothe above matters.[39] Standing back and looking at the matter overall, having regard to the relevantconsiderations I accept a starting point of $6 million is appropriate as noted, and whilethe discount of 35 per cent is a substantial discount, on the balance of the informationbefore the Court in relation to Vero's breaches, the particular circumstances of thiscase, and having regard to the steps taken by Vero, I accept it is appropriate. I alsonote of course that there have been no previous breaches by Vero.Result/orders[40] As a result I declare that Vero contravened ss 22(f) and/or (h) of the FMCA byissuing the affected invoices.[41] I impose a pecuniary penalty of $3.9 million on Vero.[42] I make an order under s 493 of the FMCA that the penalty be applied first tothe FMA's costs in bringing the proceeding.[43] I record that the FMA does not seek any further order as to costs.__________________________Venning J