Financial Markets Conduct Bill

The Financial Markets Conduct Bill is a very, very large bill with many parts. It is very complex. The tentacles of it go everywhere. It has huge impact on the modernisation, the new sophistication, of financial markets regulation in New Zealand. I acknowledge the Commerce Committee, which originally worked on the bill, and, of course, the consultation that has been going on around this bill out in the finance sector for quite some time to get it to where it is now. Mostly, I think, without exception, the demand of the sector is to know when this bill is to be passed and whether we can get it in place as soon as possible, because, of course, it changes the framework under which all securities, banking, capital raising, reporting, you name it, must operate within New Zealand. It is well overdue in terms of the need for it. Its journey has taken quite some time, but that is a function of constant, ongoing consultation and regulatory review with stakeholders, and there have been changes to the bill as reported back from the select committee. But the substance of the bill is absolutely unchanged. It is a once-in-a-generation opportunity to upgrade and modernise our financial regulation. This bill goes hand in hand with its companion legislation, the Financial Advisers Act, which was passed in September 2008 by the previous Labour Government. This bill is the other part, the right hand of that left-hand bill, or the other way around, if you like. It is absolutely crucial to the modernisation of our financial regulatory scheme.

The bill has many parts. Members may know that Supplementary Order Paper 220 is something quite different, because it is so large. I think there are about 700 pages of it. Actually, it is basically a revision-tracked bill incorporating the Supplementary Order Papers, to help members work their way through it. Early examples of it have been consulted on widely out there in the financial sector, and not just the big end of town, either, but all stakeholders, from shareholder associations, banking organisations, listed markets, you name it—anyone and everyone involved in the commerce sector. As I noted, it is part of a suite of legislation that is associated with this bill, including the Financial Advisers Act passed in September 2008 under Labour, and some of the latter parts in it refer to the Financial Reporting Bill, which is before the House at the moment. Hopefully, we will be able to progress that pretty soon. The Companies and Limited Partnerships Amendment Bill, amongst others, is also before the House, with one or two yet to be introduced. Each and every single one of those bills is about making the securities, the financial regulatory arrangements, the framework, and platforms within New Zealand not quite leading edge, I suppose, but as good as you could get anywhere in the world. That is what New Zealanders deserve, and that is what they need.

These bills are in response to unfortunate activities that happened in the finance sector of New Zealand in the early 2000s—about 2004 to 2008, as the global financial crisis crashed upon us, finance companies failed, and the courts found some activities to be questionable, with prosecutions that pointed to many, many gaps in our legislation. This bill is the second completion of this reform. It does take in lessons of the global financial crisis and the collapse of finance companies, and it is a response to the Capital Market Development Taskforce work of a few years ago. It will play a key role in continuing to rebuild the trust and the confidence in our financial sector for all New Zealanders. I quite openly admit that for some New Zealanders recent behaviours saw the loss of their savings in various organisations, some through investment failure and some, as the courts have shown, through quite deliberate and even fraudulent actions. We need those Kiwis to trust in our financial sector, and we need those who fund New Zealand’s debt to fund our mortgages to trust in our regulatory environment as they send their capital from overseas back into New Zealand. The bill will also enable different ways of raising capital, with pathways of capital from the big end of town, the NZX-listed organisations, right down to unlisted exchanges, alternative exchanges, which are possible, and, most important, crowdfunding and peer-to-peer lending, which I am extremely optimistic will be a very positive growth opportunity for New Zealand.

Yes, it is a bill of considerable technical complexity. It has been the subject of extensive consultation. I would again like to thank all of those who have been engaged, from the pre-drafting stage to the select committee to the parallel process that went on at that stage. We have constantly engaged with officials as we have improved the bill to the form it is in now. There are only three Supplementary Order Papers. One was released in May, I think. It was considerably large and it was, I think, the one that had in it some policy changes. But, again, those changes were in response to consultation and awareness of some issues that were not in the bill as reported back. A Supplementary Order Paper was tabled yesterday or today, and that is generally a technical tidy-up in response, particularly, to the Public Trust changes that Minister Collins brought in recently.

I look forward to the debate and discussion on this bill. It is a very organised bill. Different parts deal with distinct parts of the market, how capital is processed and managed, and how signals are sent around New Zealand from, again, the smallest participant, a KiwiSaver investor, a managed funds player, a discretionary investment managed scheme, and the various permutations around those, right up to the large initial public offerings and what a very large company would need to do, the form of its prospectus, and what it will now need to say and declare in conjunction with Financial Markets Authority directives as it is looking to raise substantial amounts of capital.

I look forward to the discussion and the debate in the Committee. I understand that the bill is pretty much widely supported, so I hope that continues. Thank you.

It is a pleasure to speak in the Committee stage of the Financial Markets Conduct Bill—this big kahuna of a bill, which is what it has been described as. I was just looking at the second reading speeches on this bill. At that stage the bill was 500 pages long and now it appears that it is 700 pages long, so in the intervening period an extra 200 pages have been added. I have just been reading the comments made by Minter Ellison Rudd Watts partner Lloyd Kavanagh, who was asked whether it was the big kahuna of financial markets reform and who agreed with that sentiment. He said that it was a complete rewrite of New Zealand’s securities law, and replaced the current Securities Act of 1978, which has obviously been around for more than 30 years. So this bill is a back-to-basics, fundamental change, and, indeed, it is a big kahuna of a bill. I actually do not have the whole bill in front of me, but I think it has also been described as a doorstopper.

This is a one-stop shop for securities law. It has been designed to provide a more coherent structure and it replaces a number of pieces of legislation, including the Securities Act, the Securities Markets Act, the Unit Trusts Act, the Superannuation Schemes Act, and the non-tax parts of the KiwiSaver Act. It is always important to look at the context of these pieces of legislation, and the Minister of Commerce, Craig Foss, has acknowledged that, ultimately, this bill follows on from the work that was done in the previous Labour Government through the Capital Market Development Taskforce in 2008, which is more than 5 years ago now. So it has taken a long time for this bill to get to that point and to provide that blueprint and action plan for our financial system. Labour is supporting this bill. We are also supporting Supplementary Order Paper 220, which the Minister referenced, which came about after my colleague Clayton Cosgrove proposed a Supplementary Order Paper to the Minister on behalf of the New Zealand Shareholders Association to increase the threshold for wholesale investors from $500,000 to $750,000 and many other amendments. So I am presuming that that Supplementary Order Paper actually equals the 200 extra pages—around about—that have seen this big kahuna bill become even bigger.

There are many aspects to this bill. There are a lot of things to discuss. There are 11 different parts and I am just going to mention some of those tonight in my first contribution on it. Firstly, regulated financial products are going to be categorised as equity securities, debt securities, managed investment products, and derivatives that are based on the economic substance of the financial product and not just its legal form. There is an exceptionally important requirement in this bill for issuers to prepare a prospectus and investment statement. That will be replaced with a requirement to prepare a single product disclosure statement tailored to retail investors, and I would just like to highlight this as one of the single most important outcomes of this process.

That means that for retail investors—these are the ordinary investors, and this is one of the reasons that we have gone through this process—the document that they get will contain all the information that they need to make basic investment decisions. This harks back to the financial collapses and the impact that they have had on ordinary investors in New Zealand, right throughout New Zealand, and the absolute, critical importance of people who are investing in a company having that basic information and being able to trust that information. For analysts and experts, they will be looking to an online register, which is like a website, and that will also be critically important because transparency is a really important factor in this bill. It underpins it. There was an enormous amount of discussion around how to ensure that there could be trust in the system and trust for the ordinary investors, the everyday investors out there.

The bill also beefs up the Financial Markets Authority’s powers. It has a new role to license fund managers and the providers of discretionary investment management services. It also provides a new liability framework and it introduces criminal law, which is reserved for conduct where there is knowing or reckless behaviour, and also a greater use of civil remedies. But that criminal law component to this, for the knowing and reckless behaviour, is providing also an exceptionally important criminal aspect. This means that in respect of the people who have rorted the system in the past, have put up prospectuses that have told people to invest in companies that have not been able to be proved trustworthy, and who have put up celebrity endorsements around those prospectuses and sucked in those ordinary, everyday investors—that behaviour will no longer be tolerated where that is knowing or reckless, and there will be significant criminal penalties as a result. The Companies Act 1993 will be amended to introduce a new criminal offence in relation to the serious breaches of duty of directors to act in good faith and in the best interests of the company and the duty relating to reckless trading. As I said, there will be additional powers granted to the Financial Markets Authority, such as the power to designate financial products and make no action statements, and the current regulatory regime for exchanges will be replaced with a licensing regime for significant non-wholesale markets.

Labour started that financial markets reform process. We are very pleased to see that the Government is continuing that good work. I do want to acknowledge Lianne Dalziel, who set up the Capital Market Development Taskforce in 2008 to develop a blueprint and action plan for the development of New Zealand’s financial system. This is an important part of her soon-to-be legacy in this Parliament, and it is something that we should acknowledge. We are pleased that the Government is starting to act on the recommendations in the task force’s report, one of which was having a single market regulator. This work has taken up the time of the Commerce Committee for some years now, on and off. There has been an enormous amount of work that went into it by officials. I want to acknowledge the officials in the Chamber tonight—very impressive and all respect to you. There is going to be a lot to talk about on this bill tonight, and I look forward to taking another call.

It is a pleasure to rise to speak on this bill, the Financial Markets Conduct Bill. Labour will be supporting this bill. It is a bipartisan approach that has been taken, and that is important because it is actually about the security and stability of our markets. It is a process that has played out over time, as other members have alluded to. I want to start with the main purposes of the bill, because I think it is important that we start at the beginning for those who are at home who may not have yet had a chance to familiarise themselves with this document. The bill is a 700-page document. It is a weighty tome. This is double-sided, for those at home who have not had a chance to have a copy in their hands.

💬 Hon Ruth Dyson: Printed on each page.

And printed on each side, indeed, Ms Dyson—double-sided.

💬 Hon Maryan Street: Thank goodness.

The environment spokesperson next to me says “My goodness.”

💬 Hon Maryan Street: Thank goodness.

Thankfully—a smart move printing it on both sides. I am sure it is available electronically as well for those who are that way inclined.

The purposes of the bill are to “promote the confident and informed participation of businesses, investors, and consumers in the financial markets;”—that is (a)—and “(b) promote and facilitate the development of fair, efficient, and transparent financial markets.” Those two short sentences explain these 700 pages. That is what this bill is trying to achieve and it is good to boil it down to that, because those are then the criteria by which we judge the success of the bill over time, to see whether it really plays out in terms of its own purposes.

Of course, those of us who accept and believe that markets can work well—I personally believe that markets that are well regulated make excellent servants; they find efficient outcomes. But I have a deep concern when I see poorly regulated markets or markets that are not regulated at all, because more often than not they produce terrible outcomes and they make terrible masters. So this is an attempt to make sure that our financial markets are properly regulated. It is the proper business of this House to make sure that they are working in the interests of all of our economy so that it grows over time and we can support the kinds of social services, health services, and education services that we want for New Zealanders.

There are many other aspects of this Government’s economic performance that I could comment on that I am less satisfied with, but this is one where there has been a bipartisan approach, where common solutions and agreements have been found in order to ensure that we have a solid foundation for our markets to exchange information, to provide confidence to investors, and to ensure that capital flows toward its best use. Ultimately, that is what markets are all about. They are all about signalling to investors where capital is most efficiently used for the best returns, if markets are functioning properly and in the interests of consumers and society as a whole.

I have not had much to do with the early stages of this bill, but as it has gone on I have engaged with the Supplementary Order Papers that have been put forward and have been very pleased with the way in which, as far as I am concerned, that process has played out. Supplementary Order Paper 220, which has been put forward to increase the investment threshold for deeming an investor to be a wholesale investor from $500,000 to $750,000, is there, along with a number of other amendments intended to ensure that the protections of the bill are extended appropriately. That is something that we commend on this side of the Committee and will be supporting.

I do also want to commend the efforts of Lianne Dalziel, who set up the Capital Market Development Taskforce in 2008, from which this bill is ultimately derived. That was set up to develop a blueprint and an action plan for the development of New Zealand’s financial system. We are pleased the Government is starting to act on the recommendations in the task force’s report, one of which was a single market regulator. The Labour Government, of course, took a number of measures aimed at strengthening our financial markets, and this process was accelerated by the global financial crisis and the spate of finance company collapses.

I want to speak briefly to the Crown Retail Deposit Guarantee Scheme, because that was one of the things that really triggered a hurry-up of work in this area. There was an extreme failure of monitoring in that case, and possibly $100 million—we do not know exactly, because it has never been properly investigated—of taxpayer money went astray, effectively, due to poor monitoring by the incoming Minister of Finance, Bill English. We know that the Crown Retail Deposit Guarantee Scheme was kicked off by the Labour Government in response to the global financial crisis. It was put in place with 24 hours’ notice from our Australian counterparts in order to ensure that there was not capital flight from banks. The scheme itself was fundamentally sound in its initial stage. There was incredibly quick movement by officials to cover off that risk and to act in the interests of greater New Zealand. The Ministers at the time with great wisdom put that into place very quickly so that the banking system did not fall over, which would have seen, no doubt, some terrible social consequences for New Zealand.

So it was put in place well, but, unfortunately, we now know that the Minister of Finance did not follow up adequately and demand the reports necessary to show just how wrong that scheme was going. The unintended consequences of that piece of legislation playing out over time without adequate monitoring are well known to New Zealanders. If I just cite some of them, though, the South Canterbury Finance collapse has taken the tally of depositors’ money at risk to over $8 billion. That alone was worth $1.6 billion of taxpayer funds. There were 61 finance companies that failed, and the guarantee of taxpayer money that followed has been a kind of corporate bailout, the likes of which we seldom see in this country. There was a failure of monitoring. The risks grew and grew and grew because the Minister of Finance did not keep a lid on it. The high rate of return attracted investors, and the guarantee of the Crown meant that the deposits were safe for those who put the money in.

💬 Hon Trevor Mallard: Outrageous.

It is an absolute outrage, as my colleague the Hon Trevor Mallard says. Now there are a host of other things the Government cannot afford—or claims it cannot afford. If we had saved those billions through effective monitoring—or at least the several hundred million that could have been avoided through effective monitoring—by the Minister of Finance and if he had been across his portfolio properly at the time, there are many things that we could have afforded now without getting the country into debt at the rate that this Government has been getting it into debt. So that particular example is another example of why it is important to have really good financial markets regulation.

This bill, in its attempt to make sure that we have clear and transparent reporting requirements, will mean that ma and pa investors see the changes through offer documents. That is the kind of thing that they will see. Prospectuses and investment statements will change. We will have things that are much easier to read, much more accessible, and there will be things kept in the online register. All of this will make it a market that functions more clearly and where retail investors are protected, but the Crown is not putting taxpayer money at risk in the same way and not having to bail out companies for the failures either of the Government to regulate properly or of lending that was not signalled appropriately in terms of its risk.

It is a substantial bill. As I said at the outset, it has 700 pages. It is aptly described, I think, as a new one-stop shop for securities law. It is designed to provide a more coherent structure. The Ministry of Economic Development says that it will bring us closer to Australian law in some places, and that is, in this case, no bad thing. As I said, the process has been good and the engagement has been good. The changes that have come through to raise that threshold for retail investors were first put forward by the Hon Clayton Cosgrove and were in substance adapted by the Minister of Commerce and added to. The result is a bill that can be accepted across the Committee. It is a bill that takes us forward and that updates Acts that were sorely in need of updating.

Unfortunately, here we are in urgency passing something that has been on the books for 5 years, and it was the same with the last bill that we had go through, the Patents Bill. I was out running during the meal break with a friend of mine who is involved in patent law, who saw it as somewhat ironic that this had all been rushed through under the cover of urgency when it had been in the system for 5 years. Again, here we are rushing a bill through under the cover of urgency—albeit a worthy bill and worthy of support, but it shows poor management of the House, I think. That is sad, and requires parliamentarians—

I seek leave of the Committee for this part and the remaining parts of this bill to be considered as one question. Just to make it clear, I would expect you to restate the question so the clock starts for speeches, so that people could still get their full set of speeches.

Thank you very much. Given the nature of the motion, the question now before the Committee is that—

💬 Hon Trevor Mallard: You’ve got to put the leave first.

The CHAIRPERSON (H V Ross Robertson): Is there any objection to that course of action being taken? There is none.

The question before the Committee is that Parts 1 to 9, schedules 1 to 5, and clauses 1 and 2 stand part. Those in favour please say Aye—the Hon Trevor Mallard.

I was not really suggesting that you put the question, because I thought one or two of my colleagues might want to take a call on the Financial Markets Conduct Bill.

The CHAIRPERSON (H V Ross Robertson): I did try, Mr Mallard.

I am just checking that my colleagues are in fact prepared to do that. If that is the case, I am very happy to defer to them.

Sometimes people are unseemly in their haste, but thank you, Mr Mallard. I have a question for the Minister of Commerce. I agree that we need to update the forms of disclosure that are made when people have public offerings, be they debt, participatory securities, or equity securities. I agree that the old distinction that we had between investment statements and prospectuses was not working and that anyone who was knowledgable would want to see the prospectus rather than the investment statement. I also believe that prospectuses had become so long and unwieldy, listing all manner of risks in a way that was confusing for investors. When faced with a question as to whether they should invest, they had a long list of risks that was so long it was hard to discern which were the important risks and which were the less significant risks.

So I am pleased that we are updating the forms of disclosure that are to be made, but I want the Minister of Commerce to assure me that we are going to be replacing these two documents, one of which was too brief and imprecise and the other was too long and overly detailed, with a document that strikes the balance in the middle. I was in the practice of law for a long time and used to do quite a bit of prospectus work—

💬 Hon Ruth Dyson: You got quite good at it after practising for a while.

Yes, I did practise enough so that occasionally I did something right, thanks Ruth. I started doing work, way back when, on prospectuses for what was then the Otago Savings Bank or Trust Bank Otago, and I did prospectus work for a number of other public companies and also a number of public issuers. I was lucky enough to work with people who had been in the practice doing this sort of practice even longer and they showed me the original offer documents for Radio Otago, a matter that my firm had acted in and the people whom I worked with had been promoters of it.

The original offer documents in respect of Radio Otago could be read by a layperson or an expert. They properly described the nature of the investment, which was an ordinary capital raising. They were open as to the inability to make accurate financial projections, because it was a new venture and therefore was a bit of a punt. They informed people that it was a bit of a punt, and that you could lose your investment, but you could not be liable for anything more. Those documents could be prepared without the firms that were involved in preparation of those documents becoming what one of my subsequent business partners used to call non - risk-taking, profit-sharing partners in capital raisings, because rules became so complex and expensive to comply with that the professionals made as much money out of it or had to charge a lot to meet the compliance costs of what was being required. But in those old days people had a fair understanding of what it was they were investing in, they had the opportunity to invest or not, the company was able to access public capital markets rather than being reliant on a smaller pool of investors being professional investors who met professional investment exemptions, and I think overall it was actually better back then.

I want to have some assurance that these rules here are going to fix the very real problem that we have in respect of ordinary capital raisings in New Zealand. I am not talking about debt securities and finance companies masquerading as being safe when they are unsafe, but in respect of an ordinary capital raising, which is always risk capital, I want New Zealand’s small companies to grow into big companies and in those small companies—and we are a country of small companies, partly because we are a small population—I do not want to prevent the people in those businesses from accessing capital to grow.

At the moment, the first round of capital is the people themselves. The second round is often a mortgage over the house, though obviously there are limits to the amount of capital you can raise through that. The third layer of money for those small companies growing is often family members and friends, and again we should not be preventing that from happening through securities law. But they do need to be able to expand beyond that. We know that for the lenders to these companies it is very hard to borrow money for those companies if you have not got land-based securities, so they are not going to get the money from debt markets or from banks. Effectively, they are reliant on ordinary capital raisings, and I think they should be able to do that from the public rather than just from rich people, both for reasons of lowering their cost of capital and also because I think everyone should have the opportunity to invest in profitable ventures, not just wealthy people. So I would like the Minister to address that issue.

I would also like the Minister to address the issue as to whether we are dealing with the additional layers of risk and cost that we have created for directors. The certificates and increasing legal risk that directors face if they become directors of issuer companies have become onerous. That is becoming counter-productive because we want experienced directors to be willing to offer a hand to small companies that are trying to grow, without them having to take on too much personal liability in the event that the company for which ordinary capital has been raised fails. It does happens sometimes and, in respect of that, that is why we do have limited liability companies—to protect directors from some of that risk if they are not acting inappropriately. If we so load the duties on directors that they effectively become guarantors of ventures that go wrong, then we do not get good directors who are experienced and willing to lend a hand and help these small companies grow into big companies for our mutual prosperity.

The third issue I would like the Minister to address is whether this fixes the problem of issuer audits being required post issuing to members of the public. At the moment, because of a prior bill that this Parliament has passed in the last 5 years, if you are a public issuer—after you have been a public issuer, you have to have a special issuer audit of the company that assesses performance against prospectus in a way that increases audit costs. Again, that is an inhibition because it increases costs relative to other companies and therefore increases the effective cost of capital and makes it harder for the small businesses to invest.

The last question I would like the Minister to answer is what we are doing about, and whether we address through this bill, the Financial Markets Conduct Bill, the very small capital raisings, which are at the moment theoretically illegal, through crowdsource funding. It is a really interesting thing that has started to happen through the internet where small amounts of capital—actually, sometimes they are not small amounts of capital, because lots of people put in fifty bucks, and if 100,000 people put in fifty bucks, you have raised $5 million. So these small offerings, which can be effected through the internet now and it is called crowdsource funding, ought to be facilitated.

I have absolutely no problem with that. I understand that this bill is meant to facilitate that and I want an assurance about crowdsource funding. I would like to know what the limit is per person. I do not think there should be any limit of the total amount that is being raised. I would like to know what the limit is per person, and if there is any limit on the total, I would like to know, because I do not think it is appropriate. I think that if we had an appropriate limit of, say—I do not know—a couple of hundred bucks that people can take a punt on, if we let them waste that much money on Lotto every weekend, why would we not let them invest that through crowdsource funding in something that could grow the prosperity of our country and bring the jobs and innovations that we need to prosper as an economy and to create job opportunities for the young people? I will leave it at that and I would like to hear from the Minister in respect of those issues.

I do not often rise to talk about bills such as this, but I think this is a particularly significant bill, the Financial Markets Conduct Bill, and it is because of the human experience of some people I know that I am moved to speak on it.

It certainly has been a long time in the making. It started, clearly, with Lianne Dalziel’s efforts as Minister of Commerce when she set up the Capital Market Development Taskforce in 2008. I think that was a significant move at that time because the purpose of it was to design a blueprint, an action plan, for the development of New Zealand’s financial system, and we on this side of the House are pleased that the National Government has started to act on those recommendations. As one of my colleagues said earlier, acting on the recommendations of the task force’s report is something of which we approve. One of those recommendations was a single market regulator, and I might come back to that a little later. It seems to me that even with that work being done in 2008 and the task force being set up, there was a great deal of consultation to do and a lot of people to talk to if this really were to be what it now claims to be, and that is, using the oft-used term, a once-in-a-generation opportunity to get our financial markets right.

In 2011, on 12 October of that year, the Minister of Commerce at that time, Simon Power, introduced a large bill of some 560 pages, which progressed the work that Lianne Dalziel had done and the task force had undertaken during those 3 years. Obviously, Simon Power’s aims were the same as ours, and those were to regulate and modernise our financial markets. But, obviously, there was more to do, because there was a large three-part report that recommended that it be passed by Parliament’s Commerce Committee. What we have in front of us tonight is an additional Supplementary Order Paper 220, which Labour supports, and which has now taken the bill out to nearly 700 pages.

I want to focus on some of those things that are going to be of most importance to the people whom I know, and I will draw on my experience in Nelson in particular for this. This is a substantial bill, and before I begin to go into some of its effects, I have acknowledged Lianne Dalziel, I have acknowledged the Hon Simon Power, and I would like to also acknowledge the Hon Craig Foss and the work he has done to bring this forward. As I say, it has been a long time coming. I also want to pay tribute to officials who have engaged in what—although I have not been part of it—I understand has been a very substantial consultation process. All of that is required if we are going to regulate our financial markets in a way that makes them fair, efficient, and transparent. That is one of the purposes of this bill—to set up and regulate fair, efficient, and transparent financial markets. The bill has taken the financial markets from the ground up and rebuilt a framework that can regulate, monitor, and scrutinise the operation of our financial markets. It has been a back-to-basics reform, and I think that it is overdue, but none the less I welcome it for all that.

We are all familiar with stories of people, particularly retired people, whose savings went up in smoke when various financial houses collapsed over the last few years. Those stories, without exception, have been tragic. One of the things that I consider to be a really important benefit of this bill is the effect it is going to have on what we commonly call ma and pa retail investors. They are ordinary, regular New Zealanders who think that in their retirement in particular, savings they have put away over a long period of time—over decades of a working life and perhaps after the sale of one large property and moving into a smaller property—will have released funding to them that they are now able to invest. Unscrupulous or incompetent finance houses have taken advantage of people who have seen much of their savings go up in smoke.

One of the key changes that will make a difference to these people in the future is offer documents, which are currently known as prospectuses and investment statements. What we will have is a product disclosure statement. The requirements are to simplify the product disclosure statement to a couple of pages that set out and explain the basics of what is on offer and what the risks are of investment, and then to set out a whole lot of questions, and those questions can be established in regulations. Those questions can be answered in clear, concise, and effective language. If people who have no particular skills in the operation of financial markets are to have any confidence that the remainder of their savings is not to go up in smoke, this will be one of the devices that gives them confidence and starts to build that confidence that is required if New Zealand is going to deepen its wafer-thin domestic capital that is available, particularly for new businesses that need investment.

We have a prospect of new businesses developing, particularly in clean technology. If our exciting inventors and their businesses can be accompanied by a clear, regulated product disclosure statement, then people who may wish to invest a small amount or a large amount of money will be able to do so with clarity and with certainty about what they are doing and the risks that are attached to their investment. They can proceed with some trust and confidence. This is the trouble now: there is very little confidence and trust in financial markets. We have seen some extraordinary cases come before the courts in recent times of people whom none of us would ever have dreamt would appear in the courts on charges relating to misconduct in financial markets. What we desperately need to do because of those events and because of the collapse of financial houses is to invest, ironically, some confidence back in the operation and, most important, the regulation of financial markets.

So the fairness, the efficiency, and the transparency of financial markets comprise one of the two driving purposes of this bill. On our side of the House we are pleased that we started it, and we are pleased that this Government is finishing it. I commend it to the Committee. Thanks.

I am very happy to take a call on this bill, the Financial Markets Conduct Bill. If you have a look at it, it might look like a doorstop, but, actually, reading through it, I feel that it is more like a finger in the dyke of the financial challenges facing the world at the moment. Labour does support it, because it is necessary, but when I go through and read that the bill does not adjust current legislation in regard to insider trading, market manipulation, security holder disclosure, and continuous disclosure provisions, I am concerned that perhaps it does not go far enough. But it is a step in the right direction.

I have to acknowledge the Hon Lianne Dalziel, a predecessor of the Hon Craig Foss, who initiated this process. The Capital Market Development Taskforce in 2008, which gave rise to this legislation, was necessary because there has been a lack of faith in the capital markets in this country, for very good reason. Small investors have, quite frankly, been ripped off time and time again. This legislation is necessary. It makes a huge number of changes, but I point out to the Minister in the chair, the Minister of Commerce, that I am concerned that some key provisions in commerce law and disclosure requirements have been omitted from major change and improvement. In a small country like New Zealand, that may continue to provide uncertainty and a lack of trust, although, as I say, the bill goes a long way.

I would just like to ask the Minister something. I guess we can, as politicians, make judgment in this area. We are next to car salesmen and, I guess, financial advisers in terms of reputation, and so we can look at one another very, very critically and ask why we are not doing better. If I go to clause 19, “False or misleading representations”, set out on Supplementary Order Paper 220, I have to say that it is really concerning that we have people, or we have had people, I guess—we are making changes—who were able to get away with this for so long. But we are making changes.

One of the things that I question is how bank employees will be treated under clause 19 in terms of products that have any “sponsorship, approval, endorsement, performance characteristics, accessories, uses, or benefits”. Look, it is well known in the banking sector that there are bonuses for people. One particular area that I am pursuing, and that the Commerce Commission is currently looking at, is that of swap loans. They are financial products that have been offered, not, as we have often referred to here, in taking people’s money for investment but actually providing capital, in a similar way, though, and I presume they will be under this umbrella and under this legislation.

Firstly, if the Commerce Commission does indeed identify some false or misleading activity, will those banks or the individuals involved be challenged through this legislation or the previous legislation? There are issues of timing there that I think are quite important. I think that having disclosed—perhaps at the end of this year, early next year—there is the question of what process will then follow in respect of banks that, in my view, have indeed engaged in false and misleading information in the sale of swap loans to a large number of farmers, some small-business people, and some horticulturalists across this country.

I await the outcome of the Commerce Commission investigations with some enthusiasm, because unless we get on top of those products and unless we pass this legislation, which is indeed why Labour is supporting it, we will continue to have small investors who lose their life savings and people who use financial products that are unsuitable.

My question—and I go back to it for the Minister—asks why we have not perhaps improved the areas of disclosure, insider trading, and market manipulation. We indeed have a small country. The objective of getting, I guess, more trades on to the capital markets is a good idea, initiated by my colleague. I do not think she intended it to go so far as the current Government has gone.

I rise to take a short call in support of the Financial Markets Conduct Bill, having enjoyed working with colleagues on it at the Commerce Committee. The bill is a fundamental rewrite of our securities law. It will change what the public sees about every investment that they make. The current investment statement will be replaced by a simplified and shortened product disclosure statement, backed up by more extensive information, which will be placed and made available on websites. It brings into the net of securities law a number of products, be they housing-related schemes or schemes by the acronym of “DIMS”, which I will not be spelling out in the Chamber, so that previous carve-outs, which allowed certain subsets of schemes to run along different standards, will be brought within the general net.

This is a doorstop full of paper. It is almost as big as the Income Tax Act and it is every bit as complex. This is one of those jobs where we poor mortal politicians recognise the limitations of our expertise and our reliance upon the excellent advice that we traditionally get from our professional advisers. More than that, it is incumbent upon the Committee to note the broad thrust of this and to be able to deal with issues of detail as they are surfaced by the advice process.

The reason we are doing this is operations like South Canterbury Finance, which burnt nearly $1.5 billion of the public’s money and the Government’s money. Hanover Finance, Bridgecorp, Ross Asset Management, Blue Chip, and Cynotech Holdings are all examples of companies that have—shall we say—met an unfortunate financial end and taken with them the life-savings of thousands of New Zealanders. That shall not be repeated. It is incumbent on this Committee to make sure that the laws we are working on tonight are such that they are up to the job of keeping our financial markets safe.

The reason why the gentlemen and ladies in blue on the far side and the gentlemen and women in red here are joining together to pass this bill is that there is a common principle here, which is that we understand that having integrity, visibility, and regulatory frameworks around our financial markets creates a win-win for both sides of the market. If markets are transparent, if they are well regulated, and if they are fair, that is better not only for consumers and investors but also for business owners. The interests of capital and the interests of investors are actually aligned around good, strong, clear financial markets regulation. That is what this doorstop, this brick, of legislation that we are putting on the Table today is designed to do.

It would be remiss of me, however, to note the passage of this bill without also noting the global financial crisis. The biggest change since the mid-1970s oil shock has been the fact that there has been a fundamental revision of the literature of economics, of the public policy framework around financial markets, and, in particular—and it is a big part of this bill—of our attitude towards derivatives. Do you know that a dog could have got a home mortgage in the US 5 years ago, before the global financial crisis? A family pet could get a mortgage. Do you know what—

💬 Hon Trevor Mallard: They’ve got traffic tickets in New Zealand. Bob Jones’ dog got a traffic ticket—a parking fine.

That was probably because he drove him home. We have got an opportunity here to update our legislation to take account of the shifting sense of global financial markets. That is not a small change; that is a big change. They have failed investors, they have failed consumers, and they have failed savers. So much of what used to be taken for granted by the blue team, in particular, is now down the toilet. The assumption that markets work perfectly, the assumption of rationality, and the assumption of self-regulation have been blown out of the water by the fact that a dog could get a home mortgage in the United States.

I would like to speak to a particular part of the Financial Markets Conduct Bill that I focused on a lot when I sat on the Commerce Committee over all of those months and over all of those years. We heard evidence from everyday investors who came before our committee, who told us about losing their life-savings, and who cried in front of our committee. We heard those stories and saw those people up front and face to face, which is something that every select committee should try to do. They should meet with and hear from the people who are affected by lapses in law and gaps in law.

It was an important, critical part of this bill that we address the criminal liability. I acknowledge the comments of my colleague David Parker earlier around the job that we had on that select committee not only to ensure balance, as select committees often do, but to ensure that there was not a chilling effect occurring for directors of companies. We had to ensure that they would not be put off because they would think that they might end up before the courts, or even in jail, for the issuing of material that was not fully correct. But the fact was that over the period of years when these financial companies collapsed, and we know that that effect was escalated into our communities and affected so many people, there had to be significant measures put in place that would be a deterrent to that kind of behaviour—to the reckless and knowing behaviour of unscrupulous people who were, essentially, ripping off ordinary New Zealanders.

We have argued throughout this process that perhaps it has not gone far enough, as in this country people who are convicted of offences like burglary can be treated more harshly than those who destroy huge amounts of wealth through reckless and dishonest business practices, but I would like to say that there is a key change in this bill. It is that the issuer and the director are criminally liable for misstatements in their disclosure documents, but only if the Crown proves a subjective fault element, and that is the reckless, knowing behaviour—they had to know what they were doing and it was not a mistake. If it was a mistake, there is still liability, but it comes into the civil area. It does reduce the scope of criminal exposure, but the maximum punishment has increased, to 10 years’ imprisonment and a $1 million fine for an individual, and a $5 million fine for a body corporate.

Promoters—this was an issue that I particularly focused on. People who invest and make decisions to invest as everyday investors do so often because they trust the person telling them that they should invest. Often those promoters have been celebrities—people whom New Zealanders have trusted. There have been countless examples of that. We were told by almost all of the submitters, including those ordinary, everyday New Zealanders who appeared before us, that they trusted those people and that they felt ripped off. The promoters of statements are also criminally liable, and I think that that is right. I think that if you are a celebrity, and you stand up and go on television or whatever and have your face all over the place saying “Trust me.” and telling people to invest in such and such company, then you should know what you are doing and you should take responsibility. This bill ensures that they will take responsibility, and I think that is right.

At the same time, though, there is an important set of principles underpinned in the criminal liability area. They are that the regime should not discourage capable, prudent people from becoming directors through overly punitive sanctions; that companies should be able to attract directors with a diversity of skills and backgrounds; that the directors should be able to focus mainly on business strategy and supervising management, rather than on compliance and minimising liability; that directors should supervise capital raising and exercise due diligence in relation to offer documents; that they should be liable for civil pecuniary penalties and should compensate investors who lose money if they fail to perform their duties; and that they should not be liable to imprisonment where there is a no-fault element. Those principles, as I understand it, have remained in the bill.

They are important principles because they are the principles that protect directors from that chilling effect—from the fear that if they slip up or if there is a mistake made, they might end up in the clink. It is important that they do not, but it is also important that the ones who are reckless, the ones who are dishonest, and the ones who know that what they are doing is wrong are accountable and that they end up in the clink. I would like to see that happening. I would like New Zealanders to be able to be reassured that if they invest their money in a company that is dodgy and tells them lies, then it will be held accountable. If there is one thing that I think is in this tome of a bill, it is the mechanism to ensure that that happens.

I want to make just a few brief comments on the Financial Markets Conduct Bill—really I have got just a couple of points to make. The first is—and, again, it is probably a generational sign—that I regret that we are in an age now where it is less easy to take people’s word than it used to be when I was younger, when, especially in the financial markets, people’s words were bonds. I think that most members know I had some pretty extensive experience with a family sharebroking firm. For the vast majority of that time, people’s deals, which were worth probably hundreds of thousands of pounds or hundreds of thousands of dollars, were done on someone’s word, and there was not even a handshake—you know, it was done down the phone. I think it was a different age. Unfortunately, what we have seen over a period of time has been some changes where it is less easy to rely on people’s word, and therefore there is a need for this sort of regulatory measure.

The other point I would like to make is really in support of comments made earlier by my colleague David Parker, and that is that I think we do need to keep looking towards opportunities for relatively easy capital raising within New Zealand. It is my view that there is quite a lot of interest in this. I am going to again go back just a decade or so and use the example of the old Industrial Research Ltd, which is now part of Callaghan Innovation. In one of its earlier lives it made a scientific discovery to do with immunity. Because it was not given the money to develop the discovery or maybe it got too big for it, it ended up selling the discovery off to an American farmer and a company called BioCryst.

A lot of the locals in the Hutt, and particularly in Wainuiōmata—because, as many people know, Wainuiōmata has one of the highest proportions of scientists and PhDs in the country—knew that this thing had a chance of being a seriously good investment because of the way that the sharemarket worked and the ability to invest relatively small amounts in the US market, even a decade or so ago. A number of people—dozens of people, sometimes forming clubs and sometimes just as individuals—were investing through a local company in this company, which I think is called BioCryst, which was listed in the United States.

What it showed to me was that there were people around who were actually prepared to save up their TAB money or save up their Lotto money, accumulate a few hundred dollars, and invest it in something that they thought had a real opportunity of making a difference. The point that I have made to my colleagues in the past, and certainly to people involved in the development of this legislation—people like Simon Allen, who was involved at the earlier stages—is that I think there is a place for much easier backing of Kiwi ideas than most of us give credit for. I think that there is a role through this sort of legislation for what is now described as crowdfunding. Of course, 5 or 6 years ago we had not heard that term, but I think it is a good way of putting money together.

The other point that I would make is that we also have to look to our institutions in New Zealand to keep on providing information to the market. I refer in particular to the Superannuation Fund and the ACC, which do quite a lot of research into relatively small organisations. I think one of the faults that we have in our system is that a lot of people who could be investors—either as individuals or as syndicates or other groups, or through other investment vehicles—do not get the information that is available within the system because somehow the Superannuation Fund or the ACC get scared that they might be considered investment advisers by publishing the information that they have collated. I think it is a question that we need to look at because my view is that markets could be better informed. We have got to make sure that that can happen.

If that happens, people like those in Wainuiōmata who invested in BioCryst can, in fact, pick up the other good ideas that are developed in New Zealand. A lot of these ideas would of course have to go offshore because the funding involved just has to be massive. But my view is that the longer you can hold them and the bigger the proportion of New Zealand investment, then the better off as a country we will be. We have seen it in Australia with their superannuation funds and the way that that works. They are a lot wealthier as a result of being able to do investment in their own country, and now of course in our country, and as a people they are much wealthier as a result. I think we are poorer as a result of not having a financial system that works in an adequate manner.

The question was put that the amendments set out on Supplementary Order Paper 337 in the name of the Hon Craig Foss to the proposed amendments set out on Supplementary Order Paper 220 in his name be agreed to.

Amendments agreed to.

The question was put that the amendments as amended set out on Supplementary Order Paper 220 in the name of the Hon Craig Foss be agreed to.

Amendments as amended agreed to.

Parts 1 to 9 as amended, schedules 1 to 5 as amended, and clauses 1 and 2 as amended agreed to.

The Committee divided the bill into the Financial Markets Conduct Bill and the Financial Markets (Repeals and Amendments) Bill, pursuant to Supplementary Order Paper 338.

Bill reported with amendment.

Report adopted.