Financial Markets (Regulators and KiwiSaver) Bill, Auditor Regulation and External Reporting Bill

on behalf of the Minister of Commerce: I move, That the Financial Markets (Regulators and KiwiSaver) Bill and the Auditor Regulation and External Reporting Bill be now read a first time. At the appropriate time I intend to move that the Financial Markets (Regulators and KiwiSaver) Bill be considered by the Commerce Committee, that the committee report finally to the House on or before 28 February 2011, and that the committee have authority to meet at any time while the House is sitting except during oral questions, and during any evening on a day on which there has been a sitting of the House, and on a Friday in a week in which there has been a sitting of the House, despite Standing Orders 187 and 190(1)(b) and (c). I also intend to move that the Auditor Regulation and External Reporting Bill be referred to the Commerce Committee for consideration.

The Financial Markets (Regulators and KiwiSaver) Bill establishes a new financial sector regulator, the Financial Markets Authority, and makes important changes to the governance of KiwiSaver schemes. The Auditor Regulation and External Reporting Bill provides for the regulation of the auditing profession and consolidates the setting of accounting and auditing standards within a new body, the External Reporting Board. The House is debating the Financial Markets (Regulators and KiwiSaver) Bill and the Auditor Regulation and External Reporting Bill simultaneously because of their interconnected nature.

In recent years confidence in the financial sector has been damaged by a number of serious corporate collapses, particularly the collapse of finance companies. The Government cannot remove all the risk from investment decisions. However, if we want to develop the kinds of vibrant capital markets that are required to lift New Zealand’s economic performance, it is essential that the financial sector is subject to clear rules that investors can be confident will be enforced actively and consistently. To enhance investor confidence in financial markets it is also essential that investors have confidence in key financial market participants like auditors, trustees, and financial advisers. The collapse of finance companies has clearly highlighted the need for a more integrated approach to the regulation of the financial sector, and a much more active enforcement role for regulatory agencies. Achieving both of those objectives has been impeded by the fragmentation of responsibilities across different regulators.

The Financial Markets (Regulators and KiwiSaver) Bill establishes a new Financial Markets Authority, or FMA, which, in conjunction with the Reserve Bank, will have responsibility for the regulation of the financial sector. The authority will assume the current responsibilities of the Securities Commission, which will be disestablished. It will also take over the regulatory roles of the Government Actuary and some of the regulatory functions of the Companies Office, have an enhanced role in overseeing registered securities exchanges, and take on responsibility for the regulation of financial advisers, trustees, and auditors. The result of these changes is that the authority will have responsibility for the regulation of issuers throughout the lifespan of the securities they are offering, rather than just focusing primarily on the issuers’ disclosure at point of sale, as is currently the case.

The Financial Markets Authority will undertake an annual oversight review of the NZX and will report on how well the exchange is supervising its markets. NZX and the authority will enforce market rules and market integrity regulations through a new financial markets ruling panel, which is established by the bill. The Financial Markets (Regulators and KiwiSaver) Bill also provides for the Financial Markets Authority to exercise another person’s right of action against a financial market participant. Subject to certain procedural safeguards, it will allow the authority—amongst other things—to enforce directors’ duties owed under the Companies Act. That is a significant new power, and I will be particularly interested in submissions that the select committee receives on that specific matter. The bill also provides the power to make regulations that override certain statutory exemptions in the Securities Act 1978 to help ensure that financial instruments cannot be structured in such a way as to avoid coming within its scope. To facilitate the comparability of different offers of securities, the bill provides for the establishment of a register of securities, which will provide better public access to the relevant disclosures and information relating to offers of securities.

This bill also aims to ensure that we are effectively regulating where investor funds will be increasingly directed in the future, namely KiwiSaver. At the end of March 2010 KiwiSaver held almost $6 billion of assets. This amount will only grow in years to come as more people join the scheme. KiwiSaver schemes are currently structured so that the trustee of the scheme has ultimate responsibility for the management and administration of the assets. The trustee is also currently the insurer of interest in the scheme under the Securities Act, making the trustee responsible for, amongst other things, the correctness of disclosures made by the scheme. That arrangement does not reflect how most retail schemes operate at present, because each scheme also has a manager that creates and promotes the scheme and is responsible for day-to-day investment decisions. The Financial Markets (Regulators and KiwiSaver) Bill requires that KiwiSaver schemes have a designated manager who is also the issuer for the purposes of the Securities Act 1978. This makes the directors of the manager responsible for the scheme’s disclosures, whereas the trustee is responsible for custodianship of the assets and supervising the manager of the scheme. These changes will also enable trustees of KiwiSaver schemes to be brought within the trustee’s licensing regime established by the Security Trustees and Statutory Supervisors Bill.

The Auditor Regulation and External Reporting Bill will allocate auditor regulation powers to the Financial Market Authority and strengthen the financial reporting system. Investors need to be confident that financial reports provide unbiased, transparent, and relevant information about the economic performance and position of businesses. The bill will require professional accounting bodies to regulate members who carry out issuer audits as a specialist profession. As the Registrar of Companies stated in a report to the Commerce Committee last year, many finance company audits lack the rigour and the analytical depth one would expect for entities managing such investments. The bill also empowers the Financial Market Authority to monitor how well the professional bodies are carrying out the new auditor licensing function, including the ability to instruct them to make changes.

The Financial Market Authority will also have the front-line responsibility for carrying out quality reviews of all practices that perform issuer audits. The Financial Market Authority will be able to initiate or take over investigations of licensed auditors and auditing firms if it is in the public interest to do so, and to make administrative orders should the need arise.

Finally, the bill consolidates financial reporting and auditing and assurance standards within a reconstituted Accounting Standards Review Board, to be called the External Reporting Board. These responsibilities are currently split between the New Zealand Institute of Chartered Accountants and the Accounting Standards Review Board. Like the Accounting Standards Review Board, the new External Reporting Board will be an independent Crown entity.

In conclusion, these bill are very, very important. They are among the key elements in the Government’s reform package to strengthen investor confidence and participation in New Zealand’s financial markets.

I commend these bills to the House.

Labour will support these bills, the Financial Markets (Regulators and KiwiSaver) Bill and the Auditor Regulation and External Reporting Bill, being referred to a select committee, where we intend to subject them to significant scrutiny. Although we agree with the principles that lie behind the legislation of providing for a single regulator and the regulation of auditors, we are concerned that the Government has managed to get its legislative programme out of order—it actually makes no sense whatsoever. Our committee, the Commerce Committee, will soon be reporting back the Securities Trustees and Statutory Supervisors Bill from the select committee, and the Securities Act review has just completed the discussion paper process. Presumably, the Government will be considering its approach to that discussion soon. However, this legislation and both of those matters are inextricably linked to each other, so why is there a rush to get the Financial Market Authority into place ahead of the rules that it will operate under? It makes absolutely no sense to me whatsoever that one would put in place the regulatory body without having the regulatory framework that it is designed to enforce put in place first.

And why does this legislation not address a fundamental flaw in the design of the present system? I had thought this Government would be keen to address the handbrake that the Serious Fraud Office essentially applies to regulators when it is investigating alleged fraud. That is not fixed by this legislation. I want to look at that matter very carefully when the legislation comes before our select committee.

In order to answer the question about why there is a rush, I think we need to return to the time when Labour took office in 1999. I remind this House that the previous Labour Government inherited a regulatory wasteland as far as the financial sector was concerned. We had a Takeovers Panel whose annual report each year was a blank sheet of paper, because it did not have a Takeovers Code to enforce. How ridiculous was that? Year after year we paid the chair of the Takeovers Panel to sign a blank piece of paper as his annual report to the House. We did not have a securities markets regulatory framework to provide for registered exchanges when we became the Government. We did not have continuous disclosure provisions. I remember the people in this House who railed against continuous disclosure becoming the law. One of them, now a prominent member of the National Party, was formerly a member of the ACT Party.

I remember that we did not have strong enough rules to prohibit insider trading. Would the Securities Commission have got $20 million for—oh, no, it was not really this—insider trading out of Fay Richwhite, if it had not been for the changes that we put in place and the provisions against market manipulation that we put in place, as well? We did not have regulation around financial advisers, nor did we, as we learnt, have sufficient regulation around the non-bank deposit taking sector. I say “sufficient regulation” because I am sick of people saying there were no regulators in the space of the non-bank deposit taking sector. There were regulators; they were called trustee corporations, and gee they did a good job. And the auditors did a good job, which is why we have the auditors legislation in front of us today, as well.

Every year of our 9 years in Government we were regulating different aspects of the financial sector, and the reason it took as long as that was that there was so much to be done. We had earned our reputation as a country with the financial sector’s Wild West, and year by year our Government strengthened existing regimes and put in place new regulation. I do not think that anyone should ever forget the fact that we inherited a regulatory wasteland, and we inherited it from a National Government.

I do not know why I was surprised, therefore, to find this statement in the discussion document on the Securities Act review: “While capital markets, like other markets, might be expected to work efficiently without government involvement, all advanced countries have found it beneficial to introduce a regulatory regime to counter market failures that financial products are inherently prone to.” How could anyone expect capital markets to work without Government involvement post our own finance company sector meltdown, let alone the global financial crisis? Who could write that? Who could think that? And what are the market failures that this wonderful whiz-kid has come up with? If we think about what market failures are in this sector, we realise they are about people being conned or ripped off; that is what the market failures are. There was insufficient protection offered by those who were in place to protect the interests of those who invested in finance companies. That is what makes me nervous about putting a regulator in place and leaving the rules that it will enforce until later, because the regulator’s strength will come from the rules and the principles that the Securities Act will contain.

As the previous Minister of Commerce I visited the UK’s Financial Services Authority on a couple of occasions. The second time was in election year in 2008, and I met with the outgoing chair, Sir Callum McCarthy. We had a discussion about the Financial Services Authority’s oversight of the Northern Rock failure and some of the lessons that it had learnt from that. He pulled from his pocket a laminated card with a set of 11 principles that the Financial Services Authority is able to enforce. Prescriptive rules can always be circumvented, he warned, but principles, unlike rules, are not made to be broken.

The Financial Services Authority’s principles are these: “1 Integrity—A firm must conduct its business with integrity. 2 Skill, care and diligence—A firm must conduct its business with due skill, care, and diligence. 3 Management and control—A firm must take reasonable care to organise and control its affairs responsibly and effectively, with adequate risk management systems. 4 Financial prudence—A firm must maintain adequate financial resources. 5 Market conduct—A firm must observe proper standards of market conduct. 6 Customers’ interests—A firm must pay due regard to the interests of its customers and treat them fairly. 7 Communications with clients—A firm must pay due regard to the information needs of its clients and communicate information to them in a way which is clear, fair and not misleading. 8 Conflicts of interest—A firm must manage conflicts of interest fairly, both between itself and its customers and between a customer and another client. 9 Customers: relationships of trust—A firm must take reasonable care to ensure the suitability of its advice and discretionary decisions for any customer who is entitled to rely upon its judgment. 10 Clients’ assets—A firm must arrange adequate protection for clients’ assets when it is responsible for them. 11 Relations with regulators—A firm must deal with its regulators in an open and cooperative way, and must disclose to the FSA appropriately anything relating to the firm of which the FSA would reasonably expect notice.”

I have spoken favourably about the Government’s decision to establish the Financial Markets Authority. It was a recommendation that came out of the Capital Market Development Taskforce, which I commissioned to provide a blueprint for the future of our capital markets. I have also welcomed the setting up of the Financial Markets Authority establishment board ahead of the legislation, and congratulated the Minister on the choices he has made. However, what I have learnt since making that statement leaves me with no choice other than to say to the Government that Simon Botherway must step aside from the position of chairing the establishment board. And that should be not simply for the period of the Ombudsman’s investigation into the management of potential and actual conflicts of interest in a case where the public does not separate South Canterbury Finance from Allan Hubbard, even though the Securities Commission apparently can.

As if that were not bad enough, Simon Botherway’s connections to the vultures that now encircle the entrails of South Canterbury Finance’s assets, with taxpayers’ cash in hand, mean that he could find himself conflicted in terms of what will be one of the most significant inquiries that this country will ever see into the collapse of such a finance company. Mark my words here and now: if this Government does not agree to a commission of inquiry into what has happened with regard to South Canterbury Finance and Allan and Jean Hubbard, then a Labour Government will commit to hold such an inquiry.

If National wants the Financial Markets Authority to have credibility—and it is tainted already—then it has to think about the primary objective of providing confidence for investors. I wrote to the Minister of Commerce on 28 June this year, and I asked him to explain to my constituents about Allan and Jean Hubbard. They pose no threat to anyone in terms of their ability to leave the country and live a disgracefully ostentatious international lifestyle, unlike others who have taken money off unsuspecting New Zealanders and spent it on themselves. Why is this couple being put into statutory management, when we see others living the high life? That is why this process has been tainted and why, if it is to get back on track, the Government has to act.

I seek leave to table the letter that I wrote to the Minister of Commerce on 28 June, the letter that I wrote on 30 June, and the two replies that I received.

💬 Mr DEPUTY SPEAKER: Leave is sought for that purpose. Is there any objection? There is no objection.

Documents, by leave, laid on the Table of the House.

I rise to support the first readings of the Financial Markets (Regulators and KiwiSaver) Bill and the Auditor Regulation and External Reporting Bill.

What we heard from the member who has just resumed her seat, Lianne Dalziel, was an angry speech. It was an angry speech from a former Minister of the Crown who is blaming the financial collapses of recent times on the Government of the 1990s. What we have heard in the House tonight is a bunch of Opposition MPs blaming the Government of 12 years ago. We heard in the debate on the Electricity Industry Bill that Max Bradford’s reforms were to blame for the previous Labour Government overseeing a 72 percent increase in the price of electricity. Apparently the National Government of the 1990s is to blame. We constantly hear the shadow Leader of the House talking about blood-alcohol levels from 1990, and saying that in Labour’s 9 years it did not do anything, but suddenly Labour is demanding action from this Government.

Let me tell members about the financial reforms that this Government is making, under the supervision of the hard-working Simon Power. The reforms are about regulating. I find it interesting that under the watch of the former Minister of Commerce we had some of the biggest collapses of financial companies in the history of this country. She gets angry, but I suggest to her that she get angry in the mirror, because it was under her watch that these companies collapsed and failed. The reforms that National has brought into this Parliament in 2 years include the Financial Service Providers (Pre-Implementation Adjustments) Bill and the Financial Advisers Amendment Bill. They have both passed—tick! A review of the Securities Act is coming in the new year—tick! We have the Securities Trustees and Statutory Supervisors Bill, which is currently being put through this House.

The fact is that we are having to clean up the mess of the last Labour Government. The Financial Markets (Regulators and KiwiSaver) Bill establishes a new financial sector regulator, the Financial Markets Authority. It makes important changes to the governance of KiwiSaver schemes. The second bill, the Auditor Regulation and External Reporting Bill, provides for the regulation of the auditing profession, and consolidates some of the accounting and auditing standards within a new body called the External Reporting Board. So National is focusing on improving the integrity of our financial system, which was torn apart by the negligence of the last Labour Government. The overriding focus in the commerce portfolio—where, I must admit, we do work together in a multipartisan way to bring legislation to this House—is about mum and dad investors having confidence in the integrity of our financial markets.

💬 Hon David Cunliffe: That’s right.

Mr Cunliffe agrees. He knows that our Government is focused on boosting growth and creating jobs. It is also about providing financial security for families and providing services across the board. It is clear that New Zealand needs a single financial market regulator with a culture of visibility, proactivity, and enforcement. That is where the last regulator fell down.

💬 Hon David Cunliffe: Get tough.

It was the enforcement part and the lack of a culture of visibility. Now Mr Cunliffe wants to get tough. Under 9 years of a Labour Government, he was soft. On too many occasions some of the finance company failures were about investors’ money falling through the gaps. I do not think the member would disagree with that. Undoubtedly, it damaged the confidence of mum and dad investors. This legislation is really about giving people confidence in the capital markets, more savings, a basic understanding of their investments, and advice that they can trust to help them make informed choices.

The Financial Markets Authority will have significant new powers, as the last two speakers have set out. It will set out the objectives and functions of the new regulator, which will consolidate a lot of the regulatory functions that were in the Securities Commission, the Ministry of Economic Development, the Government Actuary, and the New Zealand Exchange. Under the new bill—

💬 Hon David Cunliffe: Bills!

Under the first bill, one of the most important powers will be the ability of the Financial Markets Authority to publicly enforce the duties of issuers, directors, auditors, trustees, and other players in the markets when it is in the public interest to do so.

💬 Hon David Cunliffe: Manage conflicts of interest?

I will repeat that for the member: when it is in the public interest to do so.

This is a significant new provision. The new power was specifically requested by the Financial Markets Authority establishment board because it saw a gap in the authority’s ability to oversee and enforce financial markets. What became apparent when misconduct occurred was that individual investors could not, for various reasons, bring civil cases because of the costs and risks involved, or because they had limited legal standing. This bill will enable the Financial Markets Authority to have the power to exercise a person’s right to bring a civil action against any financial markets participant where it considers that action to be in the public interest.

The Government will also be able to make regulations to prevent financial products from being structured to avoid being supervised by the Financial Markets Authority. That is really important, because, as nearly always happens with legislation of this type, lawyers will come in and try to manipulate matters and work out ways to avoid this regulation and these types of financial regulations. The Financial Markets Authority will also have increased powers to require that warnings about financial products and providers be included in the offer documents, which is also particularly important, and that the names of the people involved be published in those offer documents.

I will not talk about the KiwiSaver regulations, but I do want to move to the Auditor Regulation and External Reporting Bill. This bill strengthens auditor regulation because it will require the Institute of Chartered Accountants to regulate auditors as a specialist profession rather than as just chartered accountants. Currently, any chartered accountant holding a certificate of public practice can carry out audits as long as they think they are competent to do so and no audit-related restrictions have been placed on them. The bill also provides for the proposed Financial Markets Authority to be responsible for auditor oversight in monitoring and reporting on the adequacy and effectiveness of the institute’s regulatory systems. As has already been stated, a report by the Registrar of Companies identified that audit failure was a contributing factor to the finance company collapses—

💬 Hon David Cunliffe: Come on, be bipartisan! You know you want to.

—it is true that some of the work that Labour did in this area was quite credible—and that shows that self-regulation alone was not working, and that we do require independent oversight in this area.

The new licensing regime will apply only to major audits such as the audits of issuers and large companies, and it will not impact on the audits of small and medium-sized businesses and non-profit entities, which I think is really important. So we will not have the unintended consequence of regulation affecting those companies. The bill also provides for consolidated accounting and auditing standards, set within the reconstituted Accounting Standards Review Board, to be called the External Reporting Board.

In summary, I commend the Minister for bringing these bills to the House. I commend the Minister for bringing a whole raft of legislation to the House in this area of the law. I commend the bills to the select committee. Thank you.

Occasionally in this House I feel as if I have come down in a parallel universe: a universe where National is no longer putting up “Iwi/Kiwi” billboards but is passing foreshore and seabed legislation that is half-decent, and a universe where National is telling Labour that we were too soft on white-collar crime and corporate embezzlement. I am glad that I have come down in this parallel universe, because I rather like the new, tough, anti-market National members, and it is about time they got off their backsides and passed this legislation. We will support its referral to the select committee, but we are going to have a very careful eye.

💬 John Hayes: Are you the second or the third coming, David?

There is the brain of the Wairarapa. He must be taking stimulants rather than depressants today, because he is making a wonderful contribution to the House.

I will not repeat history; I will not go through the very many things that Labour did to tidy up the regulatory wasteland that we inherited from the previous National Government. All I will say is that it is good to see the work in which the Hon Lianne Dalziel made huge progress being continued by this Government—

💬 John Hayes: The violin.

—and I commend the intent. I am being nice to Mr Hayes; it will not happen often. I commend the intent of this legislation.

However, it is important for us to note right at the outset that if the Government and this Parliament are to collectivise the enforcement powers of the market into a single financial markets regulator, it is essential that that regulator is beyond reproach, and is able, willing, and ready to deliver the scrutiny that this legislation demands. In light of the debacle of South Canterbury Finance and the endemic conflict of interest accusations surrounding Mr Simon Botherway, the chair of the committee of the Securities Commission, and the chair of the establishment board of the Financial Markets Authority, let me say two things on behalf of the Opposition.

Mr Botherway must immediately stand aside from the establishment board. The conflict management process has been appalling, and he is tainted by it. He is tainted by his late declaration in relation to the fact that Allan Hubbard’s South Canterbury Finance bankrupted his brother by putting his companies into receivership. That should have been put on the table at the start; it was put on the table only when my colleague Ruth Dyson put in written parliamentary questions, and that is appalling. That is why the Ombudsman is investigating, and that is why Mr Botherway must immediately stand aside.

But I am afraid that the issue goes rather deeper than that, because it is not just the process that led up to the statutory management of the Hubbards that has caused great concern around New Zealand. Mr Botherway also appears to have worked closely over many years with the primary beneficiary of the taxpayers’ bail-out of depositors in South Canterbury Finance, Mr George Kerr. In fact, I am informed tonight that they were at school together at Christ’s College from 1978 to 1984. They studied at Otago University, doing B Com degrees together at the same time, and they then worked together at Spicers Portfolio Management, where they encouraged its sale to AXA, at Brook Asset Management, then at Sterling Grace and Tempus Capital. In other words, the numero uno regulator, and the numero uno sharpie, who has made tens of millions of dollars from the taxpayer, are bosom buddies from way back.

I want the Minister of Commerce to assure the House right now that the chair designate of the establishment board of the Financial Markets Authority has severed all ties with George Kerr, and all ties with any entities associated with the heartland bank that is poised to sweep up the assets of South Canterbury Finance.

💬 Peseta Sam Lotu-Iiga: I raise a point of order, Mr Speaker. We have heard in the last 3 minutes this gentleman, a former Minister, refer to a Simon Botherway. I just want to see the relevance of what he is saying to this bill—

💬 Mr DEPUTY SPEAKER: No, I need no further comments. This is a first reading speech, which is a wider-ranging speech than some speeches, and the member is relating what he is saying back to the primary bill before us.

To clarify that, I say, of course, Mr Botherway is the chair of the establishment board that will set up the Financial Markets Authority, which this bill seeks to put in place, so he is likely to become the chair of that authority.

Debate interrupted.

The House adjourned at 10 p.m.