Financial Markets Conduct Bill

I move, That the Financial Markets Conduct Bill be now read a first time. At the appropriate time I intend to move that the Financial Markets Conduct Bill be considered by the Commerce Committee. This bill is a significant piece of law reform in the commercial sector. Its main purposes are to promote the confident and informed participation of businesses, investors, and consumers in the financial markets, and to promote and facilitate the development of fair, efficient, and transparent financial markets. These are crucial objectives that we must promote in order to achieve long-term growth in our economy.

A number of events have informed the content of this bill. The global financial crisis and the collapse of finance companies have had a traumatic effect on the lives of many New Zealanders and impaired the confidence of investors in our financial markets. I note in this regard the recent report of the Commerce Committee in relation to its inquiry into finance company failures, which highlights regulatory issues in this sector. This bill will play a key role in restoring investor confidence, by improving the regulation of those who offer financial products to the public.

It is essential that the regulation of financial markets operates in a way that facilitates the raising of capital by businesses. The Capital Market Development Taskforce, which reported in December 2009, identified the central role that vibrant capital markets play in business development and economic growth. Local businesses will find it easier to develop, expand, and be internationally competitive if they have ready access to domestically sourced capital. For this reason, reform in this sector is an integral part of the Government’s economic growth agenda. The task force provided a number of recommendations for legislative reform. I thank the task force for its work and am pleased that this bill implements many of its recommendations.

This bill largely completes the comprehensive programme of reforms in the financial sector that this Government has implemented over the past few years. These reforms include the introduction of the financial advisers regime, the licensing of trustees and statutory supervisors, and the establishment of the Financial Markets Authority. Taken together, the effect of these changes will be considerable, and will provide a solid foundation for the efficient functioning of the financial markets for years to come. They will also ensure that New Zealand remains an attractive destination for international investment.

The bill will replace a number of pieces of legislation, including the Securities Act 1978, the Securities Markets Act 1988, the Unit Trusts Act 1960, the Superannuation Schemes Act 1989, and aspects of the KiwiSaver Act 2006. Some of these laws are over a generation old, and there will be considerable benefits in having all of the law easily accessible in a single piece of legislation.

The bill improves on existing laws in many respects. One of its fundamental reforms is that it improves the definitions of different categories of financial products. It also gives the Financial Markets Authority the flexibility to reclassify products within these categories, or to declare that products fall in or out of the bill’s regime. This flexibility is crucial to ensure that the regulator has the ability to keep up with the challenges of market innovation. Another key feature of the bill is its definition of the offers of financial products that will be exempt from disclosure requirements. These are generally offers that are not aimed at retail investors. The bill provides improved guidance for businesses and investors through brightline tests for assessing who is exempt. Defining who is in and who is out is an important issue, and I will be interested in the submissions that the select committee receives on this matter.

Part 3 of the bill introduces a new regime for the disclosure that those raising capital must provide to investors who are not exempt. The current requirement for issuers to prepare a prospectus and investment statement will be replaced with a requirement to prepare a single product disclosure statement and include additional information on an internet-based register. The detailed content requirements for product disclosure statements will be set out in regulations, but the bill makes it clear that they must be tailored to the needs of retail investors. These changes will make disclosure of more use to investors when they make investment decisions, while reducing compliance costs for business.

Another significant change in the bill is the regulation of managed investment schemes, which include KiwiSaver schemes. Currently, the requirements for managed investment schemes vary, depending on their legal form and the type of scheme that they are. Part 4 of the bill provides consistency in the legal requirements for these schemes and enhances the standards of governance expected of them. For example, managers of these schemes will have to be licensed by the Financial Markets Authority and comply with general duties, including acting in the best interests of scheme participants. This will provide greater confidence for investors, by ensuring that those who manage their hard-earned money are up to the task.

The bill makes an important change to the regulation of financial product markets. It picks up one of the recommendations of the Capital Market Development Taskforce by providing for the establishment of stepping stone markets. The task force noted that one way to provide opportunities for smaller companies to raise capital and enable them to attract the governance capability they need is to create tiered markets to pull firms through different stages of their growth. It can be a big step to list straight away on the NZX for small companies, due to the extra disclosure requirements and other rules that come with listing. The bill allows the creation of markets that can have rules tailored to the nature of the issuers that list on them and investors.

One final issue that I wish to touch on is the liability regime in the bill. This is a matter of great importance, as it provides incentives for the kind of behaviour that we expect from financial markets participants. It also dictates the punishments for contraventions and the remedies that affected people may claim. The regime in this bill places an increased emphasis on civil liability for contraventions of the law, including the ability for the Financial Markets Authority to take civil pecuniary penalty proceedings in a wide variety of circumstances. The bill contains a general prohibition on misleading or deceptive conduct, similar to that found in the Fair Trading Act. It also contains serious criminal offences for egregious violations of the law, such as where there is intentional or reckless misconduct. This is a significant part of the bill, and is another area that I invite the select committee to pay close attention to during its deliberations.

This is a bill of considerable technical complexity. An exposure draft of the bill was released for consultation in August, and many extensive submissions were received at that time. These submissions have helped shape the bill that is currently before us. I would like to thank all those who submitted during this process for their constructive engagement, and I hope that they interact during the select committee proceedings in a similar manner.

Regulations under the bill will also provide greater alignment with Australia and help achieve the single economic market objective of ensuring that investors in financial products in Australia and New Zealand receive comparable disclosures.

In conclusion, this bill is a significant piece of law reform in the commercial sector. It is a crucial step towards rebuilding investor confidence and strengthening New Zealand’s financial markets. I commend the bill to the House.

The Labour Party is generally supportive of this bill, the Financial Markets Conduct Bill, as I believe most parties in the House are, but we reserve the right as we go through the select committee process to review our support based on information provided by submitters, as is the normal process. This is a substantial bill—over 500 pages. I thought I had seen the largest bill that was put through a Commonwealth Parliament, I think, in this Parliament when I chaired the Finance and Expenditure Committee. It was the tax simplification legislation, which was in two volumes that were about a foot high. This bill is bordering on that, but I mean no disrespect to the legislation. It is necessary, and we support that.

I echo the Minister of Commerce’s comments about the environment that we see ourselves in. If you look at the last 4 years, the evidence shows us that there have been 61 finance companies that have failed over the last 4 years, the latest of which we know was South Canterbury Finance, which was bailed out to the tune of $1.6 billion of taxpayers’ funds. We know that those depositors will get their money back, given the governance scheme of arrangement that was put in place originally by the previous Government, but other depositors in other situations similar to that may not be so lucky. What this tells us is that there is no way you can zero-risk an investment. What I would like to ask the Government to look at, as it goes through not just this but other legislation, is that it does not matter how much regulation and legislation you put through; people will take investment risks.

What is lacking—and I know it is not appropriate in this bill—is some financial literacy education and support for our communities to raise their financial literacy and to become far more au fait with the levels of risk that they embark on when they invest their dollar. We can have all the rules, in my view, we like to ensure that people act appropriately when giving advice and when putting financial products on the market, and to ensure that company directors act appropriately, but if people do not have the confidence because they do not have the basic education—if “confidence” is the right word—to assess investments, then that is a gap in our system that no legislation will actually take care of. It becomes the ambulance at the top of the cliff if people have the confidence to assess risk, and as I say, no legislation can zero-risk any investment or proposition.

I am not going to go into the great detail of this bill; I think the Minister has covered it. But I just note in passing—and I think my colleague Lianne Dalziel may have made these comments recently—that the Government, as an adjunct to this bill, might also want to look at the criminal penalties and sentencing arrangements in respect of so-called white-collar criminals. The evidence is reasonably clear, I think, and my colleague made the point recently, that if you are a burglar, you are often treated far more harshly by the courts. Having no disrespect and not to downplay the emotional impact of a burglary, but it is generally localised to a small group of individuals, compared with the massive emotional impact that a white-collar criminal who engages in fraud or embezzlement or misrepresentation can have, as we have seen, throughout our communities. So it is another issue, I suppose adjunct to this bill, that I might invite the Minister to take up with his colleague the Minister of Justice in respect of the penalties around white-collar crime.

The bill, I note, also provides for regulations to be made that will prevent products being structured to avoid regulation. It seems self-evident. This happened, of course, in the infamous Mark Bryers Blue Chip case. Because that investment scheme offered interests in land, it was exempt from the Securities Act, to the significant detriment of investors. I welcome the fact that those issues are going to be catered for in this bill.

It will be interesting to see—it always worries me when I see bills of this size—what officials have come up with. It will be very interesting to see the various financial stakeholders in the financial and securities sector, and various other submitters with expertise—the Law Society, the Institute of Chartered Accountants, and others—who, presumably, will come before the select committee and render their view on it. One would hope that this legislation will not wrap people in undue red tape. Although I accept absolutely that the safeguards are incredibly necessary and this reform provides a one-stop shop, as I say you cannot regulate for zero-risk investment. So it will be interesting to see whether the Government, through the select committee process, where submitters come up with productive and positive ideas around this, and perhaps ways to do things better than officials may have thought of—whether that will be taken on board by the Government. As I say, we reserve our right to review our level of support, based on that response.

I just note in passing that the Minister made reference to the Capital Market Development Taskforce. I would just note that the previous Government and the previous Minister in 2008, Lianne Dalziel, established that task force as a blueprint, an action plan for the development of New Zealand’s financial systems.

💬 Hon Ruth Dyson: That was a good Minister.

A very good Minister; a very good action. We are pleased to see that the Government—it reported to this Government as our Government acquiesced, as it were—is now taking on some of those recommendations.

It is appropriate that we have legislation like this, given, as the Minister said, the global financial crisis, the failure of finance companies, and the general lack of confidence by ordinary New Zealanders in those who provide advice and who provide products in the financial sector for investors. An economy can thrive only where there is investor confidence, where people are prepared to lay a dollar down and risk it knowing there is an appropriate level playing field and an appropriate regulatory framework, whereby everybody adheres to the rules and people get a fair shake. That does not, of course, guarantee that you will make a profit, or a substantial profit, but it means that certain assessments can be made in respect of levels of risk, and that people can do that in an open and transparent way.

So the Labour Party will support this bill through the select committee process. I note the cooperative nature with which the Commerce Committee acts, and the chair has set a high benchmark and a high example in that respect. I do think there is not a heck of a lot of politics in this, apart from trying to get the best possible outcome. I would hope, and I am sure it will happen at the select committee, that submitters are given a wide opportunity to work through the massive detail that resides in this weighty tome, and also that the Minister is open in a bipartisan way to suggestions from all parties, based on advice from submitters where deficiencies in this piece of legislation may be identified, and where this legislation can be improved.

I note that the Minister has extended the branch of cooperation, and we look forward to that being maintained, because I think for all of us this particular piece of legislation cuts to the quick with most of our constituents. There would not be an electorate in this country that has not been touched or visited upon by undue financial loss as the result of the nefarious activity of some. This will bring, as I say, a one-stop shop together. This should combat a lot of that, and give people the confidence to invest in businesses and make sound investment decisions. So we look forward to the scrutiny. We believe this bill will take some time to scrutinise, and we should be given a due time period to go through the detail, given its length and breadth. We look forward to working with submitters, and we look forward to a positive outcome for our investment community.

It gives me pleasure to rise and speak on the Financial Markets Conduct Bill. Can I thank the Minister of Commerce for his speech to the House and the direction he has led. This is a phone book full of certainty for New Zealand investors. There are 561 pages in it, and I very much look forward to it arriving at our Commerce Committee and to our starting our work.

Can I recognise and agree with much of what the Hon Clayton Cosgrave said earlier. Can I thank him for the career-limiting comments he made about me, and can I say that I am sure that the committee will work together to the greatest degree possible to make sure we do the best job we can on behalf of New Zealanders.

What is this piece of law, this significant piece of law reform, about? Well, it is about ensuring that investors are provided with understandable and accurate information to guide their decision making. That is extremely important. All of us in this House will have had constituents approach us over the last 3 years, email us, and write letters to us, and bring forward some very sad stories about the way that they have invested and what has happened to their investments and about how this has called into question some of their future retirement plans and otherwise. I know that all members of the House want to do whatever they can to work through this and to provide much more certainty, ensuring the governance arrangements in respect of financial products available to the public are robust, and minimising unnecessary compliance costs for those raising capital and promoting innovation and effective competition. Very clearly I think it is important that this bill focuses on some of the difficulties that have been experienced by New Zealanders in the past.

I want to recognise that over the last 3 years a significant change in this area—the FMA, or the Financial Markets Authority—came into effect. One of the first things the Financial Markets Authority did when it came into law was to act upon somebody who had been acting unscrupulously and trying to promote products and sell things to New Zealanders where they were not able to back that up, and it is good to see that it was able to provide greater information to New Zealanders around that. In fact, Mr Cosgrove is correct: it is not possible to legislate a zero-risk environment in this respect, but what is important is that all New Zealanders are given the opportunity to have full confidence in the regulations and to go out and seek information themselves, so that they can make an educated decision around their investment and, where they seek this information, they can rely upon it.

I do not want speak for much longer, because I am quite keen for this to get to the committee and for it to get out to the public for wider consultation and submissions. But I will just say that a couple of parts of the bill that I think will be important will be introducing civil pecuniary penalties of up to $1 million for individuals or up to $5 million for companies—that is going to be important there—extending the maximum period for prohibition by the Financial Markets Authority or the Registrar of Companies on a person managing companies from 5 to 10 years where they have not acted appropriately, establishing licensing regimes for specific financial sector participants, introducing stricter requirements for management of investment schemes, and introducing a new system to regulate the securities exchanges. As I said, it is a very important piece of legislation. Well done to the Minister for being able to have this bill promoted up the Order Paper. We, of course, will do our job diligently when it gets to the committee. Thank you.

The Financial Markets Conduct Bill is a substantial bill, and I certainly am very pleased to finally see it being debated here in Parliament. I think the fact that it is such a substantial bill does show that it has been through an amazing process. I congratulate the Government on taking the step of putting out a draft exposure bill and getting that feedback after two sets of discussion documents over a significant period of time—in fact, over two Governments—and then responding to the recommendations of the Capital Market Development Taskforce, which I was very pleased to be part of introducing.

There are some issues that I think we need to have on the table as we debate this bill, because there is a line in the regulatory impact statement that just worries me a little bit and I want to put it on the table, because I no longer sit on the Commerce Committee, and I would like the select committee to look at it very, very carefully. The regulatory impact statement sets out the objectives, which is always a very good idea in a regulatory impact statement—to actually decide what it is that you are trying to achieve from the outset. It lists the objectives as follows: “Providing information well targeted to serve investors’ decisions and their abilities to understand the information provided;”, which I think was a point that the Minister made and I think that is a very good objective.

It goes on to say: “Reducing costs to issuers by providing sufficient certainty around their obligations and removing unwarranted obligations;”—and there may be some issues with that, which I will come back to later—“Ensuring that products have adequate governance arrangements to allow for effective monitoring and reduce governance risks;” That is very good. It goes on: “Effective enforcement of breaches of duties to provide incentives for issuers to play by the rules while giving investors a degree of assurance that they can rely on the rules being enforced (particularly where large numbers of retail investors are involved);”. Again, a good objective.

And then finally, this one, which is the one I am just a little bit worried about, and it is one that has actually been mentioned by the Minister in his contribution, and also by the chair of the select committee: “Ensuring that the regulations allow an appropriate level of innovation and flexibility in the market.” That word “innovation”, when I think of the global financial crisis, is actually not a word that I necessarily find great comfort in, and that is something that the select committee is going to have to look at very carefully.

So the regulatory impact statement does acknowledge the conflicting nature of some of these, and, in particular, that is one that stands out from the other objectives, and I think it is something that is worthy of consideration. There is a balancing act that the regulatory impact statement says needs to be applied. But what I am concerned about is that the balance must not be at the expense of those who would not describe themselves as sophisticated investors.

I use those words “sophisticated investors” deliberately, because the last time I used the words “unsophisticated investors” in Parliament I received a very angry email from somebody, whom I am not going to name, and I just want to read you an extract from what she said. She said: “Dear Ms Dalziel. I am one of your ‘unsophisticated investors’ who fell victim to Lombard Investments. I hold”—and I am not going to talk about her degree, but she has substantial qualifications, she has worked in a range of fields, and I am not going to say what they are, because it may identify her. She was completing an additional degree and working in another professional area. “My partner, another of your ‘unsophisticated investors’ who fell victim to Lombard Investments, is a highly qualified scientist. This, Ms Dalziel, is called specialisation—the way most successful societies are run. Calling us unsophisticated is adding insult to injury. We are highly specialised in our fields of expertise and expected the finance industry to be the same. More to the point, we expected our country’s laws regarding finance to be made and upheld by specialised experts, including you. Politicians have failed us in this and now you call us unsophisticated investors. I think you should publicly apologise for this insult and state that in a society of specialisation we all have our fields of expertise and rightly expect the finance industry and law surrounding it also to be run by experts instead of thieves. Regards”.

I wrote back to her, and I put on the record the apology that I gave her by email. On the record here, I had no intention of offending this individual. In fact, the reason that we have this law in front of us today is because of people like her and her husband who got caught out. So I started off by saying: “I’m sorry that you and your husband fell victim to one of the finance company failures. I would be very interested to know what attracted you both to invest in Lombard, particularly their marketing or rate of return, and whether you used a financial adviser or planner to help you assess the risk of your investment. The Government is completing the work of the review of financial products and providers with a new Financial Markets Conduct Bill”—here we have that today—“to take over from the existing securities laws, and this is going to be a big feature of the new regime—defining who needs to be told what.

“This leads on to my use of the phrase ‘unsophisticated investors’. I am truly sorry that you have been offended by the use of the phrase. I have used it many times and will reflect on how I might better describe the opposite of a sophisticated investor, which is what I intended. The phrase ‘sophisticated investor’ is used in legislation all around the world, and I took the definition of a ‘sophisticated investor’ off an American website to show how truly international that was. It was the type of investor who is deemed to have sufficient investing experience and knowledge to weigh the risks and merits of an investment opportunity, and then, for certain purposes, net worth and income restrictions must be met before a person can be classified as a sophisticated investor, and then it goes through some particular examples.

“And the website goes on to say: ‘sophisticated investors are the dream clients of most financial services firms as they generate much higher fees than retail investors. Certain assumptions are made about sophisticated investors—they can hold their investments indefinitely, the funds do not need to be liquidated for cash needs, and they can assume a total loss of investment principal without causing severe damage to their overall net worth.’ ”

I went on to say to her: “In using the phrase ‘unsophisticated investors’, I was thinking about people who did not have sufficient investing experience and knowledge to weigh the risks and merits of an investment opportunity or who could not assume a total loss of investment principal without causing severe damage to their overall net worth. I am qualified to practise law, but I would regard myself as an unsophisticated investor on both of these tests. It simply did not occur to me that someone hearing me use the phrase ‘unsophisticated investors’ would think I was in any way describing them personally as unsophisticated. Again, my apologies for this unintended hurt.”

And she came back to me to explain why she invested in Lombard. She said: “I can see that I certainly don’t fit that definition of ‘sophisticated investor’ and apologise for misunderstanding the term. We chose Lombard because the interest rates were attractive, though not extreme, as we thought the ‘secured option’ was, indeed, properly secured. Also, the money seemed to go into sensible housing developments. But the main encouragement was that Sir Douglas Graham promoted the company and we, perhaps wrongly, assumed he knew what he was doing. We did not have a financial adviser, instead falsely assuming that the law covered secured investments adequately.

“It was very painful to recently see that the development we lost savings over was sold at a very low price to a couple of developers who only need to finish six nearly complete houses to cover the cheap cost they paid for the unfinished Brooklyn Rise project. Under the circumstances we would have been quite satisfied to wait a year or two without interest while the project finished, if at least we could have got our money back. Instead, the lawyers in charge decided on receivership and that we should settle for a few cents per dollar. But it looks as though their decision was wrong, since the new developers seem to think the project will be worthwhile.

“So we have basically given a couple of smug bargain hunters a good slice of our retirement savings. So I hope the new regime forces lawyers in charge of that kind of situation to really give investors full alternatives such as waiting for the property market to improve. I wish you best success with improving investments in the future and restoring investor confidence.”

This is not about innovation. This is about good practice, best practice, principles that underpin ethical practices in our financial markets, and the law does not deliver ethics—

The ASSISTANT SPEAKER (Lindsay Tisch): I am sorry to interrupt the honourable member.

I rise to speak on the Financial Markets Conduct Bill on behalf of the Greens. I think we probably should start this with a bit of an apology on behalf of the New Zealand Parliament to all those people who invested in finance companies. This Parliament failed you; it is a simple fact. We did not regulate the finance companies and we should have.

A lot of people—retail investors—invested in finance companies and lost vast amounts of money, and this Parliament, over many years, let that happen. This Parliament failed to regulate the finance companies in a way that it should have, and the result is that many, many New Zealanders have lost their retirement savings and many New Zealanders worked day and night for decades in jobs, saving money, for no purpose in the end. It is as if we took away a chunk of their lives by not regulating the finance companies properly, which is our job, because we are legislators. So day and night, people worked in jobs, put money aside in finance companies because they thought they were saving for the future, and they assumed that this Parliament was doing its job—that is, to regulate the finance companies so that investors would not lose all their money. But this Parliament was not doing its job and that is the sad truth. So this bill is a response—in some respects, but it is more than that—to that failure by the New Zealand Parliament.

I think there is a lot to like in this bill in terms of the attempt to establish a kind of comprehensive framework around financial services and financial markets, particularly, obviously, protection for retail investors, but not only retail investors. But there are some questions around it that I think really come to the surface when we are looking at what we are proposing to do in this bill. The fundamental one is that we are essentially weakening the penalties around directors of finance companies. It is hard to believe that this bill weakens the penalties applied to the directors of finance companies if they mislead investors, but that is actually what the bill does. Currently we have a strict liability regime. If you put out a product disclosure statement that misleads investors, you can end up in court under a strict liability. It is not about intent; it is just that you end up in court and get convicted of that.

In this bill we are proposing to replace a strict liability regime with one where essentially you come under the criminal provisions of this bill only if it can be proved that you were deliberate in misleading people or that you were reckless. So we have moved from a situation where, as we have seen with some of the recent prosecutions, the directors of companies that put out misleading prospectuses and misled investors—resulting in the loss of retirement savings of many, many millions of dollars for many tens of thousands of New Zealanders—had strict liability for their actions if they signed off misleading prospectuses. Under this bill they will have only civil liability—that is, they will not go to jail. They will not face jail time unless it can be proven that what they did was deliberate or reckless in signing off a misleading prospectus or a product disclosure statement, as it is called. The question we have to ask is whether that is right. Is that good policy?

Is it right that we should say that to tens of thousands of people? They have essentially lost great chunks of their lives, where they worked for hour and hour on end in order to put nest eggs together, to save money. Basically, they gave that money to a finance company based on someone whom they respected signing off the statement saying that it was true. They gave the money to a finance company, and then all of that time and all of that work that that person put in was essentially taken from them. It was taken from them when those finance companies went belly up. We took a whole bunch of their time, and a whole bunch of their work has just gone up in smoke. Hour after hour they worked late, maybe doing overtime—however it was that they got their money together—for their retirement nest egg, and we have just burnt it, and the directors of the company who signed off that misleading prospectus effectively took that time away from those people.

We are saying, OK, if you signed off on that statement and you took the time from those people’s lives—time that they could have been spending with their kids, doing something they liked, maybe, instead of working—you are not going to suffer any criminal time. There is not going to be any time taken from you. You are not going to go to jail, because we are now changing the law so that there are no longer criminal provisions, just civil ones, unless we can prove that it was deliberate or reckless. We are saying that you can take that time from those people—essentially remove the time that they have—but under this bill, unless we can show that it was deliberate or reckless, you are not going to suffer any jail time. There is just civil liability and civil provisions. Is that right? Is that ethically right? I think that is the question we have to ask in addressing this bill.

For that reason, the Green Party will not be supporting the first reading of this bill, because we are not convinced that it is right. We are interested in having the debate at the Commerce Committee, and we recognise there is a lot of good stuff in this bill—no question about it. But on that basic ethical question—is it right what Parliament is proposing to do with this bill—I think we have to say at the moment that we are not convinced that it is, and we are pretty sure it probably is not. That change from a criminal strict liability to a civil liability—unless you can show it is reckless or you can show that it was deliberate—we think is a very, very important change, and we are not convinced that it is the right change to make.

The other question is whether it will help the capital markets. There is no question that systematising the regulation of these markets is valuable, and so we can see that the bill does make a contribution. But if a key part of the capital markets is the retail investors, who together add up to quite a lot of money, does this give the retail investors the confidence they need to re-enter the retail investment market? When they see—when they come to understand, and eventually they will—that what we are proposing to do is actually weaken the penalties for directors of finance companies, I do not believe that their confidence in the retail investment sector will be improved.

Part of it is understandable: people want to punish someone. You could argue that these people, these retail investors, are behaving in an emotional way, because they want to send people to jail and strip their knighthoods and all that kind of stuff. And OK, that is fair enough, but it is also true that if a system is to have teeth—if the system is to have real teeth—and to make sure that it actually has the effects that we want, that is the reason why we put jail time in bills. There are all sorts of bills where you can end up in jail. If you steal from someone relatively small amounts of money as a burglar, then you can end up in jail. If you steal from people many, many millions of dollars because you sign off on a misleading prospectus so that a whole bunch of retail investors lose their life savings and many millions of dollars, we are now saying you will not go to jail unless we can prove that it was deliberate or reckless.

There is actually some commentary in the media about whether in the most recent cases, actually, that test would have been met, and I am not going to speculate on whether it would have or not. But if we are saying to retail investors as a Parliament that we are now weakening the penalties for those who take your money by offering misleading prospectuses, I am not convinced that that really does help our capital markets in terms of encouraging small retail investors to get involved. This same kind of test, and the provisions around this test, also apply to insider trading and the penalties around insider trading. Are there criminal penalties? Well, it depends. You have to be able to prove that it was deliberate or it was reckless. Market manipulation is the same. So the same kinds of tests are being applied in a similar way right across the different kinds of provisions of the bill, and I think that makes sense to apply them in a consistent way. The question is whether it is the right test that we should be applying to those who are doing these things.

The other part of it, I think, that is interesting is around the compensation. There are some good aspects around trying to actually enable compensation in this bill. The thing is that often when it came to the finance company collapses, there actually was not a lot of compensation to be offered. Although this bill may result in better ability for people to get compensation out of the system after the collapse of something like a finance company, whether that really helps the retail investors at all is another question. Often the money is not there, or there is not very much money there; it is all gone. So although the compensation provisions are good, whether they will really help retail investors, I do not know—it is not so clear.

So from the Green Party’s point of view, those are our concerns about the bill. We will not be supporting it at the first reading. We will be engaging with it at the select committee, because I think that those questions go to the heart of this bill and the heart of the confidence that people have when they invest their money with companies like the finance companies. Thank you.

I stand to speak on the Financial Markets Conduct Bill on its first reading. The main purpose of the bill is to promote the confident and informed participation of businesses, investors, and consumers in the financial market, and to facilitate the development of fair, efficient, and transparent financial markets. When National became the Government the country was reeling under the collapse of financial companies. National intends to restore investors’ confidence by rewriting our security laws. A strong capital market provides a vital source of finance to help our businesses to grow and create jobs. This bill provides a vital role by providing better information and, most important, protection for mum and dad investors. National will repair the confidence that was shaken by the collapse. This will be done by setting clearer guidance for the companies looking forward to raise capital. The Financial Markets Conduct Bill will provide information to encourage people to manage their investment and capitalise towards creating jobs and building a stronger economy. I congratulate the Minister, the Hon Craig Foss, on bringing forward this legislation, and I commend this bill to the House.

I rise to speak on behalf of New Zealand First in relation to the Financial Markets Conduct Bill. I think it is very appropriate that the word “conduct” is in this bill, because this is all about how our financial markets conduct themselves in the future. New Zealand First, of all parties in this House, is well known for exposing many indiscretions in the past in terms of the financial markets, and those of us who are old enough will remember the likes of the wine-box inquiry and other dealings around the world. I know that some of the National people are smirking from the other side of the House because they were a little bit young at the time and do not recall it, but had they been old enough to be around when the likes of the wine-box inquiry was on, when the Rt Hon Winston Peters was exposing much of the sorts of shenanigans that were going on in terms of some of our financial markets and our taxation system, and various other things around the world in terms of doing New Zealand itself out of its own taxes, then this certainly does reflect well in terms of this bill.

It is very appropriate also that the National Government would be bringing this bill forward to sort out those financial markets, because it is very, very well aware of the shenanigans that went on in the past in relation to many of the financial dealings around the world. Therefore it is more than appropriate that the National Government is now rectifying many of those wrongs of the past and putting the financial markets in correct order, as they should have been—and then we would not have had half of the shenanigans that went on in the 1980s and 1990s.

The Financial Markets Conduct Bill replaces a number of former Acts, such as the Securities Markets Act 1988 and the Securities Transfer Act 1991, and it also replaces Part 2 of the Securities Act 1978. So this bill is replacing quite a lot of old legislation and brings it up into the new millennium. It also allows New Zealand to align itself more with Australia and other markets, and therefore will certainly assist in terms of this Government’s and this nation’s dealings in international finances, and it will help corporate New Zealand and “Kiwi Incorporated” to perform.

I am particularly delighted to look at parts of the bill, particularly in reference to dealing in financial products on markets. The bill mentions, in the explanatory note, that Subpart 2 of Part 5 deals with insider trading, particularly the derivatives market and insider trading on the derivatives market. Certainly, New Zealand First would support this. The last thing we would want to see is some of the insider trading that has been known to occur in terms of the derivatives trading. We do not want the likes of people who are working out of various money markets around the world manipulating the New Zealand market and taking New Zealand for granted in terms of what we are doing in trying to run a strong, stable financial market here in this country.

I am particularly pleased to read the explanatory note, under “Subpart 3—Market manipulation”, which states: “This subpart prohibits market manipulation. This prohibition takes the following 3 forms: prohibiting a person from engaging in conduct that is misleading or deceptive or likely to mislead or deceive in relation to any dealings in quoted financial products. This new provision applies whether or not the dealings are in trade: prohibiting a person from making a materially false or misleading statement that is likely to induce a person to trade in quoted financial products or have the effect of increasing, reducing, maintaining, or stabilising the price for trading in those financial products. …”, and it goes on.

There are penalties involved in this too, and I see that the penalties for those sorts of offences can be a term of imprisonment not exceeding 5 years, or fine not exceeding $500,000 for an individual, or a fine not exceeding $2.5 million. This is the sort of thing that we want to see in this Parliament—coming down on some of the shonky trading, and coming down on some of the financial institutions that have done good New Zealanders out of their savings and out of their investments.

New Zealand First very strongly supports this very voluminous edition. A number of trees have obviously been chopped down for it to be published. We welcome this bill, because we think it is overdue. It is overdue in terms of bringing New Zealand into the First World financial market, and not allowing it to be a cowboy financial market, as it operated in the past, which saw New Zealand being seen as a bit of an out-west, South Pacific trading nation in the financial markets area and where there have certainly been some less than desirable activities going on. We have seen so many financial companies go under in the last 3 or 4 years. We have seen so much in the way of questionable activities by some of those involved in the financial markets. Therefore to have a Financial Markets Conduct Bill certainly is the right direction to go to bring New Zealand into a First World financial markets situation. We certainly support this. We think this is the right direction to go. We think it is overdue, however. New Zealand First will be supporting this bill through its first reading.

It is an honour to talk to this, the Financial Markets Conduct Bill. I support many of the comments that have been made here tonight in that this is an overdue reform. Thirty-three years ago the Securities Act was enacted, and certainly this bill is part of a package of reforms that this National Government has undertaken in its second term. It really is about our priorities of building a more competitive and a productive economy, one that will create jobs, and one that will create opportunities not only for our businesses to grow but also for people to work and provide for their families. It really is about encouraging confidence and trust in our financial sector. When we came into power in 2008 we were really rocked by a number of collapses. To this day we are seeing it in the news, the effect of these collapses, and not only the effect of what has been quite immoral behaviour but also the lack of regulation. We acknowledge that, and that is why this bill is on the Order Paper today.

I also believe that the process with which this bill was presented to the House is a good process. We have had an exposure draft that was released to stakeholders in our sector and in the industry. We have had a number of discussion documents and now, 500-odd pages later, we have a bill before us that our Commerce Committee will run. It is part of the regulatory reform. In the last term of Government we enacted the Financial Markets Authority. We introduced regulations around auditors and the licensing of trustees and statutory supervisors. This bill adds to what has already been done by this Government.

There is just one part of the bill that I want to talk about quickly. It is about breaches, liabilities, and regulations around enforcing liabilities on those who commit breaches. Penalties will be up to 10 years’ imprisonment. That is welcomed, certainly by the National Government. I support this bill, and look forward to it in the select committee. Thank you.

It is a pleasure to rise in support of this Financial Markets Conduct Bill and to note that Labour will be supporting it to the select committee. It is good to see a bill that has the largely multipartisan support of the House. The lifetime of the bill so far has encompassed several Governments. That is no surprise, because it is a veritable telephone book of economic justice, as it were.

There is common ground philosophically behind the need for this bill. It is common ground that markets and, in particular, firms are the drivers of our economy. It is common ground, as evidenced by this bill, that for markets to work appropriately and properly, and for the public’s interest to be safeguarded, there have to be rules of conduct. That is why it is called the Financial Markets Conduct Bill. I think it is bipartisan as well that in the recent history of this country there has been far too much misconduct, and that that has cost far too many New Zealanders far too much in terms of their life-savings. The hall of shame is well known to all of us. The names are writ into our history and they are writ into the personal histories of the families whose retirements have been prejudiced by those actions: Lombard, Blue Chip, Hanover, and, of course, the largest corporate collapse in New Zealand history and the most expensive to the New Zealand taxpayer, South Canterbury Finance. What do those finance company failures have in common and what have we learnt from them in respect of the legislation that is being brought to the House?

Before I go on to that, may I state the obvious, which is that in 500 pages of legal detail I do not think any member in this Chamber at the moment, with the possible exception of former Minister of Commerce the Hon Lianne Dalziel and the current Minister of Commerce, would be equipped to comment in great detail about many of the clauses. But that is why we have a select committee process, and why we all, in good faith, are going to engage with submitters and wrestle with the detail of this bill. It raises, secondarily, the important point that we are exceedingly dependent upon officials on matters such as this, because of the arcane and technical legal detail in the bill, and because it is a subject matter that is in itself inherently complex—for example, the market for financial derivatives: advanced mathematics and very, very opaque financial instruments. Regulators have to be on their toes to see through some of the structures.

The consequences of not doing that adequately are weighing us all down to this day. The overhyped financial bubble of the last decade, which burst in 2008 worldwide, was in large part driven by the kind of conduct that this bill seeks to outlaw in New Zealand: the inappropriate disguising of risk, the transferring of that risk to unsuspecting investors without due notice or information, and the inability of the investor to make prudent decisions because others have been deliberately, or perhaps innocently, skewing the information that they receive and clothing it in a cloak of secrecy or dissembling.

It is, I think, universally—well, almost universally, because I think the Greens are reserving their position until they see some more detail—agreed that the general intent of this bill is important. What is particularly important is that for a very small country like New Zealand, where we are quite dependent upon, for better or for worse, foreign investment to fuel our economy, it is even more important that the conduct of our market gives investors, both domestic and foreign, confidence that their investments are safe, that the behaviour in the market will be appropriate, and that therefore they can stand or fall on the prudence and smartness of their investment, but they do not need to worry about criminal or quasi-criminal behaviour on the part of the companies they are investing in or through. That is why the very detailed, prescriptive nature of this regulation is designed to pre-empt malintent or lack of clarity on the part of the companies, and thus to protect the investors themselves.

That, of course, touches on an important philosophical point, and one that I would expect members opposite would agree with us on. The law in commerce has to provide for the fact that the business of business is to make profit; that if unrestrained, sometimes that profit is made in the short term at the expense of others and sometimes by the cutting of corners; and that therefore we have a public duty to ensure that the conduct of markets is appropriate. I see nodding of heads, and I think it is a motherhood statement.

But let us reflect, then, on the narrative that is being played out in the wake of the recession and, in public politics terms, here. I think it was the Minister for Economic Development, Mr Joyce, who described the Labour Party as the party of “can’t-do”, and tried to say his Government was the party of “can-do”. Here is a bill being brought down by that Government that is 500 pages of “can’t-do”, and I say congratulations. That is right; that is appropriate. Let us get beyond this oversimplified, over-polarised view that all regulation is bad. Here are 500 pages of regulation—without prejudice to submissions and without prejudice to the ability to improve them—that should have a beneficial effect on markets, that should increase the level of investment in the New Zealand market and the quality of that investment, and that should contribute in some meaningful way to more jobs, higher growth, and higher incomes if we are doing our work well, because it will provide a safe and hopefully relatively level playing field for the conduct of business activity. To put it in more historic terms, if you like, capitalism is great at earning a crust, but left to its own devices it often falls in on itself, and that is why the dynamic tension between Government and market is essential for the market itself.

Today, in summary, we are celebrating at the sending on of this very detailed piece of legislation to the Commerce Committee. We are celebrating what unites us in this Chamber: a desire to do the best for all New Zealanders. We are recognising our limitations as politicians—that the detail in here is enormous—and we are all pledging in good faith to work through that detail with the help of public submissions. This is what democracy should be about: Parliament working together to advance the public interest, and to foreshorten the ability of markets on their own to act against that interest. The converse has been seen writ large in the lives of far too many people, and we hope that this bill will help to put an end to financial markets misconduct.

It is a sad thing, but it is known by many people, that the best, most mature, and most developed legislation comes out of how things have gone wrong. We know that through the last 5 or 6 years we have seen hundreds and thousands of New Zealanders suffer tremendous loss, and through the ashes of that we see legislation emerging that is bringing great solidarity, certainty, strength, and stability out of times that have devastated and disappointed many New Zealanders. The Financial Markets Conduct Bill, with a tremendous amount of detail in it, is to bring back that surety and that strength, which, as was said across the House, are important not just for New Zealanders but also for overseas investors. I talk to people in my neck of the woods who invest hundreds of millions of dollars into New Zealand, and having certainty is one of the key factors why they feel confident to invest here, because of the regulation and the stability of Government.

It is good to see the Financial Markets Conduct Bill come to the House. I look forward to seeing it in the Commerce Committee, and I believe that it will bring some great confidence and strength into our markets. Thank you.

It is a great honour for me too to be able to take a call on the Financial Markets Conduct Bill as—I cannot say the youngest—probably the most junior member of the Commerce Committee.

I would just like to finish by maybe taking a bit of a human approach on this. In my electorate—actually, prior to it becoming my electorate—when I was out doorknocking I knocked on a door and an elderly lady answered. We began talking and she told me the story that her husband, who had been diagnosed with dementia, had recently had to go into a special care retirement facility. She had the house on the market because they had lost basically all of their life-savings to a dodgy finance company. We spoke for probably half an hour, and at the end of it she looked me in the eye and she said: “At the end of the day, there’s actually nothing you politicians can do for me and my husband anyway.” The great thing about this bill is that I think it is going to go a long way to addressing what happened to her and her husband and to instilling some confidence back in the people of New Zealand and us in this Parliament in being able to make sure that we do the best that we can to stop that from happening again. Thank you.

I am glad to take a very brief call on the Financial Markets Conduct Bill. I think Mr Cunliffe called it right when he pointed out that the Greens have come down on the side of opposing this bill, despite accepting the need for some changes—some quite fundamental changes—and regulation around finance markets.

We clearly need finance markets in the current economic context. One does not need to speak to many business people before discovering that there is a need for capital out there. Our businesses need capital in order to trade, in order to grow, and in order to innovate and create new opportunities for employment and for export. We need reliable finance markets that we know are going to work.

People are looking for places to put their capital. We want to pull money out of the property market and put it into areas of a more productive nature than simply tying it up in homes and rental properties and the like. We have seen too much of that. We have seen the negative effect of that. It is not particularly helpful for that to continue.

We need a return of confidence. Twenty-odd years ago we saw a complete collapse of the sharemarket.

Debate interrupted.

The House adjourned at 10 p.m.