Business Law Reform Bill

I have been waiting for some time for an opportunity to speak to the Business Law Reform Bill, and the whip insisted I take it. The whip was begging for the opportunity himself, and I am sure that as the night progresses he might take a call and demonstrate that he, like myself, has a very great knowledge of this legislation. I am a little surprised at the outset that the Government wants to go through this bill part by part, because this is legislation that I think most members of the Commerce Committee, of which I was a member, agreed to. I was prepared to ease its passage through the House as quickly as possible. But having now insisted on taking the bill part by part, we will do just that, and will pick up some of the issues that are of importance.

The first component in Part 1 is the Building Societies Act of 1965. The area that is of most interest to me is the statement in section 93(1A), inserted by clause 5, that “Summary financial statements prepared under section 91A must—(a) give a true and fair view of the matters to which they relate;”. When we think it through, that is entirely sensible. I can think of a situation I was in, in one of the corporates I worked for, where there was an issue of a statement that proved not to be correct; it misled investors. There was an action taken against the corporation I was working for. Of course I want to make it clear that I had no responsibility for that component. In fact, the reason I was brought into the business was to try to clear up some of these reporting matters.

💬 Pansy Wong: What were you trying to do?

I was clearing up the mess that had been created as a consequence of a financial statement that had misled investors.

The other relevant point in section 93(1A) is that summary financial statements must: “(b) comply with generally accepted accounting practice, as defined in section 3 of the Financial Reporting Act 1993; and (c) be in the form and contain the information that may be prescribed.” Again I have to say that this is sensible legislation. When we discussed this aspect in the select committee, the Law Society and the accounting bodies that were represented were of an opinion that this was necessary, and of course we agreed with their direction.

Clause 6, “New section 95 substituted”, deals with the signing of financial statements and summary of financial statements. In particular it states: “(1) The financial statements required by sections 91 and 92 and any summary financial statements prepared under section 91A must be signed on behalf of the board of directors by 2 directors of the society.” The reason for that is simply to signal that what was being signed was the intention of the board, and that no one member of the board could sign any declaration or any statement that was not covered off by two directors. This is really a security issue.

Subsection (2) states: “The financial statements referred to in subsection (1) must be approved by the board of directors before they are signed on their behalf.” Again, this is just a good management and good governance issue, and one would expect this sort of activity to take place. Subsection (3) states: “If the financial statements referred to in subsection (1) have not been signed and a copy of them is issued, circulated, or published, the society and every officer of the society who is in default is guilty of an offence.”

Of course, this is an issue that captured the select committee’s interest because this is very significant. It has implications across the industry generally. The Law Society in particular took an interest in this component and was at pains to point out that this had to be drafted in this way to send clear signals to directors and officers of building societies that if they engaged in a practice, whether deliberately or otherwise, there would be consequences of their actions. So it is a component that the select committee supported. Again, I personally supported it, and I was able to refer back to an incident when I had been involved in a corporate.

This is the type of thing that really does focus one’s attention. It galvanises people’s attention to make sure that the activities that people are engaged in and the undertakings that they are employed to undertake are done in a lawful way and that they are protecting investors’ investments.

Part 1 of this bill amends the Building Societies Act 1965. As that Act was passed quite some time ago, the National Party supports an amendment to update it. I can imagine the intention of updating that legislation, but I am slightly concerned about how building society members will be communicated with in terms of their rights and entitlements to receive financial statements.

So—and since the Minister does not seem to be showing any interest—I would like to take this opportunity to go through some of the provisions and ensure that members of building societies get a fair go in terms of understanding their entitlements. After all, Parliament is using time—as my colleague pointed out, the Minister wants us to go through the bill part by part—and I think we should use this opportunity to see whether we can better inform the people.

The effect of one of the amendments in Part 1 is that if members of building societies do not want to receive the full financial statement—which, I take it, includes profit and loss accounts, cash flow statements, balance sheets, notes to the accounts auditor’s report, etc.—they can elect to receive a copy of a summary of the financial statement. As I do not sit on the Commerce Committee, I wonder whether my very informed, hard-working colleague Brain Connell would like to take another call and tell me whether select committee members discussed how much detail has to go into this summary of financial statements.

💬 Brian Connell: We went into a lot of detail.

I am assured by my very hard-working colleague that they spent a lot of time discussing how much detail should go into this summary of financial statements. Each member of the building society can elect to say: “I do not want to receive the full set of accounts, because nowadays, believe me, some of those full sets of financial statements could be up to 100 pages long.” So they might elect to receive just a summary of that material.

I am also happy to see the provision that spells out, quite clearly, the responsibility of the directors. It states that the financial statements must be signed by two directors, and also be approved by the board of directors. As my colleague Brian Connell mentioned just now, it is very important to make sure that the board of directors takes responsibility for approving those financial statements, and eventually two of them must put their signatures on them.

I also understand that there is a time line in this provision. The financial statements must be tabled within 4 months of the end of the financial year. I think, from memory, that that is probably a shorter time frame than was previously allowed. The financial information and accountability report has to be produced in a timely manner for it to be useful, and I think that members should receive that information as soon as possible. The provisions also cover how many days of notice have to be given for an annual general meeting to be held, and how long a time the building society has to send out the financial statements.

So when I look through these three pages of amendments to the Building Societies Act 1965, it seems, in general, that they are spelling out more the responsibility of the directors. They also lay out quite clearly the time frame within which those financial statements have to be prepared, and in what format.

I am pleased to see that the member Rodney Hide is here with us. I will raise a couple of points with regard to this legislation, and I will ask some questions, which Mr Hide, when he has a moment to look through this, will also want to ask. I have listened with interest to my colleagues Brian Connell and Pansy Wong as they explained what this legislation is about. I have just had the chance to read through Part 1, and that brought to my mind an article by Rodney Hide I read just recently. I think it was in relation to workplace safety.

💬 Rodney Hide: Oh, yes.

Rodney Hide asked some questions about whether the wording in the legislation was correct, and whether indeed the people who were being asked to comply with the legislation actually could—because it left out a couple of important parts, a couple of tests, that were really important. It said things like: “We shall all do our utmost to ensure that there is safety in the workplace.” Well, that is good, but the fact is that there is a limit to how much a business can afford. One cannot absolutely guarantee total safety.

When I read through this part of the legislation, the same sort of question comes to my mind. I wonder why we are being so prescriptive. Maybe the Minister will take a call and say: “Look, it’s the history of how building societies operate.” I do not know. Maybe they are so dysfunctional that Parliament has to prescribe that they dot the i’s and cross the t’s in whatever they have to do. When I look at this legislation, I wonder why we are passing legislation like this. Surely these organisations are smart enough and good enough to run their own operations? Yet here we are in Parliament prescribing things with regard to a summary of financial statements. We are telling these organisations how they must set them out, when to do them, how they do them, who they have to give them to, and if they do not do that, they have to do this. I seriously ask—

💬 Pansy Wong: Where is the penalty?

My colleague is asking whether there is a penalty. I go back to my point: why is this Parliament spending time and taxpayers’ money on being so prescriptive? I do not understand that. We have a colleague in this House, Ross Robertson, who is known as “Red tape Ross Robertson”. He is always saying that we pass too much law, and most of us on this side of the Chamber agree with that. Yet here we are—

💬 Rodney Hide: He had the Paper Reduction Bill.

The Paper Reduction Bill. This is classic legislation that Ross Robertson’s bill would cut right across if it could become law, but it is not law. I ask the Minister seriously why this legislation dots the i’s and crosses the t’s. Who does it help? Does it help the building societies? [Interruption] It helps the building societies.

💬 Hon Judith Tizard: Members of building societies.

It helps the members of the building societies.

💬 Hon Judith Tizard: Are you a member of a building society?

No, I am not a member of a building society. But then I ask myself this question: why can the members of the building societies not go along to the meetings and set out the criteria, the prescription, or whatever it is, themselves? Are they not able to do that? Maybe they cannot. Maybe the law we have passed in this country prevents them from doing so.

Then one has to ask the question: if that is the case, why is that so? Why do we not change the law so that they can make rules to suit themselves, rather than members sitting here telling them how they can or cannot run their organisations? Surely, they have far more interest in them, and far more knowledge of the detail than members do. I would have thought so.

I do not even know which building society we are talking about, so how do I know whether it is right or wrong? Does anyone else know which building society it is? We are talking about building societies generally, but seriously, which member can tell me which law and which building society this bill will directly affect, and do the members of that society agree? Do we know?

💬 Brian Connell: The Minister will take a call and tell us.

The Minister may be able to take a call, but I just raise the point.

💬 Rodney Hide: Do we still have building societies?

That would go back to the fundamental question then—do we have to have building societies at all? Why do we have those sorts of things?

I too have some questions for the Minister in the chair, because it is not often that we find ourselves amending legislation that was passed before Craig McNair’s mother was born. This is true. This is the Building Societies Act of 1965, so this legislation has stood the test of time in parliamentary terms and in New Zealand terms—it is nearly 40 years old. So the building societies legislation has been trucking along for 40 years, and then, suddenly, we have to change it. What are we changing it for?

Clause 4 in Part 1 of the Business Law Reform Bill will insert a new section 91A in the Building Societies Act, which will allow building societies to prepare summary financial statements. Forgive me, but presumably those building societies have been getting along since 1965 without needing to put in summary disclosures and financial statements. All of a sudden, they are needed. Why?

I want to draw Mr Carter’s attention to something that quite disturbs me about our building societies. The new section 93(1A), to be inserted by clause 5 of the bill, states: “Summary financial statements prepared under section 91A must—(a) give a true and fair view of the matters to which they relate;”. I ask the Minister, does that mean that since 1965 financial statements that did not give a true and fair view of the matters to which they related have been able to be prepared? See? The Minister does not know about the Building Societies Act of 1965. How is it that we are passing legislation after nearly 40 years to allow summary financial statements, and having to say “… give a true and fair view of the matters to which they relate;”?

I ask the Minister whether that is not a requirement already. I look across to Government members in this Committee and ask, is that not a requirement now? I look across to United Future, the great party of common sense, whose members know about financial matters, and I ask Mr Paul Adams whether it is not already a requirement for building societies to “give a true and fair view of the matters to which they relate” when they provide a financial statement? It is. So why are we passing this legislation now?

Mr Adams says: “I don’t know. I just got told to come down here by Peter Dunne to vote for it.” New Zealand First does not know either, because those members are busy trying to tidy up the foreshore and seabed legislation, but I doubt whether they will be voting for it. I look forward to hearing Jill Pettis who, once again, will not take a call, but chip, chip, chip—she knows all about how building societies work.

💬 Jill Pettis: Yes, I used to work for one.

Oh, she used to work for one. What did the member used to do for that building society?

💬 Jill Pettis: Arrange people’s mortgages.

Very, very good. Well, when that member was arranging people’s mortgages and preparing financial statements, was it a requirement that she gave a true and fair view of the matters to which the documents related? [Interruption] She says it was, so again I ask the member, who has worked for a building society—which puts her ahead of everyone else in this House—why are we doing this? Why is this change necessary?

Maybe Mrs Jill Pettis, who is in a position to know, could finally take a call to explain something of which she has experience. I ask her to take a 1-minute call to explain why summary financial statements are needed, why we need to be worrying about building societies giving an untrue and unfair view of matters, and why we might be worried under proposed section 93(1A)(b) that they might not be complying with “generally accepted accounting practice”. Why on earth would we be putting that into legislation 40 years after the original bill?

I do not mean to be rude, but I think Mrs Pettis was around in 1965.

💬 Jill Pettis: Just.

Just—so she was just around, unlike Craig McNair’s mum.

I move, That the question be now put.

Madam Chair, thank you for your generosity. When you were good enough to call me on Part 1 before, I was developing an argument that went along the same lines as Mr Hide’s contribution, and I really want to get back to that in some degree. Section 95, “Signing of financial statements and summary financial statements”, which is proposed to be substituted in the Building Societies Act by clause 6 of the Business Law Reform Bill, states: “(1) The financial statements required by sections 91 and 92 and any summary financial statements prepared under section 91A must be signed on behalf of the board of directors by 2 directors of the society.” The same question that Mr Hide was posing, with a slightly different slant, is what was happening prior to this legislation. Do members know?

💬 Hon Members: No.

Why not? If it has been happening—

💬 John Key: We weren’t listening to the question.

Members were not listening to the question!

💬 John Key: What was the question?

I would like to repeat it. If a board was signing information prior to this legislation, were board members really of a view that they did know what they were signing, and they should not be signing it now? What is different? Were they acting illegally prior to this? What were they doing for the last 40 years? Well, not all the members of those boards were acting illegally, I am sure. But what were they doing?

The other issue is in the proposed section 95(2): “The financial statements referred to in subsection (1) must be approved by the board of directors before they are signed on their behalf.” The same question arises. What were those boards doing prior to this? Would the Minister please take a call and explain to me what the difference will be? Were boards of directors, prior to this legislation, having financial statements sent out on their behalf before they signed them and knew what was in them? That seems to me to be highly irregular. We have already touched on section 95(3): “If the financial statements referred to in subsection (1) have not been signed and a copy of them is issued, circulated, or published, the society and every officer of the society who is in default is guilty of an offence.” Were boards of directors not guilty of an offence prior to this? Why not? What has changed? What is the difference? Were they acting illegally prior to this?

If this provision is designed to sheet home responsibility, then, OK, that is fine, but it is a bit of a slur on the good people who held those offices prior to this legislation being enacted. I am sure that over the last 40 years there have been boards of directors of building societies that have conducted themselves ethically.

Debate interrupted.

Sitting suspended from 6 p.m. to 7.30 p.m.