Estimates Debate — Vote Commerce

The Government’s overall economic goal is to build the foundations for a stronger economy that will provide New Zealanders with jobs, higher incomes, and improved living standards. Work under Vote Commerce directly contributes to this priority by helping to create dynamic and trusted markets, increase the ease of doing business, improve international linkages, and develop enterprising and innovative businesses. It does this by ensuring that effective policy and regulatory frameworks are in place to promote competition, support efficient business transactions, lower compliance costs, improve business confidence to make investments, and give firms access to other markets.

Improving confidence in capital markets is essential. Priority under Vote Commerce has been given to several areas of work designed to improve investors’ confidence and participation in New Zealand’s capital markets, following the global financial crisis and the collapse of many financial companies here in New Zealand.

Today in the House the Minister of Finance reported to us that New Zealanders have lost approximately $8.5 billion in collapsed finance companies. That is why investing in a minority shareholding in an energy company must look attractive, sensible, and sustainable for many New Zealanders who want a return but are gun-shy about taking a risk.

We often refer to the “mum and dad investor”. This is essentially the investor who has a bit of spare cash being saved for retirement and who does not see investment as something that they are highly specialised in. Of course, of equal importance has been the work of improving international linkages so that investment and financial activity can easily flow to and fro across the Tasman.

The total appropriation for Vote Commerce has increased by 12 percent—$15.5 million—to a total of $141.43 million in 2011-12. The main change in the appropriation was due to the establishment of the Financial Markets Authority on 1 May 2011. I know that the Minister of Commerce is particularly pleased about the creation and the work of the Financial Markets Authority. It is clear that New Zealand needs a single market regulator with a visible, proactive culture of timely enforcement. On too many occasions in finance company collapses we heard of investors’ money falling to the floor through gaps between regulators.

The Financial Markets Authority—the FMA—is an independent Crown entity funded by Vote Commerce. It was established in 2011, replacing the Securities Commission. It commenced on 1 May. The Financial Markets Authority enforces securities, financial reporting, and company law as they apply to financial services and securities markets. The Financial Markets Authority also regulates securities, exchanges, financial advisers and brokers, trustees, and issuers, including issuers of KiwiSaver and superannuation schemes.

The Financial Markets Authority is playing a more proactive monitoring role than its forerunner, the Securities Commission. The Financial Markets Authority is larger than the Securities Commission, with more staff and resources in a new office in Auckland. The Financial Markets Authority is able to publicly enforce duties of issuers, directors, auditors, trustees, and others involved in financial markets when it is in the public interest to do so. This is a significant new provision that the Securities Commission did not have. The new powers were specifically requested by the Financial Markets Authority establishment board, because of the gap it saw in the Financial Markets Authority’s ability to effectively enforce and supervise our financial markets.

Coming out of the global financial crisis, having improved protection for such investors, it is imperative for such investors to have confidence investing in New Plymouth—sorry, New Zealand, as well as New Plymouth, of course! We certainly need investment, with many great opportunities there. Investment in New Zealand is very important, and it is an incredibly important component to our financial recovery and growth. A substantial incentive for people to shift from a borrowing-based way of thinking to an investment-based way of thinking is that they have confidence in a regulatory framework that ensures professional, effective, ethical, and accountable oversight to protect the interests of the investor. Thank you.

It is my privilege to speak on the Vote Commerce estimates for this 2011 year. The Vote Commerce estimates were increased by 12 percent this financial year, and one of the key reasons for that increase, as my colleague Jonathan Young pointed out, is the establishment of the Financial Markets Authority.

That authority will, in its first year, have tabbed for it $31.7 million for its establishment and also its functioning. It replaces the Securities Commission. We are informed that it will provide for a more active, more well-resourced, and more streamlined regulator of financial markets. The purpose of it is, again as Mr Young pointed out, to improve investors’ confidence and participation in our capital markets, particularly after the recent spate of finance company failures that occurred in the last 3 to 5 years.

One of the key provisions of the Financial Markets Authority’s statute, which we put in place, was to give it the right of action, on behalf of either a company or an individual, to take on rogue companies, particularly finance companies. That will provide for those people who cannot take on the action themselves and for the Financial Markets Authority to at least enforce that statute. It will create a new market intelligence unit, which issuers will be able to consult as they develop new products in order to avoid the need for corrective measures later on in the process. That is about working with the industry to provide for more effective and more efficient markets. We have seen recently with the spate of low-ball offers that the Financial Markets Authority will be able to take on such inequitable low-ball offers provided by those people who prey on vulnerable investors. So, we can see that the Financial Markets Authority will be an all-powerful regulator, unlike the Securities Commission, which was its predecessor.

The commerce portfolio has been a busy one under the current Minister of Commerce. He departs Parliament in the next few months, so we salute his work in the portfolio. The Commerce Committee has been a rather industrious committee. We have pushed through legislation on financial service providers and financial advisers, auditors and insolvency practitioners, and securities trustees. We have also dealt with patents and copyright law, which was quite difficult. But the mother of all financial markets legislation is still to be done, and that is the reform of the Securities Act, which is well overdue. We expect a draft exposure paper to be out in the next few weeks.

In terms of the financial advisers legislation, the financial advisers I speak to, particularly in my own electorate of Maungakiekie, say it adds compliance and it adds regulation. But compliance and regulation also allow for the industry to be more credible, and for the people who practise financial advisory services in the markets to have more integrity. The practitioners have said that that is OK. To date, to 1 July, 1,300 authorised financial advisers have been registered, with 700 still to complete that process.

I will just touch on another piece of legislation that the Minister has signalled should be reformed, which is in the area of moneylenders. The Minister has signalled there will be a financial summit next week, on 11 August, where stakeholders in the whole moneylender industry will come together to share ideas and to exchange their thoughts on the way forward in terms of regulation. We should see some response on that from the Minister and from this Government in the coming months. It is an area I encounter every day in my electorate office and it is one that needs reform. I see people who have been affected by loan sharks or moneylenders.

I thought I might take just a quick call on the estimates for commerce. It was a spectacularly constructive estimates hearing that we had with the Commerce Committee this year, and one I was happy to make a small contribution to. We—or the committee, I should say—were interested in a range of issues, with some of them traversed in Vote Commerce and others traversed in Vote Consumer Affairs. We kind of married the votes together to some extent, over about an hour and a half, from memory.

One of the things covered off, to some degree, was how well the Financial Markets Authority had begun its functions since it came into effect on 1 May. Interestingly, I think that the culture that has taken root at the Financial Markets Authority is a very strong one. A proactive sense of enforcement and supervision has become part of that organisation’s ethos. In particular—literally from memory—within about 48 hours of the Financial Markets Authority being formed it took a view on low-ball share offers being made by one individual, and a warning notice, from memory a new power under the Financial Markets Authority legislation, was exercised very early in the piece. I think it is fair to say that the Financial Markets Authority has come out of the box pretty quickly, with a fair degree of focus.

Colleague Sam Lotu-Iiga talked a little bit about what was happening in the financial markets. As I have said many times, one thing we cannot do is regulate for certainty; nor can we regulate for risk. I have said it many times but I will say it again now: nor should we try to regulate for risk. That is the nature of getting a return on an investment. But of course what we know about the type of product that was offered in the financial markets is that the Financial Markets Authority desperately needed a power to be able to deem a particular product to be a security for the purposes of security legislation—in particular, for the Financial Markets Authority to be able to do that in order to avoid a situation where product was being specifically designed to fall outside of securities legislation. Fundamentally, this type of product came about as a result of a property syndication - type product that was put on the market. Of course, over the last 5 or 6 years we have seen about $8.3 billion worth of investors’ money lost or, as they say, put at risk. About $6 billion of that was prior to 2008 and about $2 billion - odd since 2008.

One of the things about this story—it is not a story, actually; it is a fact—is something that all members who are constituency MPs have experienced, and even the odd list MP might have experienced it, as well. An elderly gentleman came to my office in Feilding many months ago now. He was explaining to me that he had left school at about 15 years old, and had managed to save the equivalent of between $75 and $100 a week from all of his wages over the period of his life. At about 73 or 74 years old he had managed to collect about $250,000 in cash—I am pretty sure that is what he told me—and at that point he decided it was a reasonably substantial amount of cash for an elderly gentleman to have just sitting in a bank account so he went and saw a so-called financial adviser to find out how best to invest that money.

The advice he got was to diversify the investments, which, on the face of it, seemed reasonable in order to spread risk. That is indeed what he was told to do, except that that risk was spread across four finance companies so he ended up losing the whole lot. It was clear to me at that point—and I know that the Hon Lianne Dalziel shares this view—that a product designed to avoid securities legislation is always going to be in the proximity of clever issuers, lawyers, and the like, which is why the new powers attached to the Financial Markets Authority relating to the capacity to deem those products to be securities for the purpose of securities legislation are so important.

I regret I seem to have run out of time to address patents and other matters, but I am sure Ms Curran will raise those matters.

Vote agreed to.

Vote Consumer Affairs agreed to.

Vote Justice