Financial Markets Conduct Bill

on behalf of the Minister of Commerce: I move, That the Financial Markets Conduct Bill be now read a second time. The Financial Markets Conduct Bill is a major overhaul of financial markets law in New Zealand. It has been referred to by me and others as a once-in-a-generation opportunity to make New Zealand’s financial markets more effective. 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.

The bill has been through an extensive consultation and collaboration process to get this far. It stems from reform work begun in 2005, and it gained momentum from the Capital Market Development Taskforce, particularly its excellent 2009 financial report. It was informed by the global financial crisis and the failures of our financial companies sector. It owes a nod to our Australian cousins, and I expect that it will facilitate greater harmony in financial market regulation in our single economic market. It has been supported by all, or almost all, submitters at every stage in the process, with the divergence of views being limited mainly to the detail.

In the course of the bill’s development, the most urgent and clearly needed reforms were split out by this Government. This critical work included the establishment of a new regulator, the Financial Markets Authority; key reforms of KiwiSaver governance and disclosure; better regulation of non-bank deposit takers; and licensing of trustees, statutory supervisors, and auditors. This process has ensured that this bill, which contains the core—the complex detail, the hard stuff—would not be rushed. In June 2010 a 200-page discussion document was released, which was followed up by a 400-page exposure draft of the bill that was released in 2011. The bill was introduced to this House in October 2011, at 560 pages plus the explanatory note.

The bill has been reported back by the Commerce Committee, with a unanimous recommendation that it be passed with amendments. The committee has done excellent work. Dealing with a bill of this size and complexity is not easy. It is pleasing that the select committee unanimously supported the bill, continuing a tradition of cross-party support for financial sector reform.

I wish to make some brief comments about the committee’s amendments and some key matters in the bill. The committee’s proposed amendments improve clarity of the bill, particularly around liability. It is crucial that the bill strike the right balance between holding people to account and encouraging businesses to come to the market. The bill places more focus on civil liability and compensation, and reserves the main criminal sanctions for those users and directors who are guilty of serious wrongdoing. The changes made by the select committee essentially set criminal liability at the same level as for the Crimes Act, and provide broader defences to civil liability. These are important improvements.

I wish to reiterate that the bill is intended to encourage capable and prudent people to become directors. We want companies to be able to attract directors with diverse skills and backgrounds. Although directors should supervise capital raising and exercise due diligence regarding offer documents, their primary focus should be on devising business strategy and supervising management, rather than on compliance and liability. For that reason I agree with the committee that directors should be liable for civil pecuniary penalties and should compensate investors when they fail to perform their duties, but should not be liable for imprisonment where there is not a criminal fault element. Likewise, accessories such as senior staff and advisers should be directly liable to investors only if they are truly involved in the contravention, in the sense of being an intentional participant in the primary contravention with knowledge of the essential facts, and all those who are civilly liable, including directors, should have appropriate and consistent defences to that liability. The select committee has made important clarifications in this area.

The final liability issue I would like to touch on is the fraud on the market concept in the bill. This approach, which borrows from US law, creates a rebuttable presumption about the causation of loss. Under the bill the court will first determine whether there has been a misstatement in an offer document that is materially adverse to investors. Then, if the products have declined in value, the court must presume the misstatement to have caused the loss to the investors, unless the contrary is proven. The reason for the presumption is that it is unrealistic and wrong to require each investor to prove that they have personally relied on a misstatement. Investors get their information from a variety of sources, including market commentary, financial advisers, the media, and friends, as well as offer documents. A disclosure misstatement can influence these sources, causing the market to misprice the risk, thereby causing the loss to the investor. It is important to note that the amount of compensation is still a matter for the court’s determination and that the presumption is rebuttable.

The bill also sets out the basic standards of conduct expected in financial markets and by financial markets participants. These rules replicate key provisions of the Fair Trading Act but are paired with the enforcement and liability scheme in the bill. These basic rules will be enforced by the Financial Markets Authority. As a result, the core rules need to be kept in sync with the Fair Trading Act. So, as noted by the select committee, changes proposed in the Consumer Law Reform Bill will result in equivalent changes to the fair dealing provisions in the bill.

This bill will be a success if investors are in a position to make confident judgments about the potential risks and returns from their investment decisions, informed by high-quality disclosure and, where they want it, quality advice. The key part of the reforms to achieve this is to improve disclosure through the use of single-product disclosure statements that tell investors what they need to know, backed by a public register that contains richer detail and facilitates comparison between products.

But improved disclosure and conduct rules are not sufficient. The bill also seeks to implement consistent and reliable governance rules that will be enforced by a proactive regulator. For example, managers of all retail managed investment schemes will both have direct fiduciary duties to investors and be supervised by a licensed supervisor who is responsible for the custody of the assets of the scheme.

I want to reiterate that all investment carries risk, and part of taking risks is that sometimes investments fail to deliver a return, and, regrettably, there will also always be fraudsters. The rules in the bill are intended to provide a boundary to these risks so that investors can focus on business and investment risks. Investors should at the very least expect that the people in charge of their investments are required to comply with best-practice governance obligations, and these obligations will be promptly and effectively enforced.

As part of this improved governance, the bill introduces licensing of key financial markets participants, most notably fund managers. Licensing brings New Zealand into line with internationally expected norms of financial markets regulation, making these institutions more internationally recognisable and therefore internationally competitive. Licensing does, however, bring risks of high barriers to entry and of insulating incumbents from competition. Because of these risks, licensing under the bill is expected to be relatively light. It is primarily focused on ensuring that the unscrupulous are excluded from the industry, rather than ensuring that every participant has a gold-plated compliance regime or that no one fails.

I would like to conclude by thanking members of the select committee for their work in considering the bill, and to acknowledge the contributions of those who provided submissions on the bill. I commend the bill to the House.

I join, on behalf of the Labour Party, with the Minister for Courts in respect of his comments on the bipartisan nature in respect of this bill, the Financial Markets Conduct Bill. It is indeed about promoting efficient markets, investor confidence in markets, and fair market outcomes, and, to the best extent that this Parliament can, attempting to ensure that those who are charged as company directors with facilitating the investments of others take that duty of care very seriously—and in large part they do, of course.

I think it is noteworthy to touch on the nature of directorships. There was a time when being a director of a company was a reasonably blasé sort of option to take, and by that I mean that people did it, it was done in good faith, and there was not a huge set of Draconian responsibilities around a directorship. That is going back some years. We now know that becoming a company director can be an onerous task, that it is a specialist task, and that now, even prior to this bill but certainly post this bill, being a director comes with a huge burden of responsibility and a large amount of accountability, and even more so in terms of disclosure and transparency through this legislation.

We know the history of this. We know that in the last 4 years there have been 61 finance companies that have failed, the most recent being, of course, South Canterbury Finance, which was bailed out to the tune of $1.6 billion of taxpayers’ funds.

It was interesting that in the Commerce Committee meeting this morning on another piece of legislation—without getting into that—whilst we were in public session we had an interesting discussion about risk and entrepreneurship and how the balance has to be struck. You do not want to cauterise or strangle entrepreneurship. You do not want to cauterise or strangle entrepreneurship in terms of legitimate business risk-taking. Running a business, owning a business, and participating in the investment market is, by its very nature, risky. It is not a sure thing. Very few things in life are sure things. As the old adage goes, if it smells and tastes like a sure thing, it generally is not. So this bill seeks to strike a balance in terms of allowing entrepreneurship and appropriate decisions to be made—for instance, by directors and others.

That does not negate the fact that those decisions may not have a positive outcome. That is the nature of making business decisions. You risk, you get reward, and sometimes those decisions and those risks do not pay off, because that is the nature of business. I think it is appropriate as we go through this to just note that. There is no such thing, as I say, as a sure bet, a sure investment, a sure thing. If there was, I am sure we would have a far wealthier population generally than we do now. It is important to note that this country is built on entrepreneurship, and built on appropriate levels of risk by appropriate and qualified risk takers.

If we look back in history, of course, the Capital Market Development Taskforce, which was set up under the previous Government in 2008, moved to develop a blueprint and an action plan for the development of New Zealand’s financial system. That is the original genesis for, ultimately, this bill. We are pleased that the Government has taken this on. I know that investors, given the sort of investment carnage that we have had, are crying out for appropriate levels of disclosure, as the Minister said, and transparency and accountability. Without confidence in our financial markets, we will not achieve the level of investment that is required, and we will not prosper and grow as an economy and as a country. And it is important, as the Minister said, that these legislative frameworks are, as best as we can make them, in line with our Australian brothers and sisters across the Ditch, because effectively, in commercial terms, we are almost—almost—one market. So we had the financial task force.

We have now moved, of course, to the 61 finance company collapses, and no one wants to return to those days. It is interesting if you go through the history of some of them, in terms of the criminality that we have seen from some in the recent past. A couple of my colleagues have noted, and I think the record would show it is probably correct, that when it comes to white-collar versus blue-collar criminals, if you will—the burglar versus the white-collar criminal who loses millions and millions of dollars of the funds of the citizenry—it could be argued, I think, with a high degree of validity that throughout our history the burglar has got a hell of a lot worse sentence and has been dealt with in a far more severe way than many of our white-collar criminals of the past.

The bill, as the Minister said, does a number of things. It offers regulated financial products that are categorised as equities, securities, debt securities, managed investment products, and derivatives, based on the economic substance of the financial product, not just the legal form—in essence, again, attempting to simplify and also create confidence in the market. The offer process, as I have said, is modelled in an equivalent way to the way it is in Australia, bringing us in line. There is a requirement for issuers to prepare a prospectus and investment statement; that requirement will be replaced with a requirement to prepare, as the Minister noted, a single-product disclosure statement tailored to retail investors.

That leads us to a point that I made, I think, in a previous debate that although we have these pieces of legislation, and we can tailor-make our documents so that retail investors can understand them, so that they are simple, and so that they are relatively transparent or as simple as you can make them whilst meeting legal obligations, there is also—and I note that Simon Power did some work on this when he was Minister of Commerce—an ongoing need for a higher degree of resource into financial literacy in this country. I mean no disrespect by that. For some of us who have had experience in commercial areas, when interpreting documents and business investments we have a level of confidence that we could make judgments and, perhaps, have a greater understanding of the strictures and documentation surrounding these investments. For others in our community, who have not had that visibility or that experience, it is tougher for them to make judgments. Again, I think where you see the 61 finance companies that collapsed, many in the community thought that these were appropriate investments, that these were going to provide wonderful financial riches, and it just smelt too good. It is also incumbent upon this House, I think, and the Government to ensure that we have, and that we are putting some resource into, financial literacy—not just for our adult population but also for those people who are at school, so that they can grow up having the confidence to manage their own affairs and participate in investments.

The Financial Markets Conduct Bill provides, for instance, for regulations to be made that will prevent products from being structured to avoid regulation. This happened, of course, in the infamous case of Mark Bryers and the infamous Blue Chip case. Because the investment scheme offered interests in land, it was exempt from the Securities Act, to the significant detriment, of course, of investors. Your average Joe in the street looked at an investment like Blue Chip and thought this was a great deal—there was a great sell job on that—and people invested in good faith. I think that there is always an element, when you come to investment decisions, of—I would not say greed, but obviously people want to maximise their investments, and that often clouds judgment in terms of whether it is an appropriate risk and an appropriate level of investment. However, in the case, of course, with Blue Chip, this was built as some great, gilt-edged deal, and people were hoodwinked. You could not blame the citizenry for that.

What this bill will do, not only in that case but in others, is simplify, make transparent, and make more accountable a lot of the frameworks and a lot of the schemes of arrangement so that investors can have greater confidence. Many, I am sure, on both sides of the House will know constituents who have been burnt and who will not be participating in an investment market in these sorts of ways as they have in the past, either because they lost their life savings or because their confidence is shot to pieces. Those people will look for simplified investments, either in property or in other areas that they know and trust.

💬 Hon Chester Borrows: A Government guaranteed scheme like Mighty River Power.

We will not destroy the atmosphere—

Order! The member’s time has expired.

Thank you very much for the contribution of the previous speaker, the Hon Clayton Cosgrove. What a very convincing argument for investing in products that have got such strong guarantees as some of those available in the mixed-ownership model.

This Financial Markets Conduct Bill is, as you see, one of the bigger bills that have been in this Parliament this year. It is over 500 pages in length; 300 or so are pieces of legislation that have been brought forward from other Acts, and quite a number of pages represent new legislation. As we know, the backdrop to this bill is the global financial crisis and the collapse of finance companies, which have had a traumatic effect on the lives of many New Zealanders and have impaired the confidence of investors in our financial markets. We understand that having confidence and having a robust financial market are incredibly important for the ongoing expansion of our economy, particularly around those listed companies.

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. The Financial Markets Conduct Bill completes this comprehensive suite of reforms of financial market regulations. The bill will replace the financial market conduct regulations contained in a number of statutes—

Order! The time has come for the House to rise.

Debate interrupted.

The House adjourned at 6 p.m.