Financial Markets (Regulators and KiwiSaver) Bill

This is what I would call a meaty part of the Financial Markets (Regulators and KiwiSaver) Bill, and this is the one I want to focus on. I cannot imagine that debate on this part will be over in an hour, so I do not know why the Minister in the chair, the Minister of Commerce, thinks it will pass so quickly. I will table an amendment to this part, which I would like the Committee to consider. The Minister will not be surprised at this because Labour members of the Commerce Committee referred to it in the report back from the committee. We think it is fundamentally important that there are principles to bind all financial markets participants. We were disappointed to see the securities review repeat one of the errors of the past, which is not to have a number of principles. I think one overarching principle was mentioned at the end of the discussion document, which I feel will be ineffective in terms of what we are trying to achieve here.

What I have done is—[Interruption] I have not tabled it yet. I have plenty of time, but somebody might like to assist me with that—to take from the Financial Services Authority in the UK the principles it established under its conduct provisions. It has authority under legislation there to issue statements of principle in respect of the conduct expected of approved persons. When the authority issues a statement of principle, it is also required to issue a code of practice for the purpose of helping to determine whether a person’s conduct complies with the statement of principle, and the code then specifies descriptions of the conduct etc. that would be a breach of this code. Any failure to comply with a statement of principle means that issues need to be addressed. I have mentioned this in the House before and I will mention it again, because I think it was a bit of a driver for me, but, unfortunately, it was too late for me to influence the securities legislation review. The reason is that when I went back to the UK and met with the Financial Services Authority for second time in my period as Minister of Commerce, it was, unfortunately, in 2008. It was at that time that I met the outgoing chair, Sir Callum McCarthy—I have told this story before—and at the meeting we had, he pulled from his pocket the laminated card with this set of principles. That is where I got the principles from. He told me that they guided him in all he did and that they guided the Financial Services Authority in all it did. Then he gave me his own personal laminated card. He probably had dozens of them, but doing that was very effective. For me that is the indelible memory I now have of that occasion, when I realised for the first time that the enforceable principles that underpin rules make the difference, because, unlike rules, they are not made to be broken. Having come from the legal profession—and I know that others in this Chamber have come from the accounting profession—I know that our professions, our entire livelihoods, are dependent on advice for people to get around rules, but principles cannot be got around because they guide everything we do with integrity.

Let us look at the principles that the Financial Services Authority developed under its code. The first one is integrity: “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.” How useful that would have been as a principle to underpin certain activities of certain finance companies. “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.”

I will comment on one thing, because I know that the Minister in the chair, the Minister of Commerce, has made some statements recently about the need to hold people personally accountable for statements they have made in the public arena—celebrity endorsements. I do not agree with that; I think we should prohibit them from doing it. Under current broadcasting standards, we are not allowed to have a doctor say that a particular non-prescription drug is OK. That is prohibited, because a doctor saying that sends a very clear message. I do not know about other members, but I do not think it is appropriate to have a celebrity endorsement for a finance company where that person cannot possibly know whether that company is up to delivering. I do not think we should punish the messenger; I think we just prevent that message from being sent, because it is the wrong message to be sending. I think this is what the statement of principles that sits behind the Financial Services Authority in the UK is all about. As principle 7 states, we have to make sure that information is communicated in a way that 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.”

We have talked about conflicts of interest in relation to this bill. The chair of the establishment board of the Financial Markets Authority, Simon Botherway, was in a situation that is now currently before the Ombudsman, as I understand. But I want to reflect on one element. I personally think that I have taken a very strong line on conflicts of interest. When I was Minister of Immigration I made sure that my husband, who is a lawyer, did no immigration work at all—none, not one jot of immigration work—even though of course very few immigration cases end up in the Minister’s hands. But it was the message it sent that was wrong. But in this particular case I think I made a mistake in the House when I referred to Mr Botherway, in the question of South Canterbury Finance and putting his brother’s company into receivership. As I understand it, it was Lion Breweries that put that company into receivership, and South Canterbury Finance then appointed its own receiver. It is a step removed. I understand that the individual concerned took advice. I want to put it on record that I accept his word for that, and that he acted honourably. I still believe he acted mistakenly, and that is a view I will continue to hold because I feel that conflicts of interest are not just about real interests; they are about perceptions. Unfortunately in this place, as we see all too often, perception is reality. However, I did want to put that on the record. I agree with my position, but I do not agree with how I presented it. I wish Simon Botherway well in his new career.

I return to the principles. “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.” This is so fundamental. We can think about all of those people who went to a financial adviser expecting to get good, decent, quality advice about where they should put their money, and they were let down by a number of those advisers. Did they cross the legal line? Maybe not, in particular cases, but they certainly would have crossed the line as far as this principle is concerned. “10 Clients’ assets—A firm must arrange adequate protection for clients’ assets when it is responsible for them.”, and of course that should go without saying, but, unfortunately, it does not go without saying because adequate protection was not made in many instances, in terms of the advice that people should have received. Then, finally, “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.”

The reason I really like that principle is that it puts it back to the person who is the financial market participant to say: “I’m going to deal with those who regulate my right to do this, or undertake this activity, in a reasonable way. I’m going to provide them with the information they need in order to ensure that the market itself has integrity.” That is what I think we are faced with at the moment. We are not talking about what really matters around these things. We have talked in this legislation about the Financial Markets Authority’s functions to promote the confident and informed participation of businesses, investors, and consumers in the financial markets. That is quite an important objective. We want to promote and facilitate the development of fair, efficient, and transparent financial markets. But there are two types of people out there, and we have written one law to cover both of them. The two types of people are those who know that they take a risk when they invest their money, and the other people out there are those who do not get that and who do not relate risk to return, or anything like that.

I know that the answer to that, in many respects, is the question of financial literacy. But it is more than that. We should be able to trust people to treat people honestly and with integrity. Unfortunately, the history of the finance company failures in this country says that there were people, day in, day out, who were prepared to rip off unsuspecting New Zealanders and take all of the benefit from it and none of the consequences for it. I think that is unfair. We have to make sure we do better. We have let down the people of New Zealand in this place, and not just from a party political point of view because I think we can all look at each other, we can all look in the mirror, and say that we all took a little too long to realise that people would take advantage of the lack of regulatory framework around the finance companies, and they did. There are other people within that framework, though, who did not take advantage of other people. They genuinely screwed up their business model; they made mistakes. But they made those mistakes with other people’s money. The question is: who pays? Who carries the cost when things go horribly wrong?

If these sets of principles were drummed into the hearts and minds of everyone who is out there, fund-raising off a sophisticated investor, or an unsophisticated ma and pa investor, or whatever we want to call them, if they were drummed into our everyday living and being, then how much better would it have been? How much money might we have seen saved, and not seen lost, in the debacle of the finance company failures? Our select committee is still considering its review of finance company failures. This legislation bridges the gap, in terms of some of the gaps we have already identified, but it does not go far enough. We know of the next item of legislation to come soon, but again I am expressing some disappointment at what I have seen so far. I also think that some of the gaps we have identified need to be brought back to this House and debated when we report back on our review of the finance company failures, and I hope we will be in a position to do so soon.

I apologise to the Committee that I was not in a position before now to present the amendment I have now tabled in the House but I have been somewhat focused on other matters over the last month. I want to put on record my thanks to my colleagues for allowing me the time to spend with my constituents in Christchurch East over what has been a very difficult time. I know of the challenges that we face in Christchurch East, in terms of the recovery from the disaster that the two earthquakes have meted out to my electorate in particular, but other parts of Christchurch as well. In many respects what I am learning about recovery is that it is something we need to do in this area as well. The recovery process for those who lost thousands and thousands of hard-earned dollars, their life-savings in many instances, has not been resolved. It has not been resolved by this Government, and it is not resolved by the establishment of the Financial Markets Authority, except for one small element. I will come back to that element when we get to that particular part of the legislation.

I think it is fair to say that Lianne Dalziel has just had three calls in a row, and it is only appropriate that she was not interrupted given that she is a former Minister of Commerce and that she has chaired the Commerce Committee. I think she chaired the committee on this particular piece of work in a way that indicates she understands what is going on—she was the Minister of Commerce when a lot of the things she described occurred—and she has been determined in her discussions with me about amendments to this legislation, and I appreciate that. I also think, frankly, that the comments she made in respect of the chair of the establishment board will be welcomed by him.

I will talk briefly about the next step the member referred to, and that is in relation the securities legislation, which is still to be drafted. But an exposure bill will be released in August for all those who are interested in the detail of this particular piece of work to go through it in some detail. I persuaded myself that although it was an extra step, I would rather that the bulk of the work, because it is such technical work, was done at the exposure bill stage rather than at the time it goes to the select committee. I suspect that that will inform the working of the select committee by the time we get the bill to it, which will be, hopefully, prior to the House lifting in October for the end of this parliamentary session. In fact, I am determined that that will be the case. I do think, although it does slow it slightly, that it is an essential step. My view is that the principles outlined in the member’s amendment fit more squarely with the securities law discussion rather than the Financial Markets Authority.

💬 Hon Lianne Dalziel: So you’ll put them in?

I am not saying they will go in; I am saying that there is an opportunity. The Government will oppose this amendment in this bill, but there is an opportunity for further discussion, and I would be happy to have that discussion with the member at the time of the exposure bill coming forward in August, which, from memory, is the time.

The issue of celebrity endorsement was slightly overlooked in the reporting of this issue—that is, the Cabinet paper says, from memory, that the issue of celebrity endorsement is subject to a further report to the Government, and we will get that report in May. The media ran the story as though it was a done arrangement. That is not the case. Cabinet has asked for further advice about the practicalities of regulating in this particular area. We will know more about that in May.

The chair of the Commerce Committee looked at me slightly quizzically when I was talking about Part 1 establishing the Financial Markets Authority; of course, it is the purposes of Parts 1 to 4 that are contained in Part 1. I want to talk briefly about the establishment of the Financial Markets Authority. The Financial Markets Authority, or the FMA as it has become known, will replace the Securities Commission and take on certain functions of the Ministry of Economic Development, including those of the Government Actuary. It will be an independent Crown entity that, in the same way as the Commerce Commission, carries out its functions independently. Now, that level of independence—and this is an important point—accords with international norms for securities regulators.

The functions of the Financial Markets Authority will include promoting the confident and informed participation of business, investors, and consumers, and that will be done by the issuing of warnings, reports, and guidelines, and so on. One of the functions is to promote investor awareness that all investment involves risks, and it is not the role of the Financial Markets Authority to remove those risks. It is the role of the Financial Markets Authority to monitor compliance with, and investigation and enforcement of, financial markets legislation.

The authority will also perform these functions in respect of governance. It will regulate financial advisers, securities trustees, statutory supervisors, and auditors. This is a really important point, because one of the things we saw at the time of many of those finance company collapses was various regulators and oversight bodies staring at each other, as those particular agencies decided that because their legislation was restrictive and prescriptive, they did not have responsibility for the oversight and enforcement of the investment product that was being designed in some cases to be precisely outside of the securities legislation to avoid any independent scrutiny, enforcement, or oversight by a regulator.

This particular mechanism of bringing these entities together takes away those gaps. I have referred previously to the fact that as the money hits the floor—and let us not undersell it; we are talking about billions of New Zealand taxpayer dollar investments hitting the floor—the regulators sat and stared at each other and said things, euphemistically, like: “Well, we’re not sure that we’ve got statutory responsibility to oversee this particular part of the transaction.”, or “Our legislation doesn’t allow us to intervene on this particular point because it is very prescriptive about what type of product is a security for the purposes of the securities legislation.” This body will remove the notion of that fracturing of regulatory oversight, and, if nothing else, the most significant component part of this work is to give investors, and, for that matter, designers and innovators of product that is going to the market, a one-stop shop to have discussion with the regulator and the enforcer and overseer of the market.

I use that distinction deliberately, because often when producers of product are thinking about going to market, they will not want to talk to the regulator for fear of the enforcement side becoming part of their discussions, rather than the regulatory side of the operation. That is an important distinction. The Financial Markets Authority will be much closer to the market and the design of those products than its predecessors, and that is a really important consideration. The market intelligence unit, which will be contained within the Financial Markets Authority, is designed to be close to the producer, the public issuer, the person or company that is taking product to market.

Also, when we get into the detail of the bill, it is worth pointing out this particular power. For too long, because of the prescriptive nature of some of this legislation, product has been designed specifically to fall outside legislative and securities markets legislation oversight. That will change with the Financial Markets Authority being given the power to deem a product to be a security for the purposes of oversight, supervision, and jurisdiction in a way that will force, in some respects, those who are taking product to market to talk to the regulator at the appropriate time to ensure that everybody understands exactly what is going to market.

We cannot take away risk. The legislative arm of this Government cannot take away risk from these products and from investors, nor should we try to. But the point here is that enforcement and supervision have to come with power and a comprehensive oversight. My view is that this authority will do that. There is still work to be done on the securities legislation, and that work is well under way.

Thank you, Mr Chairman Robertson, and I congratulate you on your acting chairmanship in today’s debate. I want to say a couple of things in response to what the Minister just told the Committee. I think it would be very useful if what he has just said was right and we were going to see comprehensive regulation and enforcement from one body, and one body only. But the problem with the system that is to be constituted by the Financial Markets (Regulators and KiwiSaver) Bill in Part 2 in particular, which creates the Financial Markets Authority, is that, of course, it does not quite go as far as that.

When the markets are faced with situations of criminal behaviour, and in particular with serious fraud, then the serious fraud task force—or perhaps, on occasion, the police—will sometimes step in, either on receiving a complaint or because it is investigating other conduct. Of course, if the serious fraud task force or the police are investigating matters on a criminal basis, we will simply find that the Financial Markets Authority is locked out of the process. It will have no option in most situations but to simply stand aside and wait until the criminal investigation, usually conducted by the serious fraud task force, has been completed. As we all know, criminal investigations, because of the safeguards that are necessarily in them given the penalties that can be suffered, can take some time. That can have a significant, chilling effect on any regulator’s inquiry into a particular course of conduct. So I am afraid the Minister oversold these reforms on at least one important aspect when he gave his contribution earlier.

I think it is important to point out that unless and until we have some sort of regulatory and investigative principle in this country relating to the primacy of an investigator, whereby investigators or regulatory or enforcement bodies—all of which have some sort of overlapping jurisdiction in respect of some particular matter—can by an overriding statutory authority simply agree that the matter will be within the jurisdiction of one of them, and one of them only, to go forward with the investigation, then we will still have this kind of overlap. It will be a problem. We can see that problem arising in all sorts of areas. Transport accident investigations are one area that springs to mind, but there are many, many other areas where the existence of overlapping regulatory or enforcement bodies can prevent the speedy and expeditious conclusion of a particular inquiry. That will still happen in respect of the financial and securities markets when fraud, and in particular serious fraud, is alleged, even after this bill is passed by the House if that is what the House decides to do.

I will make a couple of other points. The Minister talked about the comprehensive nature of this reform, and I think I have indicated one area where that is an overblown claim. The other area is one that I touched on in an earlier contribution and that is the failure of this Parliament to address the fringe lending sector of the market. This bill still does not go far enough in that respect. We need to have comprehensive regulation across the market. The sort of reform that my colleague Lianne Dalziel advocates for in her amendment to insert new clause 9A, which she has now tabled, would be very useful. If there was a set of principles that bound all participants in all financial markets, and if it was up to the Financial Markets Authority to then fill in the meaning of those principles in any particular context, we would have progress. But despite the advocacy of the Labour members on the Commerce Committee, that is not the way that the Government has decided to proceed.

In particular, I think it would be useful to consider how the principles that are contained in Lianne Dalziel’s amendment would apply in respect of the fringe lending sector. The scheme of the amendment that she has put forward is based, as she said, on the English Financial Services and Markets Act 2007. I have a copy of the relevant section. Section 64 of that Act allows the Financial Services Authority, as it is called in England, to issue statements of principle and codes of practice. I think I said 2007; I should have said 2010.

💬 Hon Lianne Dalziel: 2000.

I beg your pardon; I cannot read Lianne Dalziel’s writing. The legislation, in section 64, allows statements of principle and codes of practice to be issued. After that happens, the authority fills in, as I said before, what those definitions mean in any particular case.

In her amendment Lianne Dalziel refers to obligations to do with a particular provider’s communications with customers. The proposal that she has tabled is that “A firm must pay due regard to the information needs of its customers, and communicate information to them in a way which is clear, fair and not misleading.” My colleague said she felt that would deal with the issue of celebrity endorsements. That problem has to be faced. It is a shame that Cabinet has kicked it into touch and is waiting for yet another report, which, we hear from the Minister, will not be ready until May. Meanwhile, times are tough out there and those celebrity endorsements are influencing people.

I think particularly of the fringe lending sector, where we have Stacey Jones and others saying a certain finance company is a fantastic one. [Interruption] The honourable member Peseta Sam Lotu-Iiga ought to listen to this contribution, because he knows the demographic to which that endorsement appeals. This Parliament has failed to prevent those sorts of practices, despite having had the opportunity time and time again to do so. What happens? People continue to get ripped off, because they think: “Gee, that sportsperson is a real icon—a real hero of mine. If he or she is endorsing a product, it must be a really good one. It must be one that we can trust.” Therefore they invest their money without much further thought. That is a real shame. Unfortunately, under the provisions of this bill such practices will be able to continue, and we should not think that is desirable.

It would be much better to go along with the sort of proposal that the Minister indicated the Government will be voting against, but which Lianne Dalziel has put up. Her amendment states that there are principles to bind all participants in the financial markets. If people complied with those principles, their conduct over time would elevate, and the rip-offs would stop.

The last point I will make in respect of Part 2 relates to the financial literacy point that arises out of the issues I have just been speaking to. In the end, until we deal fairly and squarely in this country with the issue of financial literacy, it does not matter what regulations or laws we pass, because we will still have major problems in this area. That is particularly the case in respect of the fringe lending sector, which I mentioned earlier. Again, we see something of a disappointing result when this bill is looked at in the round on the financial literacy point. The Commerce Committee, in reporting it back, has acknowledged that some work is already being done by the Retirement Commissioner in that area. There is a subsidiary function for the Financial Markets Authority that is enhanced somewhat in this bill, but still no one in New Zealand is fairly and squarely responsible, on behalf of the Government, for trying to improve people’s basic level of understanding about the financial products on offer in the market. Until somebody is tasked with that responsibility fairly and squarely, and until there is a Minister responsible for that agency and accountable to this Parliament, we will still have major problems in that area, with people not being able to understand the basic types of products on offer.

So I say the claims that the Minister has made about comprehensive reform are brave. Certainly no one could deny that this bill is a step forward—in particular, in the provisions of Part 2. But in respect of the significant omissions that I have identified on financial literacy and the failure to really come up with a comprehensive code of conduct that ought to apply across the markets, so that we can, as the Commerce Committee stated in relation to the Financial Markets Authority, facilitate “the confident and informed participation of businesses, investors, and consumers in financial markets”, this Parliament will not have done its job.

I rise to take a call on Part 2 of the Financial Markets (Regulators and KiwiSaver) Bill. I will move to a topic that I do not think has been addressed yet in the debate on Part 2. It relates to the ability of the Minister under clause 20 to request the Financial Markets Authority to inquire into an issue that is of concern to him or her. Under clause 20 “The Minister may, by notice to the FMA, request that the FMA inquire into, and report on, any matter relating to the financial markets, financial markets participants, or other persons engaged in conduct relating to those markets.” I want to explore that issue a little, and to inquire of the Minister in the chair, the Minister of Defence, whether those are the sorts of issues that are being talked about.

I think it was evident to quite a few people in New Zealand and quite a few people in Parliament that problems were afoot as a consequence of the property bubble that developed around the world. There was a property bubble that was inflated during the heady days when credit was easy in various parts of the world; we were not immune to it. We were one of the worst in the world, but we were not the worst. The Government of the day, which was a Labour Government, pushed against the bubble in a number of ways. We tried to take the heat out of it a little by increasing interest rates through the Reserve Bank, which does that independently. We also took the heat out of it by running Government surpluses, so that the Government was saving money and effectively taking out of the economy money that would have otherwise further inflated that property bubble.

I suppose at this juncture I should put on record the fact that, of course, for every one of those Budgets that we ran as a surplus, the National Opposition complained that—

💬 Hon Maurice Williamson: How did the Government increase interest rates?

No, I said it was done through the independent Reserve Bank. The Government did not increase interest rates.

💬 Hon Maurice Williamson: I thought you said the Government did it.

No. We ran surpluses, which were opposed by Mr Williamson and everyone else on the National Opposition. It said we were being greedy, and that those surpluses should have gone back to people in tax cuts. If we had done that, we would have had not only bigger problems in the finance companies, but also a terrible Government balance sheet. We would now be like the so-called PIGS—Portugal, Ireland, Greece, and Spain—which have such high levels of Government debt that they are really in the mire. The third way we pushed against it was by introducing KiwiSaver, which introduced private savings.

None the less, it is true that despite all of those measures there was a property bubble in New Zealand. One of the symptoms of that property bubble was excessive lending into some risky propositions by finance companies. That symptom was evident for some time before the crash. Warnings came from the Governor of the Reserve Bank and warnings came from various other commentators. Of course, some self-interested people in the property sector, including a number of real estate agents, said there was nothing to worry about. The finance companies themselves presented a very rosy picture of the future in a way that understated the risk that was out there.

It would have been good if the Minister had had the power at that time to look a bit deeper into some of these things. I think it was evident to a number of people that related party transactions that were of concern were proliferating in the finance sector. By that, I mean transactions in which the people who were ostensibly acting as independent managers of finance companies were lending money for the benefit of the finance company in a way that returned interest to the people who were investing in the finance company through debenture stock. They were presenting themselves in a way that was, in my view, dishonest. They were effectively saying they were not self-interested in those things, when we now know that a lot of them had loans from the finance company using the money that people had deposited into the finance companies. They were using those moneys to lend into ventures that were highly speculative, and in which they, members of their family, or related family trusts had an interest. Those related party transactions were not properly disclosed.

I would have liked to see that sort of issue inquired into at the time, or, indeed, even now. There is a systemic issue of why that matter was not picked up by the people who already had statutory obligations to supervise those organisations. Finance companies always have a debenture trust deed. In respect of that debenture trust deed there is always a statutory supervisor. The statutory supervisor is generally a trustee company, and it is one of the roles of that statutory supervisor to supervise the conduct of the finance company under the deed of trust that governs the terms of their debenture stock. I think that is an area where that provision could be used, and I am interested in the Minister’s view.

I will give members another example: our accounting standards. I do not know what other people in this Committee think, but I think some of our accounting standards have become so hideously complex that even people who have a degree in accountancy, as I do, struggle to read them. They have become so complex that they no longer make common sense to people. Therefore, people do not bother to read them properly. In fact, most people cannot read them properly, and even those who could read them do not bother to go to the trouble, because they would have to spend a day or half a day to read it and get to the bottom of it.

Not only that, but, as my colleague Charles Chauvel just said, the standards have become instruments in tick-box compliance rather than in fair provision of information to people who are making investment decisions. Although they have become more complex, they have actually become less useful. They have also driven up compliance costs. They are no cheaper. In fact, accounting costs and audit costs—the audit of those practices—have become, in some cases, hideously expensive. The added complexity, firstly, has not protected people; secondly, has become more expensive; and, thirdly, does not serve the purpose for which it was originally intended.

I get a bit tired of some accountants in society, when they are asked for a comment from the newspaper, forever calling for a reduction in compliance costs. In fact, they are perhaps one of the centres of greatest compliance cost in our economy. I attest to that from my own private experience, in respect of both the cost of putting together prospectuses and the costs of audits and accounting fees, as the increasingly complex accounting standards take longer and longer to comply with.

There is a need for an inquiry and a report into how we can appropriately provide realistic information. We went the wrong way with investment statements. Investment statements dumbed things down, and anyone with a bit of knowledge went to the prospectus anyway. But in the prospectus itself we have gone too far the other way. We ended up with the worst of all worlds, which is some very complex things that no one reads, or few people read and few people understand, and investment statements that were too superficial.

The third thing that I suggest we look into is how these rules have been applied in practice. I might come back to this issue in a later call, if I have the opportunity and do not have the time to finish it in this call. The issue relates to how organisations that wanted to make due provision for risk, which was inherent somewhere in an investment portfolio, were effectively being stopped by the trustees and the auditors from doing so. If someone wanted to make a provision for what, effectively, we would call a doubtful debt, they could not do it, because the trustee would say that they did not yet have a provable loss—they cannot point to a particular loss. Therefore, if that person was making a provision for a doubtful debt, they were effectively keeping capital back from the people it should be distributed to, and the trustee would force them to revalue their unit up. If someone has made an allowance for an inherent but unspecified liability in the investment portfolio of a finance company, an investment trust, or a mortgage trust, the auditors would come along and say to them that they had to put up the price to $1.10 instead of $1. That would completely defeat the purpose of the provision for doubtful debt.

That issue remains a very, very real problem, because it was an absolute disincentive to people acting prudently. It was caused, again, by the people who were meant to be protecting the interests of the depositors. It was unworldly, I would say, but it happened on more than one occasion, and that sort of thing should be inquired into. That is the sort of thing that the Financial Markets Authority can help with, and I am interested to hear from the Minister whether he supports that inquiry.

I rise to speak to Part 2 of the Financial Markets (Regulators and KiwiSaver) Bill. Part 2 is particularly about the Financial Markets Authority and its objectives and functions, and the like. I note that Labour supports this provision and this bill. We all in this Chamber probably agree wholeheartedly on the purpose of the bill, which is to restore investor confidence in New Zealand’s financial markets, because clearly those markets have been very sorely tested, indeed. It is important to note that we all have a really important interest in getting this legislation right.

We support the bill because we believe that this new authority, the Financial Markets Authority, by consolidating a range of different regulatory functions in one single agency, makes some sense. We also recognise that the officers of the Financial Markets Authority will be playing a significant and important role, and therefore their processes must be fully transparent. They must be beyond reproach. This issue is an example of the importance of having a very robust range of public servants in our country.

Of course, the reform of financial markets was a process established by Labour, and we are pleased to see the Government continuing our good work. In particular, in looking at Part 2, first of all, we see the objective and functions of the Financial Markets Authority. There is an objective of promoting “fair, efficient, and transparent financial markets.” The issue of fairness is a really important one, and it is a core Labour value. It is one we think of as an underlying principle. I have to say that at the moment we live in a very unfair society, and one that is getting less fair every single day. I ask why people actually need to use finance companies. Why do people have to engage with finance companies? I will particularly focus on the bottom end of this market, if you like. I will focus, probably not surprisingly to members opposite, on what one might call the fringe end of the market—the loan sharks, the finance companies on our streets, the national companies that advertise on television, right through to sole traders in a little, one-office company on a street in Onehunga, Panmure, Ōtara, or Māngere that lend people money. There certainly is a need for more robust regulation to ensure that they operate in a fair, efficient, and transparent manner.

Why do people have to go to those sorts of places? Obviously, it is about accessing credit. Usually people who go to that end of the market have very little choice. They are under enormous financial pressure, they cannot necessarily access credit from mainstream agencies like banks, so they end up using those agencies, which charge very high rates of interest and lend irresponsibly. One of the very important things for the role of the Financial Markets Authority is to be very clear about looking at that part of the market. I note under clause 9 of Part 2 that the Financial Markets Authority’s functions include the collecting and disseminating of information or research about any matter relating to those markets—that is, the financial markets. One of the things I say is that we need to make sure we look across the range of providers in financial markets and continue to put some light on this end of the market, the fringe end of the market.

So the first question I ask the Minister, Wayne Mapp, to answer is whether the Government is committed in this area. I have to say that it was very disappointing when the member’s bill I put up and worked hard on with Charles Chauvel was defeated by National and ACT voting against it despite it being a genuine attempt to deal with a part of our financial market. I suggest we look at and give the Financial Markets Authority some responsibility to look at how we might control excessive interest rates. I think that the Financial Markets Authority should have some responsibility to look at questions like how we can control excessive interest rates and what regulations there should be. Members opposite voted down provisions on setting interest rate caps, for whatever reasons they had. What are their alternatives? What are they doing to deal with the facts? I think the Financial Markets Authority, if we are talking about promoting fair, efficient, and transparent financial markets, needs to look at that question.

The second area is the issue of responsible lending. What will the Financial Markets Authority’s work be in that regard? I suggest that in looking at the point in clause 9 about “issuing warnings, reports, or guidelines, or making comments, about any matter relating to those markets or financial markets participants or other persons engaged in conduct” relating to those markets, one of the very real things that need to be done is to look at what responsible lending looks like. What should the requirements be in lending money that people cannot afford to borrow? What are the rights of people who are struggling to make ends meet, who are forced into a situation of having to borrow money—for example, to pay for food or to purchase school uniforms for their children—at excessive interest rates in a situation where they cannot afford to pay back that money? I think we really need to look at that end of financial markets as a matter of some urgency.

I support the work that my colleague Lianne Dalziel did in relation to putting up an amendment in relation to this part. She is really looking at how we can have a code of conduct that would apply and make sure that the operation was done in a useful and acceptable way. I think that is a very sensible idea. Members on this side of the Chamber urge members across the Chamber to seriously consider the amendment of Lianne Dalziel.

I will touch on the issue of financial literacy. I absolutely think that financial literacy should be a core function of the Financial Markets Authority. It should have a core responsibility to educate. When I did a lot of work on the issue of loan sharks and fringe lending, a lot of people said to me that we need to improve financial literacy. In fact, members opposite waxed lyrical about how it is a matter of financial literacy and that one of the ways we can deal with those people at that end of the market is to make sure that consumers know what they are getting into, their rights, what is unacceptable, and things like how interest rates and compounding interest rates work and all the rest of it. Well, here is the time, people, to really look at sitting up there and doing something to improve the work in relation to an educational function for the Financial Markets Authority.

It is certainly true that the Retirement Commissioner does a lot of very good work in a very principled manner on the issue of financial literacy, and that work targets right across the board. The Retirement Commissioner looks at financial literacy from schools, to entrance into the workplace, through to senior citizens and everybody in between, because obviously the needs are different at different stages of one’s life. But a lot of that work and a lot of the resources developed by the Retirement Commissioner have not rolled out as significantly as they should do, due to a lack of funding. So there is a really important role for the Financial Markets Authority in ensuring that good-quality, independent financial literacy work that targets people at different life stages is rolled out, monitored, and developed. That will make a difference to consumers’ experiences of dealing with financial markets. That is an area that we need to beef up. We need to make sure that the responsibility is much more strengthened than it currently is in Part 2 of the bill.

In summary, although we support the bill and the development of the Financial Markets Authority, I think it is important that we get some commitments about ensuring that that authority looks at what is going on at the fringe end, or the loan shark end, or however one wants to describe it, of financial markets.

I congratulate you, Mr Chair, on your recent appointment.

I will address Part 2 of the Financial Markets (Regulators and KiwiSaver) Bill and the amendments proposed by my colleague the Hon Lianne Dalziel. First of all, though, I say that I was very pleased to hear Minister Simon Power talk earlier about taking responsibility; the importance of the new Financial Markets Authority, which replaces the powers of all those agencies that have been mentioned; and the importance of having wider enforcement and surveillance powers. He referred to previous agencies, and compared the behaviours that went on with a number of those agencies to a staring competition. Consequently, they were not taking responsibility for the obvious gaps and issues that occurred, which means we have ended up in a situation where we need to create the new Financial Markets Authority.

All I could think of while he was saying that was: “Good. Yes, I agree with that.”, but also I wish that his Government would take its own advice and practise what it preaches. We heard today in the House the Prime Minister attempt to dodge responsibility for the mishandling of the South Canterbury Finance collapse. I put that on the record because it is a clear area where responsibility needs to be taken. I am sure that my colleagues will have more to say about it.

I also reiterate what my colleagues have said about all the other issues that were raised by my colleague Lianne Dalziel in her amendments. I endorse what my colleague Charles Chauvel said about celebrity endorsements. Something is definitely wrong when a person who is considered an icon in society or a trusted person can front a company’s product and lend them their brand, and then have it turn out to be a lie. I consider that to be deception at the highest level. We do not seem to have anything in place that can really, truly address that issue. Countless submitters came before the Commerce Committee, either on this bill or on the financial collapse inquiry, and raised that issue. It is morally wrong, and it should be wrong in law. If we want to talk about taking responsibility, that is another clear area where we could make some headway.

I also endorse the comments made by a number of my colleagues around financial literacy. It is a critical issue. It is an endemic issue right throughout our society in terms of the complexity of financial communications and people’s lack of understanding, whether they are considering being investors or considering documentation of any kind.

Financial literacy has been raised again and again. It is a known issue across society at all levels and at all ages. In this digital age the issue certainly needs to be addressed and addressed quickly. It has been raised in the Commerce Committee, which I sit on, by a number of significant bodies, such as the Retirement Commission and the Securities Commission, as an area of critical importance. If this Government is to do anything meaningful to underpin the new legislation, I certainly think financial literacy is an area that urgently needs to be addressed. As my colleague Lianne Dalziel says with her amendments, communication with customers is absolutely critical, and a firm must pay due regard to the information needs of its customers and communicate information to them in a way that is clear, fair, and not misleading.

Responsible lending, as my colleague Carol Beaumont pointed out, is another area of critical importance.

I would like to turn the attention of the Committee to clause 20 in Part 2 and, in particular, the opportunity for the Minister to request that the Financial Markets Authority inquire into, and report on, a matter. In that regard, I wish to raise before the Committee an issue much in the media today, and that is the debacle around South Canterbury Finance, and the crystallisation of a loss to the taxpayer of $1.2 billion and climbing. That number stands in stark contrast to the approximately $500 million that would have been a capped liability, had the Minister of Finance and his colleague the Minister of Commerce accepted one of a number of recapitalisation deals in August and September of last year.

This is a screw-up of epic proportions for the Government. I know of no company, no corporation, where a chief financial officer could make a $700 million mistake, and keep his job. It is for that reason that the Labour Opposition has called either for the resignation of the Minister of Finance or for the production of documents such as offer documents, which would prove his contention that he made a rational decision. If there is a reason that would justify a $700 million extra loss, I do not know what that would be.

I would like to turn the Committee’s attention to the chain of events that led to this debacle, and, first, to identify the period of May to July 2009, nigh on 2 years ago, when the Government was first advised that the books of South Canterbury Finance were, to use the technical term, “rumpy”. Advisers were sent in, Treasury was advised, and provision was made in the Crown accounts for the Crown’s liability under the Retail Deposit Guarantee Scheme, because the Crown knew, 2 years ago, that the company was verging on insolvency. The Government faced the first of probably three sets of tragic decisions, and that was that rather than putting the company into statutory management the Government opted to install a new management team through proxies and allow the company to continue to refinance its debt.

The second crucial decision was made in April 2010 when the Government decided to extend South Canterbury Finance in the Retail Deposit Guarantee Scheme. Now, there is no partisan argument about its original inclusion or the value of the scheme. Both parties agreed to set up the scheme, and although South Canterbury Finance was brought in under National, the preparatory work was done under Labour, and there is no debate about that. But there is big debate about whether it should have been extended. By that time the Government knew full well that there was a massive hole on its balance sheet.

The CHAIRPERSON (Lindsay Tisch): The member must come back to the relevant theme in Part 2.

I am being absolutely relevant to clause 20.

The CHAIRPERSON (Lindsay Tisch): I want you to bring it back. I have sat here for a minute now, and I have not heard anything to do with Part 2. Although the member’s comments may well be relevant they must be tied back to the relevancy of Part 2. I ask the member to come back to that.

Clause 20 in Part 2, which features on page 27 of the bill, allows the Minister to request that the Financial Markets Authority inquire and report. I am challenging the Minister to request such an inquiry around South Canterbury Finance, if he thinks there are other matters that need to be brought forward for scrutiny—other than his own incompetence. At the moment, in the absence of documentation that would prove that the Government had good cause not to accept a $500 million cap in liability in August and September 2010, we are now faced with a $1.2 billion bill, and climbing. The difference is equivalent to all the new money in the Budget round. If anything justified an inquiry, I would submit that that did.

The third critical set of decisions occurred up to and including 31 August 2010, where officials negotiated with South Canterbury Finance through the night, around a recapitalisation deal, or several options, one including Permanent Investments. At that time, the deal would have limited the Crown’s liability, I understand, to about $400 million, providing about $1.2 billion of Crown equity. There were some risks around that deal, which were advised on by KordaMentha and others, and the Crown allowed the company, perhaps encouraged the company, to go into receivership. Equity-holders were wiped out; debt-holders were made good, some to an enormous profit margin; and then, shortly after, the Crown faced a third round of offers. A very interesting offer came from the same company, Permanent Investments, this time associated with the New Zealand Superannuation Fund and Ngāi Tahu, which I understand would have capped the liability to around $500 million, transferred the good bank to a consortium owned by those three parties, allowed the bad bank to be restructured, and hopefully a happier outcome to occur than has occurred. There is now an unexplained wedge between the approximately $500 million cap that that deal would have afforded, and the $1.2 billion, which has already come to charge under the Crown accounts, which were released this week.

Clause 20 provides that the Financial Markets Authority may institute an inquiry. I submit that this is the largest financial collapse in New Zealand history, and if anything ever merited a Financial Markets Authority inquiry, it is this. My colleague Lianne Dalziel has raised the issue of whether the authority would be keen to do that, given the involvement of some of its own, should we say, in earlier stages. We have heard various accounts of the management of potential or perceived conflict of interest issues around one Simon Botherway. I am not going to repeat those issues right now, but let me say this: there is much more to come on this issue. We cannot have a $700 million loss to the taxpayer over and above that which would have been required by the recapitalisation of the company, and not have hot political debate. If I was ever in doubt of that, it was on Sunday morning when I was at the Avondale market—a very august place in my electorate—and an elderly Pacific Island gentleman came up to me and said “Mate, we’re doing it tough. We need you to fight for us.” That $700 million would be a lot of money to him, because he cannot feed his family, and there are 180,000 people unemployed. I know that I have to come back to the clause, Mr Chairman, but forgive me if I am feeling for my constituents. Clause 20 provides an inquiry power, which, if it were ever to be used, should be used in a case like today’s.

The third leg of the treble is the Minister’s justification for his action, which, ironically, has been to challenge the Opposition to produce the offer documents, which he himself has in his possession. I say to the Minister of Finance—

The CHAIRPERSON (Lindsay Tisch): Come right back to this part.

—under clause 20, that if he does not want an inquiry, if he wants to keep his job and prove that he is right, then he should do so by releasing each and every document, all the offers, all the advice, into the public domain, because we do not have a third round. If I am wrong, and there is a $700 million reason why he was smart to pay $1.2 billion and climbing, then I am happy to admit it, but I have not seen it yet. I can only make the judgment that a huge mistaken punt was taken on behalf of the taxpayer. I fear that it may have been worse than that, and that there will be more to tell about this issue as it goes forward, but for now, suffice it to say that clause 20 provides a very important power, and it sits right here in Part 2 of the bill. It provides for an inquiry power. We face a financial scandal that is of such magnitude that it has eaten Budget 2011. There is no new money for Budget 2011. There was $800 million 2 weeks ago—$700 million has been wasted on this issue alone, above what could have been capped with a recapitalisation deal. That is a tragedy of epic proportions, and New Zealanders want to know the reasons. I tell this Government to use this power, if it is so confident it is right—release the documents and let the light shine, otherwise the Minister must go.

I want to focus in on the question of the members of the Financial Markets Authority and, indeed, the associate membership. The Government has announced today who the members of the Financial Markets Authority are, and I would have thought that the Minister of Commerce would take the opportunity to talk about why this particular membership was chosen.

Clause 10 of the Financial Markets (Regulators and KiwiSaver) Bill states: “The board of the FMA consists of not fewer than 5, and not more than 9, members.” I ask myself whether we got those numbers right, given that one member of the establishment board is on the board of the Financial Market Authority now and one member of the establishment board has become an associate member. I cannot remember the discussions that we had on associate members, but I am not sure what they will do. That is to be determined by the particular notice of appointment that they are given. So I really would like to see the notice of appointment, or get some comment from the Minister as to what the associate members that have been announced will do.

I want to reflect for a minute on why I think it is important that the Government did look more carefully at the role of the establishment board and took some of those people—a lot more of those people—through into the new Financial Markets Authority. The reason I say that is that the membership of the establishment board was welcomed across the board. There was considerable support for the members of that group, not all of whom, obviously, were going to make themselves available for the Financial Markets Authority. But there were also people in there who were never going to be appointed.

Obviously, Neville Harris is an extraordinary public servant, and as the Registrar of Companies he obviously would not be taking up that role, but he is a critical element in the establishment board. But apart from him, and perhaps Paula Rebstock, who perhaps has not seen herself in a role in the Financial Markets Authority but more as an economic consultant coming in for the establishment of it, there are people on the list of the establishment board, like Frank McLaughlin, who is an incredibly well respected corporate lawyer, and I would have thought I would see his name on the list.

Maybe there are things that I do not know. Some people may not have put their names forward, and it will be very interesting when all of this is explored further. There is also Andrew Harmos, Mariette van Ryn, and Scott St John. Shelley Cave is the one person who has come across and is also a member of the Securities Commission, which probably is neither here nor there, but it does seem a shame that the one person who has made it on to the board, from the establishment board, is one from the Securities Commission given that this is a whole new ball game, as it were.

There is also Bruce Sheppard. Now, Bruce and I have had our moments in the past, particularly when I was the Minister of Commerce and he was the head of the New Zealand Shareholders Association. But what I have always enjoyed about Bruce is that one does not die wondering what he thought about an issue. He is somebody who challenges things with incredible integrity, and he annoys a lot of people. I know that I probably do, too, but I really was quite disappointed to see him listed as an associate member rather than as a full member of the board. That is probably the kiss of death for him; I can assure the Committee that he probably would not say very nice things about me from my time as the Minister. But I do respect the fact that he was not afraid to front on issues that were important to his members.

The Financial Markets Authority board is supposed to be a brave new start, and I just feel that the board announcement today—soft announcement that it was—without any comment from the Minister in the chair, the Minister of Commerce, while we are debating the very bill that brings it into existence, was really a missed opportunity. I did want to place that on the record of the House. I am not making any comment about the people who have been selected. I know the media want to speak to me about some conflicts of interest that they have already identified, but I will obviously not comment about conflicts of interest until I have done a little bit more homework—better than I did last time.

I will continue with a couple of points in relation to the Financial Markets Authority as outlined in Part 2 of the Financial Markets (Regulators and KiwiSaver) Bill. Firstly, I will talk particularly about its ability to monitor and conduct inquiries and investigations into any matter relating to financial markets or the activity of financial market participants. Secondly, I will talk about the provision to keep under review the law and practices relating to financial markets, financial market participants, and other persons engaged in conduct relating to those markets.

Those are two very useful responsibilities or functions of the Financial Markets Authority. One issue that is worthy of some consideration is the types of inquiries and investigations that we might need in relation to our financial markets. “Financial markets” covers quite a range of different operations, from the second tier or fringe end right through to very big investment companies and the like. I think understanding how those companies operate—how people choose to use different types of lenders, for example—is very useful.

In the course of looking at the issue of fringe lenders or loan sharks, it became very apparent to me that people were using so-called finance companies that were lending irresponsibly and at an excessive interest rate, even though they could have got access to credit elsewhere. That seemed to be a very strange situation, and understanding that type of behaviour seemed to be very important. It may well go to the matter I raised earlier of financial literacy, or it may well go to other matters, like the way particular communities are targeted by some sorts of finance companies, and so on. The types of inquiries the Financial Markets Authority could conduct under clause 9 is something for us to think about.

Likewise, keeping under review the law and practices, as outlined in clause 9, provides an opportunity for us to look at our financial markets in terms of how we can ensure that they are functioning as per the objective, which is to have fair, efficient, and transparent financial markets, as outlined in clause 8 in Part 2. One of the ways of keeping the law and practices under review is for the Financial Markets Authority to ensure that it is looking at best practice internationally. Where similar problems are being addressed in other jurisdictions, let us make sure that we look at and review the laws in those jurisdictions. A number of countries have been dealing with, for example, the question of excessive interest rates and how they might be managed, and trying to work out whether capping interest rates is the best way to go or whether other provisions are better. Using that information and keeping law in other jurisdictions under review is particularly relevant to us and useful for us as a country.

I come to the amendment being promoted by the Hon Lianne Dalziel, which is to insert a new clause 9A in Part 2. She is attempting to look at principles to bind all financial market participants. That is a really good idea. It makes a great deal of sense for us as a Committee to agree on the kinds of principles we think should underlie every financial market transaction, and that all the participants should sign up to. One of the provisions she has outlined in the amendment is that “A firm must conduct its business with integrity.” A lot of the places that have caused a great deal of harm in New Zealand—and I do not mean just at the fringe market end; I mean some of the investment companies that have caused many small investors to lose their life savings—were not acting with integrity. The amendment would ensure that we have that requirement as a bottom line. Another provision is “Skill, care, and diligence:”.

The two provisions I thought it was worth picking up on as Labour’s spokesperson on consumer affairs were the two provisions in the amendment about principles relating to customers’ interests and communication with customers. I think the suggestions she is making in the provisions are very sensible.

The question was put that the following amendment in the name of the Hon Lianne Dalziel to Part 2 be agreed to:

to insert the following new clause:

9A Principles to bind all financial markets participants

The FMA will have an overriding power to enforce the following principles which will be binding on financial market participants—

(a) integrity: a firm must conduct its business with integrity:

(b) skill, care and diligence: a firm must conduct its business with due skill, care and diligence:

(c) management and control: a firm must take reasonable care to organise and control its affairs responsibly and effectively with adequate risk management systems:

(d) financial prudence: a firm must maintain adequate financial resources:

(e) market conduct: a firm must observe proper standards of market conduct:

(f) customers’ interests: a firm must pay due regard to the interests of its customers and treat them fairly:

(g) communications with customers: a firm must pay due regard to the information needs of its customers, and communicate information to them in a way which is clear, fair and not misleading:

(h) conflicts of interest: a firm must manage conflicts of interest fairly, both between itself and its customers and between one customer and another:

(i) 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:

(j) customers’ assets: a firm must arrange adequate protection for customers’ assets when it is responsible for them:

(k) relations with regulators: a firm must deal with its regulators in an open and cooperative way, and must tell the FMA promptly anything relating to the firm of which the FMA would reasonably expect prompt notice.