FXBTG FINANCIAL LTD v FINANCIAL MARKETS AUTHORITY [2019] NZHC 2775

FXBTG FINANCIAL LTD v FINANCIAL MARKETS AUTHORITY [2019] NZHC 2775 [30 October 2019]IN THE HIGH COURT OF NEW ZEALANDWELLINGTON REGISTRYI TE KŌTI MATUA O AOTEAROATE WHANGANUI-A-TARA ROHECIV-2019-485-391[2019] NZHC 2775IN THE MATTER of an appeal under section 42 of theFinancial Service Providers (Registrationand Dispute Resolution) Act 2008BETWEEN FXBTG FINANCIAL LIMITEDAppellantAND FINANCIAL MARKETS AUTHORITYRespondentHearing: 16 September 2019Appearances: M A Keil for AppellantR S May and C E Clayton for RespondentJudgment: 30 October 2019JUDGMENT OF COOKE JTable of ContentsBackground [2]Evidence received on appeal [7]The overall scheme of the Act [11]Not providing any financial services [21]First ground of appeal: FMA erred in concluding FXBTG was not conducting financialservices [28]Inconsistency of treatment [29]Erroneous assessment of the evidence [33]Second ground of appeal: No false or misleading appearance [47]The FMA's approach [48]Analysis [51]Conclusion [59][1] By decision dated 24 June 2019 the Financial Markets Authority (FMA)decided that the appellant, FXBTG Financial Limited (FXBTG), should bederegistered from the Financial Service Providers Register pursuant to s 18B of theFinancial Service Providers (Registration and Dispute Resolution) Act 2008 (the Act).FXBTG appeals against the decision of the FMA in accordance with the right of appealto the High Court from such a decision under s 42 of the Act.Background[2] FXBTG was incorporated in 2012. It says that it provides general financialadvisory services, and operates an online foreign currency exchange service inAuckland to its customers in China. The company was duly registered in November2013.[3] On 22 March 2019 FMA staff prepared a recommendation that FXBTG beissued with a notice of intention to direct deregistration. The recommendation wasmade on the grounds that:(a) the services FXBTG provided did not constitute "financial services"within the meaning of the Act;(b) their foreign exchange service was being provided to customersprimarily in China;(c) FXBTG did not have any New Zealand resident customers;(d) two overseas regulators had published warnings regarding thecompany; and(e) FXBTG had previously made misleading claims about New Zealandsupervision and regulation on their website.[4] The recommendation assessed that continued registration would have theeffect of damaging the reputation of New Zealand's financial markets and regulationof those markets. That recommendation was accepted by the FMA, and written noticeof intent to deregister setting out the reasons for the decision was issued to FXBTGthe same day.1[5] In response, FXBTG's solicitors sent a letter to the FMA containingsubmissions in response to the FMA's proposed direction.2 On 14 June 2019 theFMA's Director of Regulation, Mr Mason, accepted a recommendation prepared byFMA staff that FXBTG be deregistered as a financial services provider.3 By letter toFXBTG dated 24 June 2019 the FMA set out the reasons for the decision.[6] The Act provides for a right of appeal to the High Court from a decision of theFMA. The appeal proceeds as a general appeal.4 FXBTG appeals the decision on thegrounds that:(a) FXBTG is in the business of providing financial services from a placeof business in New Zealand within the meaning of ss 5 and 8A of theAct, and it is generating financial activity from the provision of suchservices;(b) FXBTG's registration does not create a false or misleading appearanceas to the extent it is regulated by New Zealand law for the purpose ofs 18A of the Act; and(c) the FMA took into account irrelevant considerations, and failed to applymandatory considerations in reaching its decision.Evidence received on appeal[7] The appeal is supported by an affidavit from the sole director of FXBTG,Xiaomin Li, sworn on 26 July 2019. The affidavit was initially filed in support of aninterlocutory application for an interim injunction. On 12 August 2019 that1 Financial Service Providers (Registration and Dispute Resolution) Act 2008, s 18B(3)(a).2 Section 18B(3)(b).3 Section 18B(3)(c)(i).4 See Financial Markets Authority v Vivier and Company Ltd [2016] NZCA 197, [2016] 3 NZLR70 at [42]–[46]; and Austin, Nichols & Co Inc v Stitchting Lodestar [2007] NZSC 103, [2008]NZLR 141.application was called before Ellis J, and it was agreed that the best course was towork towards an expedited hearing of the substantive appeal. Timetable directionswere given which included provision for the FMA to file affidavit evidence inresponse.[8] At the hearing of the appeal before me Mr May objected to the Court receivingthe affidavit evidence of Xiaomin Li, and pointed out that no leave to file that evidencehad been sought by the appellant. This is an appeal under Part 20 of the High CourtRules 2016. Under r 20.16 further evidence is only received with leave of the Court.[9] The FMA has also filed evidence in accordance with the timetable. It comesfrom Mr Mason who was the decision maker, and the author of the letter of 24 June2019 which advised FXBTG of the decision. He described the purpose of his affidavitwas to "outline the background, context and reasons for the decision to issue thedirection that is subject to this appeal". No leave was sought by the FMA to file thisaffidavit. Ms Li also then filed a short affidavit in reply sworn 29 August 2019.[10] The appeal accordingly comes before the Court in a slightly irregular way. Forthe future, it seems to me that any need to provide material beyond the reasons for thedecision contemplated by s 18B(3)(d) is better provided in the form of a report of thedecision-maker under r 20.15 in accordance with a direction from the Court.5 Thatreport can provide the record of the materials relevant to the decision, such as thepreliminary decision, advice papers, and submissions on the preliminary decision. Inmy view that is the better way for the record to be before the Court. If parties wish tofile affidavits in relation to such an appeal, leave will be required. In the present caseI granted leave to both parties for the provision of the affidavits filed.The overall scheme of the Act[11] Before addressing the specific arguments advanced on appeal, it is appropriateto outline the statutory scheme, including the relevant deregistration powers.5 Note, however, there is authority to the effect that such reports cannot be used to supplement thereasons for a judgment of a court — see Maungaharuru-Tangitū Trust v Hastings District Council[2018] NZHC 3261.[12] There are two particular factors that are important to understanding how thesections are designed to operate. The first is that the Act forms part of an overallsystem of securities regulation in New Zealand with the total system found in a numberof different enactments. Together they operate as a regime. The Act sets up a systemfor the registration of financial service providers. The substantive obligations orcontrols relating to such providers, and securities regulation generally, is found inother legislation, including the Financial Markets Conduct Act 2013, and the FinancialAdvisers Act 2008. It is accordingly appropriate to interpret and apply the Act in lightof the other legislative enactments. This is more likely to correspond withParliament's overall intention.[13] Secondly it is apparent that the legislation that was enacted from 2008 toreform New Zealand's securities regime arose out of wider international initiativerelating to securities regulation. An International Monetary Fund review in 2003 ledto a greater international concern for the monitoring and regulation of financialservices.6 Given the cross-border nature of securities trading, a greater degree ofinternational coordination was appropriate. These initiatives help to explain thescheme and purpose of New Zealand's legislation.[14] As enacted the Act did not have any provision that specified its territorialscope. However, as a consequence of amendments first made in 2010 by the FinancialService Providers (Registration and Dispute Resolution) Amendment Act 2010 abroad territorial reach was introduced. Section 8A provides:8A Territorial scopeThis Act applies to a person who—(a) is ordinarily resident in New Zealand (within the meaning ofsection 4 of the Crimes Act 1961) or has a place of business inNew Zealand, regardless of where the financial service isprovided; or(b) is, or is required to be, a licensed provider under a licensingenactment; or(c) is required to be registered under this Act by any otherenactment.6 International Monetary Fund Financial Sector Assessment Program – Review, Lessons, and IssuesGoing Forward (International Monetary Fund, 24 February 2003).[15] Importantly any persons having a place of business in New Zealand arecovered by the Act even if the financial services they were providing are not providedto persons within New Zealand, or in relation to New Zealand investments. In otherwords, the financial services could be provided from New Zealand to persons basedentirely overseas in relation to entirely overseas investments.[16] That territorial scope does not appear to match to the other legislationregulating financial services, in particular the Financial Markets Conduct Act 2013.Part Two of that Act deals with what is described as fair dealing. The relevantterritorial scope of that legislation is prescribed by s 33 of that Act in the followingterms:33 Territorial scope of sections 19 to 23(1) Sections 19 to 23 apply to—(a) conduct in New Zealand; and(b) conduct outside New Zealand by any person resident,incorporated, registered, or carrying on business in NewZealand to the extent that that conduct relates to dealing infinancial products, or the supply of a financial service, thatoccurs (in part or otherwise) within New Zealand.(4) In this section, registered means registered under the FinancialService Providers (Registration and Dispute Resolution) Act 2008.[17] It is arguable that s 33 does not cover services provided to entirely overseasclients in relation to overseas investments.7 It may be that the potentially greaterterritorial reach of s 8A of the Act is to ensure that the providers of financial servicesacross territorial boundaries are appropriately registered in New Zealand — and formpart of the regulatory regime when they are based here, even though they may beproviding services to overseas clients.[18] But the potentially broad territorial reach of the Act led to overseas financialservice entities establishing places of business within New Zealand purely in order toobtain registration in New Zealand. The fact of registration is then promoted to add7 The alternative view is that this still can involve "conduct in New Zealand" under s 33(1)(a). Imake no findings on this point.credibility to their offerings. In reality the entities were not regulated by theNew Zealand securities law regime at all. This has been referred to as the problem of"flag of convenience" registrations. It was this that led to the enactment of ss 18A and18B (as well as ss 15A and 15B) by the Financial Service Providers (Registration andDispute Resolution) Amendment Act 2014. When the Select Committee reported onthis proposed legislation, it stated:8We recommend inserting new sections 15AA and 18AA (clauses 80 and 84)to clarify the extent of the Financial Market Authority's powers. Thisamendment would allow, for examp1e, the authority to prevent overseasfinancial service providers registering in New Zealand solely to bolster theirreputation; we consider this would strengthen New Zealand's financialregulation regime. We recommend allowing the FMA to act on its owndiscretion when considering deregistration of a financial service provider; thishas resulted in a proposed amendment to section 18A ( clause 84).[19] The present case turns on ss 18A and 18B. Section 18A provides:18A Purpose of FMA's powers relating to deregistrationThe purpose of section 18B is to provide for the deregistration of aperson (A) if A's registration has, will have, or is likely to have theeffect of—(a) creating, or causing the creation of, a false or misleadingappearance with respect to the extent to which A—(i) provides, or will provide, financial services in NewZealand; or(ii) provides, or will provide, financial services from a placeof business in New Zealand; or(iii) is, or will be, regulated by New Zealand law in relationto a financial service; or(b) otherwise damaging the integrity or reputation of—(i) New Zealand's financial markets; or(ii) New Zealand's law or regulatory arrangements forregulating those markets.[20] If, after considering s 18A the FMA considers it is necessary or desirable forthe provider to be deregistered, it must give the provider written notice, together with8 Credit Contracts and Financial Services Law Reform Bill 2014 (104–2) (Commerce Committeereport) at 15.reasons, of its intention to give the direction.9 The provider may respond withsubmissions in relation to the proposed direction. If, after considering thesubmissions, the FMA remains of the view that the provider should be deregistered,then it may direct the Registrar to do so.Not providing any financial services[21] There is an initial issue that is appropriately addressed before assessingFXBTG's arguments on its grounds of appeal. It is particularly relevant to the firstground of appeal addressed below. It relates to whether ss 18A and 18B are directed,or primarily directed, to financial services providers who are not providing financialservices covered by the Act at all.[22] In Financial Markets Authority v Vivier and Company Ltd the Court of Appealoutlined the approach that should be adopted in respect of ss 18A and 18B.10 TheCourt summarised the position in the following way:[56] Drawing these points together, what is far more material thanincorporation or possession of a place of business in New Zealand is whetherthe FSP is providing financial services in or from New Zealand, and whetherit is generating any associated financial activity in New Zealand. If it is notdoing so, or cannot demonstrate any intention of doing so, alarm bells shouldsound.[57] We accept bona fide FSPs with a place of business in New Zealand,but no relevant financial service activity in New Zealand, may seekregistration notwithstanding. In such a case we would expect that registration(and continued registration) might reasonably depend on:(a) reliable information being given as to the manner in which theFSP was to promote itself. For instance, either not promotingitself at all, or promoting itself on the basis that it states clearlythat it is neither providing financial services in or from NewZealand nor is regulated by New Zealand law in relation to thefinancial services it provides in other jurisdictions;(b) evidence of compliance with the requirements of a relevantoffshore regulator would also be relevant to the FMA'sassessment; and(c) other relevant information including, for instance, that the FSPis substantial and reliable.9 Financial Service Providers (Registration and Dispute Resolution) Act 2008, s 18B(3)(a).10 Financial Markets Authority v Vivier and Company Ltd, above n 4.[23] One of the features of this passage is that it appears to be directed to a financialservice provider that is not undertaking financial services conduct in New Zealand atall. All three of the cases that have come before the Court in relation to theseprovisions appear to have involved entities which have been similarly assessed.11 AsI read ss 18A and 18B, however, they are directed to entities that are conductingfinancial services activities in New Zealand, but "the extent" that they are doing soleads to the conclusion that the New Zealand registration is being used to create a falseor misleading appearance of their connection with New Zealand or regulation by theNew Zealand regime.[24] I say this because ss 18A and 18B deal with entities that would otherwise beregistered, and it is necessary to be registered only when an entity is undertakingfinancial services covered by the Act. The legislation as it stood prior to itsamendment already contemplated that entities who were not engaged in conductingfinancial services in New Zealand at all would not be registered, or would bederegistered. Under s 18(1)(b) the Registrar was required to deregister a financialservice provider if it was "not in the business of providing a financial service (at anytime after the expiry of three months after registration)".12 So the new provisions werenot directed at deregistering entities that were not providing any financial servicescovered by the Act at all. Section 18A addresses a different issue — when an entitythat is conducting financial service activities in New Zealand but "the extent" to whichit is doing so results in a misleading appearance given how things are portrayed.[25] I nevertheless accept that ss 18A and 18B (and ss 15A and 15B) can still applyto an entity not conducting financial services in New Zealand at all. Whilst thesections appear to have been directed to entities that do conduct services, it is alsoapparent that an entity who engages in no such activity, but has New Zealandregistration, would still be potentially caught by the provisions. Such a registrationcould still create a misleading appearance with respect to "the extent" of the existenceof services being provided in or from New Zealand, or the New Zealand supervision.11 See also Excelsior Markets Ltd v Financial Markets Authority [2015] NZHC 3334, [2016]NZCCLR 14; and Innovative Securities Ltd v Financial Markets Authority [2017] NZHC 1187,[2017] NZCCLR 25.12 Given s 8A, that would include consideration of financial services provided from New Zealand topurely overseas clients in relation to purely overseas investments.A registration in those circumstances could be seen to be even more obviouslymisleading. Put another way, s 18(1)(b) and ss 18A and 18B can legitimately overlap.This point is reiterated by s 18C which provides:18C FMA may direct deregistration regardless of whether section18(1) appliesThe FMA may give a direction under section 18B in relation to a personregardless of whether any of paragraphs (a) to (d) of section 18(1) apply.[26] The observations from Vivier outlined above are understandable against thatbackground. But the references at [56] and [57(a)] of that judgment to the entity notproviding financial services in or from New Zealand at all should not be understoodto be a requirement for the application of ss 18A and 18B.[27] My only other observation about Vivier is that, whilst it speaks of an entity"seeking" registration in New Zealand, the framework of the Act actually requiresregistration if a person wants to provide financial services covered by the Act,including its broad territorial scope. Under s 11 a person potentially commits anoffence if it is in the business of providing a financial service without a registration.13This also means that when a person is undertaking such a service but has beenderegistered under s 18B, such services will need to be discontinued.First ground of appeal: FMA erred in concluding FXBTG was not conductingfinancial services[28] FXBTG's first ground of appeal is that the FMA erred in concluding thatFXBTG was not providing any financial services at all.14 In advancing that argumentthere were two related points put forward by Ms Keil.Inconsistency of treatment[29] The first point is that FXBTG contends that the decision of the FMA wasinconsistent with an earlier decision of Registrar of Financial Service Providersappointed under s 35(1) of the Act.13 Provided the person knowingly breaches s 11(1) (s 11(2)).14 This covers points (a) and (b) of the point of appeal dated 14 August 2019.[30] The factual background to this is that the Registrar conducted an enquiry intoFXBTG in the manner contemplated by s 18(1)(a) of the Act, and formed the viewthat FXBTG should be deregistered in October 2018. This was on the basis that it wasnot in the business of providing financial services. FXBTG objected. The Registrarsubsequently described what occurred in the following way:FXBTG commenced proceedings to appeal the deregistration initiated by theRegistrar. Information provided with the appeal documents were sufficient toshow that the FSP was in the business of providing financial services at thetime it was deregistered. The Registrar therefore reregistered FXBTG on thegrounds that the Registrar was satisfied that FXBTG was still in the businessof providing a financial service at the time of deregistration (section 22 ofAct). FXBTG was reregistered on the FSPR on 21 November 2018. As aresult of the reregistration, FXBTG ceased proceedings.[31] FXBTG argues on this appeal that the decision of the FMA on 24 June 2019 isinconsistent with the decision of the Registrar, and the decision of the FMA isaccordingly wrong in law. Ms Keil put it in the following way in her writtensubmissions:15In this context, a duty on the Crown to act consistently has substantive as wellas procedural application. Where the factual situation cannot be distinguished,the duty will include the need for consistency of outcome in the absence of areasoned explanation to justify different treatments by the co-regulators underthe FSP Act.[32] The answer to this argument is found in s 18C of the Act. It directly addressesthe potential overlap between s 18(1)(b) and s 18B. The two provisions, and twodecision-making processes, are independent of one another. The decisions are madeby different statutory officers. The decision of the FMA leads to a direction to theRegistrar (s 18B(3)(c)(i)). The legislation accordingly contemplates potentialinconsistency. The FMA can legitimately conclude that a provider is not providingfinancial services even if the Registrar has earlier accepted that it is. As Mr Maysubmitted, s 18B(2) sets out the mandatory considerations for this decision by theFMA. The FMA must simply address the facts, and the mandatory considerations, foritself. For that reason I see no error in the FMA's approach.15 Counsel for the FMA argued that this point was not squarely within the grounds of appeal, but itseems to me to be sufficiently close to mean that formal amendment to those grounds was notnecessary.Erroneous assessment of the evidence[33] The second point advanced for FXBTG was that the FMA was simply wrongto conclude that it was not in the business of providing financial services within themeaning of the Act. The letter advising of the decision of 24 June 2019 outlined theFMA's approach as follows:5. The term 'financial services' is defined in section 5 of the FSP Act andcontains a list of services that fall within its definition. Havingconsidered the nature of the services undertaken in New Zealand byFXBTG, the FMA is of the view that the services provided are principallyin the nature of market commentary, compliance and administrative andare not 'financial services' in terms of section 5 of the FSP Act. Inparticular, we note the 'financial advisory' services described inFXBTG's submissions is, in our view, general market commentary byway of trend analysis that does not fall within the definition of 'financialadviser service' under the FSP Act and consequently the FinancialAdvisors Act 2008.[34] I accept that the FMA decision proceeds on the basis that FXBTG was notproviding any financial services at all. Challenging this conclusion involves mixedquestions of fact and law. Given that this is a general appeal I accept that if FXBTGsatisfied this Court that this conclusion was wrong, there would be an error that couldresult in the appeal being allowed.[35] The activities FXBTG undertakes were summarised by its solicitors in thefollowing way by a letter sent on 26 April 2019 to the FMA:FXBTG does not dispute that it only has overseas clients at this stage in itsdevelopment and that it is not regulated in New Zealand for the financialservices it offers. However, FXBTG has had a presence in New Zealand since25 June 2012. It employs a staff member in New Zealand at its Aucklandoffice responsible for accounting, compliance, financial advisory services andforeign exchange services enabling its customers which are primarily based inChina to exchange foreign currency via the company's on line platform whichis operated from Auckland.[36] The further evidence received on appeal, including from Mr Mason, is that theoffice is located in the living room of an apartment in Mount Roskill where there is acomputer. The relevant staff member is Xiaomin Li, who has recently obtained aMaster's degree in Professional Accounting from Auckland University of Technology.She is the sole staff member, and sole director of FXBTG. The relevant factsdemonstrate that FXBTG has what can fairly be seen as a relatively rudimentary officeset-up.[37] The relevant issue is whether the tasks undertaken from this place of businessamount to financial services as defined by the Act. A number of statutory provisionsneed to be considered in order to understand the definition of "financial services" in acomplete way. There is a list of financial services in s 5 of the Act, one of which is "afinancial adviser service" (s 5(1)(a)) which is defined to have the meaning containedin s 9 of the Financial Advisers Act 2008. There are descriptions of such services ins 9 (and exceptions in s 10) in the Financial Advisers Act 2008. That includes givingan opinion or recommendation in relation to acquiring or disposing of a financialproduct. A "financial product" is defined in that Act in a way that ultimately includesgiving advice about acquiring or disposing of "a derivative" which may have potentialrelevance in this case.16[38] The evidence provided by FXBTG to support its argument is that it providesdaily financial analysis and consulting services to Chinese customers in respect oftrading in foreign exchange, gold and oil. It put forward agreements it has with otherinstitutions to provide such services, and a list of 19 customers.[39] The FMA assessed this material as FXBTG providing only generic financialadvice regarding market trends. Notwithstanding Ms Keil's arguments I do not acceptthat this finding was wrong. In particular I am not satisfied that FXBTG hasdemonstrated the FMA was wrong to conclude that none of FXBTG's advisoryservices amounted to financial services. FXBTG has not provided clear evidence thatit has engaged in financial advisory services in relation to particular investments, orproposed investments by specific clients. It seems to me that it would be relativelyeasy for it to do so if it was indeed engaged in such activities. All that Ms Li has saidin her affidavit is that FXBTG "has been undertaking general financial advisorservices to Chinese customers".16 Financial Advisers Act 2008, s 5, definition of "Category 1 product" and "FMCA financialproduct".[40] A more complex issue arises in relation to FXBTG's operation of the foreignexchange platform, which it operates under licence at the apartment in Aucklandwhere a computer is located. Whilst the server is located in Hong Kong, foreignexchange platform activities are undertaken in New Zealand. Ms Li explained anumber of contracts that FXBTG has entered for the purposes of its business, includinga contract with MetaQuotes Software Corp which allows it to operate an onlinebroking business. She explains that "I direct the business of FXBTG from Auckland,ensuring the financial platform is operational and suiting our customers' needs fromAuckland as well as all other day to day operational requirements of the company fromthis office".[41] These activities led Mr May to say in his submissions:54.2 While FXBTG also provided foreign exchange broking – a "financialservice" for the purposes of s 5 – this was provided to customers basedexclusively in China, and the services provided from New Zealandwere, as in Innovative Securities, not the core business of a financialprovider.17[42] This activity involves engaging with customers in relation to their decisions tobuy and sell foreign exchange, which are then actioned in Auckland using theplatform. I agree that these activities likely amount to foreign exchange brokingservices, and that a foreign exchange broker service is within the meaning of afinancial service as set out in s 5 of the Act (see s 5(1)(ab)).[43] Mr May's point that all the customers were based in China, that the businessis provided from New Zealand and that such activities were not the core business of afinancial service provider does not ultimately matter. Section 8A of the Act makes itplain that such overseas related activities can still be financial services within theterritorial reach of the Act. Mr May's reliance on Innovative Securities Ltd seems tome to be misplaced. There the Court concluded that the tasks in New Zealand werebroadly administrative and compliance related, and could not individually orcollectively be regarded as financial services for the purposes of s 5 of the Act.18 Buthere FXBTG is undertaking foreign exchange brokering from a place of business in17 Innovative Securities Ltd v Financial Markets Authority, above n 11.18 At [92]–[93].Auckland, and whilst those services are provided only to overseas customers inrelation to investments outside New Zealand, such services are still captured by theAct as a consequence of s 8A.19[44] This means that, technically at least, the FMA was wrong to conclude thatFXBTG was not conducting any financial services at all. In my view FXBTGprovided financial services as defined by the Act, albeit it in a very rudimentary way,by the tasks being undertaken by Xiaomin Li at the computer in the living room at theMount Roskill apartment.[45] But as I have already outlined this error is not of significance. This debate hassomewhat eclipsed the real issue. When a provider is technically, or notionallyengaged in what is defined as a financial service because of the Act's extendedterritorial reach, but its substantive activities are overseas, ss 18A and 18B potentiallyapply. Those sections apply to providers that do conduct some financial serviceactivity covered by the Act, but where the registration under the Act is used to createa misleading impression as to the extent to which it is providing financial services inNew Zealand, providing financial services from New Zealand, or is regulated by NewZealand law, as identified in s 18A. That seems to me to be the focus, rather than themore technical question relating to whether the rudimentary activities qualify asfinancial services at all.[46] So even though the facts demonstrate that FXBTG does technically undertakefinancial services, that does not seem to me to lead to the conclusion that the FMA'sdecision should be overturned on appeal. What seems to me to be more important iswhether the FMA's decision under s 18B(2) is wrong. That question really turns onthe other grounds of appeal addressed below.Second ground of appeal: No false or misleading appearance[47] FXBTG's second ground of appeal challenges the FMA's findings that it wasnecessary or desirable to deregister it in order to address a false or misleading19 Ms Keil also relied on s 215 of the Contract and Commercial Law Act 2017 in support of theargument that relevant financial service activities occurred within New Zealand. I do not see thisprovision adds much given the territorial scope of the Act under s 8A.appearance.20 For the reasons that I have outlined, this goes to the focus of ss 18A and18B.The FMA's approach[48] The false or misleading appearance contemplated by s 18A(a) relates to theextent to which the relevant provider provides or will provide financial services in orfrom New Zealand, or is or will be regulated by New Zealand law. In the letter finallyadvising of the FMA's decision dated 29 June 2019 there is no analysis of the factsrelevant to the s 18A(a) criteria. The reason for this is that the final letter primarilyresponds to the submissions advanced by to FXBTG on the earlier notice of intentionto deregister dated 22 March 2019. That notice set out the FMA's views on the natureof the business being undertaken by FXBTG and advised:• FXBTG has previously made misleading claims about supervision,regulation and government accreditation on its websites. While themisleading statements were removed following our correspondence withFXBTG, we saw that a new statement in Chinese on 'www.fxbtg.nz' astranslated (by Google Translate) stated that FXBTG is a 'New ZealandGovernment accredited financial service provider' (copy attached).In such circumstances, when a company is registered on the FSPR, we believeit is likely that the registration will create a misleading impression as to theextent that the entity provides financial services in New Zealand and is subjectto regulation in New Zealand. We also believe that registration on the FSPRin such circumstances is likely to have the effect of damaging the integrity andreputation of New Zealand's financial markets and New Zealand's law andregulatory arrangements for regulating those markets.[49] FXBTG's submissions responding to the notice focused on the FMA'sconclusions that it was not undertaking financial services at all. It also drew uponauthorities under the Fair Trading Act 1986 in relation to what amounted to false ormisleading conduct.21 The only submission of significance in relation to the factualposition was that there had been confusion in relation to translation, and that allchanges required by the FMA were immediately made by FXBTG. Whilst the finalletter of 24 June 2019 did not address that point, the recommendation leading to theletter addressed essentially maintained the view expressed in the earlier notice.20 This includes the matters set out in paragraph (c)–(f) of the points of appeal dated 14 August 2019.21 In its decision the FMA did not accept that those authorities were relevant. This is not challengedon appeal.[50] On appeal Ms Keil relies on an internal harm assessment dated 10 September2018 conducted by the FMA. This assessment concluded that the harm of FXBTG'sactivities was minimal. She further submitted that in order to consider whether it wasnecessary or desirable to deregister the financial service provider under s 18B(2) theFMA needed to engage in a harm or proportionality assessment, and that the FMA hadfailed to show a good reason to close down FXBTG's business. In response Mr Mayexplained that the harm assessment was undertaken only in relation to an initialanonymous complaint received by the FMA, and that the approach advocated byFXBTG would amount to an unnecessary gloss on s 18A which would be inconsistentwith the approach that had been advocated by the Court of Appeal in Vivier.22 Hesubmitted it was not necessary for the FMA to prove likelihood of harm.Analysis[51] This ground of appeal concerns the legal requirements set out in ss 18Aand 18B, and the scope of the discretion given to the FMA. In Vivier the Court ofAppeal stated:23[45] If one breaks the inquiry under s 18B into the two logical stagesidentified by Nation J [in Excelsior Markets Ltd v Financial MarketsAuthority24], the following points may be observed:(a) The first stage is to assess whether one of the grounds in s 18A is madeout. That is, whether registration is misleading or damaging tofinancial markets. That requires an assessment, Although in termsof s 18B(2) the FMA is only required to take into account s 18A,statutory powers must be used in accordance with their purpose, herestated to be to provide for deregistration in the circumstancesenvisaged by s 18A.25 It follows that a direction to deregister in theabsence of either of the considerations in s 18A would be beyond thescope of the statutory provision.(b) The second stage is to assess whether deregistration is necessary ordesirable. That too requires an assessment based on the factors in s18A and whether there is any mitigation. [52] And then later:22 Financial Markets Authority v Vivier and Company Ltd, above n 4.23 Financial Markets Authority v Vivier and Company Ltd, above n 4.24 Excelsior Markets Ltd v Financial Markets Authority, above n 11.25 AstraZeneca Ltd v Commerce Commission [2009] NZSC 92, [2010] 1 NZLR 297 at [29].[61] in acting under s 18B(2) the FMA must take into account themandatory considerations in s 18A, to decide whether, at a minimum,registration will likely have the effects prescribed in that provision. Secondly,in doing so it may have regard to its expert knowledge and experience offinancial markets in New Zealand and overseas. Thirdly, it is not required tohave evidence specific to the conduct of the particular FSP if inferences as toeffect can reasonably be drawn from generic information (such as the absenceof any, or any material, financial services in or from its New Zealand place ofbusiness).[53] Section 18B(2) accordingly requires the FMA to form opinions. It mayexercise the powers where it considers it "necessary" or "desirable" to do so.Desirability is a lesser standard than necessity. Section 18A stipulates that the purposeof these powers concerns damage to the integrity of New Zealand's financial marketsor the regulation of them. Whilst s 18B(2) only requires the FMA to take s 18A intoaccount, the FMA must still conclude that deregistration is necessary or desirablegiven the purposes that are to be achieved as set out in s 18A. This involves the FMAapplying its experience and expertise.[54] I see no error in the FMA's assessment of the present case. The exercise of thepower was properly directed to achieve the purpose set out in s 18A. It is apparentwhat kind of operation the sections are directed to. FXBTG's registration seems tome to fall within the class of registration contemplated by Parliament in ss 18A and18B. The financial services undertaken by FXBTG in New Zealand are almostentirely notional — a single person operating a computer from an apartment inAuckland. The clients and their investments are entirely overseas. FXBTG acceptsthat the New Zealand securities law does not substantively regulate what it does. Theobvious question is why such a business would want to have a physical presence inNew Zealand at all. The answer is that it does so to claim the reputation benefit ofNew Zealand registration. This is effectively confirmed in the affidavit of Xiaomin Liwho said:36. There are significant advantages to FXBTG in being located in NewZealand as it is the first financial market to open on each day, given itstime zone. New Zealand is also socially and politically stable, and ratesas the second highest nation in the world for being the least politicallycorrupt, behind Denmark by only 1 point (out of 100). New Zealand'sregistered banks stability will also improve given recently proposedmoves by the Reserve Bank to gradually raise bank capital requirementsto lessen the risk of defaults in the banking system. Access to consumersfor dispute resolution and the Courts will also improve with a focus bythe Ministry of Justice on increasing accessibility to justice. NewZealand is perfectly placed to promote its reputation for being a safeplace from which to conduct a financial service business.[55] The fact that the New Zealand markets open first does not seem to me to berelevant given that none of the relevant investments here are actually made on theNew Zealand markets, and those who wish to trade on the international markets arequite capable of doing so at all hours of the day and night. Otherwise the paragraphovertly refers to the benefits of New Zealand's good reputation. This illustrates thatobtaining registration here is good for FXBTG's reputation. Given the entirelynotional connection with New Zealand, seeking to take advantage of that reputationby referring to it in its online material is misleading. Yet that is what FXBTG hasdone.[56] Ms Keil contended that there was substance to FXBTG's registration,including because its profit and loss statements showed that its business had grownsubstantially in the last three years with trading income rising from $50,000 in 2016to $1.4 million in 2019. Expanding into New Zealand is said to be part of the growthplans. What the profit and loss statement actually shows, however, is that the $1.4million in 2019 was attributed to what is called a "service fee", and that it was offsetby significant operating expenses including approximately $1 million in "marketing".In the absence of any further explanation, this material does not suggest to me thatthere were financial services undertaken in Auckland of a different character to thatdescribed above. And given that there are no New Zealand investments or customersat all, the claimed future expansion into the New Zealand markets plans have littlesubstance.[57] I accept Mr May's submission that the harm assessment conducted by the FMArelated to a complaint that had been made to the FMA about FXBTG, rather than itsoperations more broadly. I also accept his submission that no additional harmassessment is required by the provisions. The word "otherwise" in s 18A(b) suggeststhat the misleading appearances referred to in s 18A(a) are seen by Parliament asinherently damaging to the integrity and reputation of New Zealand's markets and theregulation of them. An additional harm assessment is not required.[58] For these reasons I see no error in the decision reached by the FMA.Conclusion[59] Sections 18A and 18B of the Act were inserted to deal with entities who soughtregistration under the Act to artificially claim a reputational benefit by association withthe financial services regime operated under New Zealand law. This case appears tome to be the classic situation the provisions were enacted to address. FXBTGtechnically engages in financial services within the meaning of the Act, but only in anentirely notional way. It has a single employee operating a computer in an apartmentin Auckland, and on that basis it has represented it is regulated under New Zealandsecurities law. That creates a misleading impression.[60] I accept that the FMA erred including that FXBTG was not technically engagedin financial services covered by the Act at all, but I nevertheless accept that it was rightto conclude that s 18B applied, and that FXBTG should be deregistered.[61] For those reasons the appeal is dismissed.[62] The respondent is entitled to costs. If this cannot be agreed it may file amemorandum seeking costs within 20 working days, with any memorandum inresponse being provided 10 working days thereafter.Cooke JSolicitors:Campbell Law, Auckland for AppellantLuke Cunningham Clere, Wellington for Respondent