Regulatory Systems (Commercial Matters) Amendment Bill

This bill, the Regulatory Systems (Commercial Matters) Amendment Bill, was considered at the Commerce Committee. There were, I think, a total of 13 written submissions, and submissions that supported the bill with particular interest in amendments to the Companies Act, the Financial Markets Conduct Act 2013, and the Construction Contracts Act 2002.

Just a couple of opening remarks with regard to this bill: this is the bill that puts, I suppose, the time limit on the need for this bill to pass this week because it contains a clause that brings into play the retention framework for companies in the construction industry that go bust. Therefore, it is pretty important that it passes, but it is quite a considerable piece of legislation. It has got a number of parts, and the part that we are dealing with, the “Commerce and consumer affairs” part, contains a number of provisions.

In the original submissions on the bill, there were a number of submissions by the New Zealand Financial Markets Association, which, I think, to their credit, officials went away and had another think about. They came back to the select committee with a further five additional changes to the netting provisions in the Companies Act, which were, essentially, clarifying the—well, the Financial Markets Association recommended five additional changes, and officials did not recommend making those changes at this stage, but they thought it was important enough to come back with another departmental report. They went away and undertook further consultation with some key stakeholders, and there were, as they said, mixed views on whether those changes were needed and their potential impact. So they could not advise the committee that those proposals were appropriate for inclusion in the bill, but they thought that there was merit in further work to better assess whether there was a problem to actually further address.

So, ultimately, I think that the select committee did a lot of important work on this bill, and when we get to Part 4 of the bill, we will be able to go through the amendments to the Construction Contracts Act, which is, I think, where a lot of the interest will lie. But, ultimately, it is about maintaining the effectiveness and efficiency of the regulatory systems and about clarifying and updating the statutory provisions in each Act. There are a number of Acts—in fact, there is quite a long list of Acts that are being amended here—and I think there will be a lot to discuss as we go further on in this bill.

We have seen a lot of legislation pass through this House since the global financial crisis that is designed to prevent money laundering or nefarious behaviour in financial dealings. We have all supported this and we have all applauded it, but when I look at a couple of clauses here, I wonder whether, in fact, this is not a backward step.

Let me give you one example: Part 1, clause 4(2A), regarding the annual return. What this used to say was that the old requirement of signing off an annual return—this is an amendment to the Building Societies Act 1965. In the past, what used to have to happen was the annual return had to be signed off by two directors and the manager or secretary of the society. So there were three people: two of them in governance positions and one in an operation role—it makes sense. What we are doing now with this piece of legislation is deleting the need to have two in a governance position and one in an operational position, and changing it by saying it must be signed off by the manager or secretary—that makes sense because it is still in the operational role—and a second person who is a director, a qualified accountant, or a lawyer.

The concern I have about this is that, first of all, we are removing one layer, or one extra barrier, against nefarious activity—or fraud, for want of a better term, I suppose. The second thing is: OK, you could actually have the manager married to a director of a society. I would say that would not be unusual and certainly would not be impossible. So the thing we have got to do when we are looking at these sorts of pieces of legislation that are designed to make the job of the Ministry of Business, Employment and Innovation easier and more efficient is to ensure that we do not take away fundamental safeguards that protect the investment of the person involved with this. To say this can be signed by a qualified statutory accountant or a lawyer means that this could, in fact, be signed by the person in charge of the cheque book—the manager or the secretary—and someone who has no direct association with the building society itself, as long as they are a qualified lawyer or an accountant. I think that that actually removes one of the safeguards that protected members of a building society.

The thing I would say is that the previous condition was not onerous—to ensure that at least two directors signed off on the annual report. I have no idea why that condition was removed, when I think it provided a really important safeguard, and, after all, what both parties have been attempting to do since 2008—in fact, all of Parliament has worked very closely together to ensure that safeguards are put in place to protect investors and asset holders. So that concerns me a little bit; there is no doubt about that.

The other clause I would like to talk about is clause 16, and this is about annual meetings of shareholders. This is an amendment to the Companies Act. I am going to quote clause 16(5). It is an insertion that says: “… it is not necessary for the board of a company to call, or for a company to hold, an annual meeting of shareholders under this section if—(a) there is nothing required to be done at that meeting; and (b) the board has resolved that it is in the interests of the company to rely on this subsection [when there are issues] …”. That is, the board can determine that there is “nothing to see here”, that it is time to move on, and that they do not need an annual general meeting. Again, I think that that removes a certain safeguard. It is not difficult to hold an annual general meeting if all it means is that people gather around a board table for an hour and say “Hey, look. This is the statement of accounts. This is what we are doing. There is nothing out of the ordinary here. There’s nothing to see. Move on—we’ve done that.” Of course, it has to say in the constitution that the company does not require a meeting to be called or held, but, again, what I think this potentially does is it moves power from shareholders onto a board that has an interest in protecting their own rights over those of shareholders.

You could argue, quite successfully, probably, that a shareholder would not have invested in a company if, in fact, the constitution said there will not be an annual general meeting. That was a sticking point, but I just have concerns—[Bell rung]

The CHAIRPERSON (Lindsay Tisch): Stuart Nash.

Thank you, Mr Chairman, and I will not take the 5 minutes. What I was saying was that what we cannot do is take the power away from those who have no governance say but simply a financial interest, and put it all in the hands of those who actually do have a self-interest in a company or a body corporate or a building society, because that removes, I think, an important safeguard. As mentioned, it does say here that if a constitution does not require an annual general meeting, then you do not have to have one, and a shareholder can make a decision based on whether he or she believes that that is an adequate safeguard or not. But also in this, you could have a situation where a shareholder has invested in this, without this clause and the board makes a decision to change that. You do not have to do that at the meeting, you do not have to hold a special meeting to change the constitution, and before you know it, another important safeguard has gone.

I am not saying this does not streamline the process, because I suspect it does streamline the process, and I am not saying that what I talked about in clause 4 does not streamline the process, because I am certain that removing one layer of accountability, of course, does streamline the process. I suppose my point overall is that we have got to be really careful in that balance of streamlining the process and holding to account those who have positions of responsibility. We really strengthened this, and what I really would be loath to see is that because we say “Well, that was a long time ago. We are out of that. We can trust people now.” we actually weaken the accountability of those who have responsibility. We just have to be really careful that we are not doing that. Thank you.

I rise on a specific matter, as we should in this Committee stage—that is, Supplementary Order Paper 276, an amendment I have on the Table in my name. It is an amendment to an Act that is not otherwise amended in this Regulatory Systems (Commercial Matters) Amendment Bill—the Credit Contracts and Consumer Finance Act. If you will just indulge me, I will give a little bit of background as to how this particular amendment came to be before the House. We have a number of growing companies in the peer-to-peer lending space. They include Citizens Brokerage Ltd, Lending Crowd, LendMe, PledgeMe, Southern Cross partners, Harmoney—all of which seek to connect lenders and borrowers through a peer-to-peer platform online.

This is quite an exciting development. Around the world, companies such as RateSetter and Lending Crowd are doing billions of dollars in loans in a growing industry that is allowing borrowers to access cheaper capital and lenders to get better rates of return than they might otherwise. The interesting thing is that at this stage the industry is quite Balkanised around the world, and that is because there are different financial market regulations in different parts of the world, and that results in different indigenous competitors dominating their home markets. It is not so different from the scenario we had with other types of peer-to-peer trading, such as we see with eBay and TradeMe. Inevitably, there will be global consolidation of peer-to-peer finance. However, in the short to medium term there is the opportunity for a home-grown competitor to establish itself in the New Zealand market. The example that is most famous in New Zealand is actually TradeMe.

So the question that the New Zealand First members might like to ask themselves, first and foremost, is: do they want an indigenous home-grown New Zealand company to eventually dominate the peer-to-peer lending market in New Zealand, or would they prefer that we eventually become colonised by a company that has grown offshore and does business in the New Zealand market? That is, at a very high level, what is at stake here for members.

That gets you down to the technicalities and the difficulties that such companies are facing. One company in particular, Harmoney, which is probably the largest at present—although I would not be quoted on that—finds itself in an unenviable position due to provisions in the Credit Contracts and Consumer Finance Act 2003, a bill that was written long before peer-to-peer lending on the internet might have been anticipated. The simple problem is that they find themselves unable to charge any kind of credit fee to a borrower, other than the reasonable costs of arranging a loan. The problem with that is that if you are in the peer-to-peer lending business, your goal is to get transaction costs down to zero. In other words, you cannot collect revenue for the thing that you do, which is arranging or facilitating peer-to-peer loans. Because you are not engaged in lending any moneys of your own, you do not have anything else on which to make money. You cannot make a return on capital, because you do not have any; you are just a facilitator.

So that leaves these companies, such as Harmoney and PledgeMe, in a position where they have no way of funding their core business. It actually is impossible for this industry to exist under current legislation. To date, they have tried several workarounds. They have tried charging fees only to the lender, which is not forbidden under the Credit Contracts and Consumer Finance Act, but that of course leaves them in an uncompetitive position, because unlike any other deposit taker, you have to put all of the fees on to the lender; the borrower cannot pay any. This has left these organisations uncompetitive, or less competitive than they would have been if only they had been able to spread the costs symmetrically across lenders and borrowers and recoup their revenue that way.

One way of remedying the problem that has been floated by people in the sector is to return to an annual percentage rate. Returning to an annual percentage rate would mean that you would have transparency for the consumer, and it would allow consumers to take an apple-to-apple comparison of the total cost of capital as well as the cost of fees in one annualised rate. However, that is far too bold an initiative to introduce across the financial sector in the Committee stage of a regulatory systems bill. The purpose of a regulatory systems bill is to allow for changes to be made to our regulatory system that are small and technical in nature and that may not have been foreseen in previous times when the laws we are amending were passed by this House.

Turning to my Supplementary Order Paper—and I thank you, Mr Chair, for your indulgence in letting me set out that background—what my Supplementary Order Paper would do is very simple: it changes the “Interpretation” section of the Credit Contracts and Consumer Finance Act 2003 and, in particular, it adds the following words to a list of four definitions of what a credit fee can be: “fees and charges payable to a person who is licensed to provide a peer-to-peer lending service (within the meaning set out in regulation 185 of the Financial Markets Conduct Regulations 2014) for or in connection with facilitating and establishing the credit contract through the peer-to-peer lending service, and who has no beneficial interest in the credit contract”. In other words, this is an exceedingly narrow amendment. It applies only to those organisations that are registered as peer-to-peer lenders by the Financial Markets Authority Act under the Financial Markets Conduct Act 2013, and it allows them to collect revenue on moneys only when they have no interest in the actual capital being loaned and borrowed.

This is an amendment that makes an incredibly minor technical change to add something to a 2003 Act that was allowed by a 2013 Act. The Financial Markets Conduct Act allowed peer-to-peer lending. It explicitly provides for peer-to-peer lenders to be registered. However, this particular amendment will make up for the fact that in 2003 peer-to-peer lending on the internet was not anticipated. This is something we can fix right now to have a better regulatory environment than the Australians, who are currently about to eat our lunch in terms of basing peer-to-peer lenders there rather than here.

This amendment is so narrow and so simple and so welcomed by the industry it affects. There are no good reasons that this Committee should not pass it. It is a pity that the Government has indicated to me that it will not support it—and by the Government, I mean the National Party. However, every other party at this point, with the exception of United Future, has said either that they will support it or that they are considering supporting it. There exists in this Committee the numbers to pass this amendment and ensure that we will have a better regulatory environment to build world-beating, peer-to-peer lending companies and financial technology right here in New Zealand, if only members around this side of the Chamber can see that this is sufficiently narrow in scope to fit into a regulatory systems bill, that the benefits are suitable, and that they will enable the type of industry that so many in this House always say they wish to flourish. I hope that I will be given further opportunities to answer any questions that members around the Committee may have about this particular amendment. Thank you.

I am very pleased to take my first call on the Regulatory Systems (Commercial Matters) Amendment Bill—

💬 Sue Moroney: One of many.

—the first of many—and we are on Part 1. I want to express a little concern, first of all, that within Part 1 we are amending 12 different Acts. Just in terms of drafting—it is a little hobby horse that I have—I hate it when we have these omnibus bills that are all drafted in a single Part that amends multiple different Acts. I think they would get better scrutiny, and more concise scrutiny, if the debate followed a slightly more structured form—so if we went through each of the parts, you know, one at a time, or with each of the enactments being amended one at a time, which is not allowed for in the way that this is drafted.

But I also suspect that I have spotted a typo, and I would like to get some assurance from the Minister in charge, because it is a typo that potentially changes the meaning of a clause within this bill. It is in new section 147A, inserted by clause 100, which deals with credit unions and the Friendly Societies and Credit Unions Act. The purpose of this subpart is to allow those societies to meet electronically—so rather than having to have a general meeting in which there is a vote, they can do it through online voting, and that is a very sensible change. But the rest of the provisions apply only—as I read them—to credit unions, rather than to friendly societies.

If you look at new section 147A, “Meetings may be held using audio, audio and visual, or electronic communication”, in clause 100, the wording of this clause is: “The rules of a registered society or branch or of a credit union may [etc., etc.].” I suspect—and I may be wrong—that there is an extra “or” in there, and that is actually quite important, because it potentially extends the scope of this particular provision beyond what it was intended to cover. My reading of it was that it was supposed to cover only credit unions and not any registered society or branch. If it was covering any registered society or branch, the application is potentially significantly wider than one might anticipate. So I guess my question to the Minister in the chair is whether that is an extra “or” that was not intended, in which case, presumably, it is a reasonably easy thing to fix.

The second part that I wanted to ask a question on is the changes to the New Zealand Superannuation and Retirement Income Act of 2001. This bill inserts new functions for the Retirement Commissioner that I suspect will be most welcome because, certainly, the role of the Retirement Commissioner has expanded from when that office was first established. The Retirement Commissioner is now taking on a wider role around encouraging New Zealanders to be good with money—basically, to save, to think of the future, to pay back debt, and so on—and these are things that were not explicit within the mandate of the Retirement Commissioner.

So if we go back to the provisions that we are amending here around what the functions of the commissioner were, it was pretty narrowly confined specifically to superannuation and to reporting, particularly to the Government, on the sustainability of superannuation. I can see the Minister in the chair, Nikki Kaye, has got a speech that she just cannot wait to get stuck into around superannuation, because some of the questions that I am about to ask will, I am sure, give her plenty of material to work with.

Under new section 83(db), in clause 116(1), one of the new functions that the Retirement Commissioner is going to be given is “to advise on financial capability issues, when requested to do so by the Minister:”, but it does not specify whose financial capability issues the Retirement Commissioner is to report on. So is it the financial capability issues of members of the public, or is it the financial capability issues of the Minister and the Government, for example? One of the questions, for example, could be: does the Government have the financial capability to meet its commitments under the New Zealand Superannuation and Retirement Income Act of 2001, or is it that they are being asked to advise the Minister on the financial capability of members of the public when it comes to, say, supporting their own retirement and their own savings for retirement? So, really, my question there is: when the clause refers to financial capability issues but is not specific about whose financial capability issues are to be reported on, how is that section to be interpreted?

Also, new section 83(da), in clause 116(1), inserts new functions for the Retirement Commissioner “to promote education, and publish information, about financial matters to assist individuals to make financial decisions confidently and informedly:”. One of the very successful programmes that the Retirement Commissioner has been running in recent years is the Sorted.org.nz website, which provides a whole range of tools that people can use to assess all sorts of matters relating to their personal finances—whether it is the length of time it is going to take them to repay their mortgage and how they might save that by shortening the period of time, and so on. They do that outside, effectively, the scope that they have within the existing functions in the original Act, so updating the Act to reflect that will be very good.

One of the things that I would like to see the Retirement Commissioner doing a lot more of, and I hope the insertion of this provision will allow them to do so, is a lot more work in schools, because one of the things that has been raised with me regularly as the Labour Party education spokesperson—and I am sure it has been raised with members all around the House—is financial literacy in schools and the desire of members of the public to see a much greater focus on financial literacy in schools. It seems to me that we cannot expect every school and every teacher to account for every possible thing that we would want children to learn, but the Retirement Commissioner could certainly play a role here in supplying to schools the resources that might be able to assist them to ensure that young New Zealanders have a much greater degree of financial literacy than they do now. So my question, I guess, to the Minister is: is that the type of activity that the Retirement Commissioner might be expected to pick up under these new provisions that are being inserted by this bill?

I guess there are three questions—to summarise—because the nature of this debate is that we are sort of chopping and changing around different provisions within Part 1. But my three questions are: is the “or” intended, or is it an errant “or” in new section 147A: in clause 100? The second question is, when it comes to new section 83(db), in clause 116, whose financial capability issues can the Retirement Commissioner report upon—is that simply anybody? Then, when it comes to new section 83(da), in clause 116(1), would things like financial literacy within schools be encapsulated within that broader remit for the Retirement Commissioner? I think that is something that would be very welcome.

I plan to take just a brief call to answer some of the questions raised by the member Chris Hipkins. The first question that was raised was around new section 147A, in clause 100, and I just want to confirm with the member that it is not a drafting error. “Society” refers to a friendly society, “branch” refers to a branch of a friendly society, and “credit union” applies to a credit union.

The second general statement that I would make—I am not going to go into the detail of the other two questions—around the Commission for Financial Capability and the role of the Retirement Commissioner is that my understanding is that they do currently have a role in terms of helping with programmes around financial literacy in schools. We as a Government have also put $2.5 million into youth enterprise, specifically helping in communities where there is not parent support or teachers available and where they have not had Young Enterprise Trust programmes focusing around financial literacy and young enterprise. It is a very, very successful programme, and it is a very, very successful investment. So I think that is just my contribution.

I am going to talk about a couple of clauses that are completely unrelated, but I would say that my experience of the Young Enterprise Trust is that it is a fantastic scheme, but it is not compulsory, and it tends—it tends—to be in those schools of a high decile where the teachers and the parents are really engaged in this sort of thing. My personal view is, actually, probably the same as Mr Hipkins’. We need financial literacy to be an integral part of the curriculum if we are to have these young guys who know the difference between 10 percent per week and 10 percent per annum when they are trying to buy a car at the age of 16. The lack of financial literacy is absolutely terrible in this country, and we have got to change it. You know, it is a terrible thing to say, thinking about the global financial crisis, but when you have the DIY attitude that we have got and a lack of financial literacy, you are going to get people who believe that Colin Meads knows all about investments because he was a great rugby player.

The CHAIRPERSON (Lindsay Tisch): Focus back on the bill.

We have got to change it. What I would like to talk about is—

💬 Kris Faafoi: It’s a good point, though.

—thank you—clause 124, and these are amendments to the Companies Act. This is interesting, because I am not too sure how this works. So what this is about—

💬 David Seymour: Familiar feeling.

Well, thank you very much. I should know how this works, should I not? But what this is about is the reimbursement of expenses that are incurred in connection with a takeover of a company. So what the rules in this Act say is, despite anything in the target company—so you have got two companies. You have got one that wants to take over—company A wants to take over, and company B is being taken over. What this says in new section 48, in clause 124, is that despite anything in the constitution of a company being taken over, if this company is being taken over, then the company being taken over must reimburse the director of that company any expenses he or she incurs in this whole process. As a number of us will be well aware, when a company is being taken over, then the directors are really required to step up and do a hell of a lot more work than they would in the normal course of events.

The other point that is interesting is that any expenses incurred in this whole process by the company that is being taken over must be reimbursed by the company that is seeking to take over that company. This goes to a panel if there is any dispute about this, but I suppose my question is: if the takeover is not successful, are those costs still to be incurred? What can happen is that this can go to a special panel that will assess the amount that a target company has to pay to one of its directors, but it will also assess a fair amount that the company seeking to take over has to pay to the target company. And if that is not agreed upon or if they cannot find common ground or if there is, in fact, dispute about this, then, in fact, it can go to the High Court. The High Court has the sole jurisdiction, as I understand it, so what we are talking about here is that the panel is a panel of mediation. It is not arbitration, but it does bring up some interesting dilemmas.

You know, what we can find in a number of these companies is that the directors are highly competent, highly engaged, and highly paid individuals, and if they are going from, for example, their standard director’s fees of, let us say, $100,000 a year for, let us say, 10 hours’ work or for 15 hours’ work, they could, in fact, incur significant costs—

The CHAIRPERSON (Lindsay Tisch): I am sorry to interrupt the honourable member. The time has come for me to leave the Chair for the dinner break.

Sitting suspended from 6 p.m. to 7.30 p.m.

At the point that I was stopped, I was talking about amendments to the—

💬 Hon Ruth Dyson: Quite rudely interrupted, actually.

—yeah, rudely—Takeovers Act 1993. But before I go any further, if people think there is a slight red hue on the lens of the TV, there is not. The Parliamentary Rugby Team has been out training and I exerted myself a little bit too hard. So if I am looking a bit red, that is the reason—genuine. I know the Chair was a valued member of the Parliamentary Rugby Team.

I was talking about the changes to the Takeovers Act 1993. It needed to be amended, but the points that I am making, and I will make them again because it has been an hour and a half, are talking about the reimbursing of directors. What this clause talks about is that if one company is taking over another company, then the director of the company that is being taken over has to have his or her costs reimbursed by that company. So that has to happen. The other thing that has to happen by law in here is the company that is being taken over has to have its costs reimbursed by the company that is taking it over. It does not matter whether the takeover is successful or not; those costs still have to be reimbursed, and they can be considerable at times.

Let me give you an example. As we know, a lot of companies have a professional board of directors staffed by men and women who are professional directors, who pull down often $200,000 or $300,000. When a company is being taken over, there is a significant amount of work for these directors to do to meet the terms of their contract. So what this is saying, and I get it, is that if a director is responsible for a significant increase in work due to his company, her company, or the company that they are on the board of, then they must be reimbursed. The other thing that must happen is the costs incurred by the company being taken over must be reimbursed by the company taking it over.

It does not matter what is in the constitution of the company being taken over; this is still a requirement under the Takeovers Act. As mentioned, how this works is that if there is any dispute, it goes to a panel. The panel will make a determination. That is only mediation—it is not arbitration—which means it is a non-binding agreement, because from there, if there is any dispute at this point, then it can go to court for the court to determine. Just to give the Committee an idea of how much money we are talking about, this new section 53 in the Takeovers Act says “…court means—(a) the District Court,”—so this has to go to the District Court—“if the amount to be reimbursed is no more than $350,000;”, and that has been increased from $200,000, “or (b) the High Court, if the amount to be reimbursed is more than $350,000.” If it is $350,000 or less, you can go to the District Court. You can go to the High Court if it is $350,000 or more.

But I suppose what I am outlining here is that the legislation has actually recognised the fact that $200,000, in terms of reimbursement, is just not realistic in this day and age—$350,000 is much more in keeping with 2017 rates of pay for directors and costs incurred. But we are talking a significant amount, $350,000. It may sound a lot, but, again, if your company is being taken over, there is a substantial amount of work that might have to be done in this, and that money must be paid by the company taking you over. So it can be a substantial amount of money, of that there is no doubt. But you have also got to remember that when this goes to a court, if it either goes to the District Court or the High Court, there are significant costs involved in this as well. So it will go to only those jurisdictions, the District Court or the High Court, if there is a dispute around how much money must be paid by the company taking over the other company.

On top of that, the company doing the taking over could, I would suggest, end up incurring double those costs again if it is a litigious situation or it gets quite acrimonious. So we are talking about a substantial sum of money. If it is Spark or a big company, this is just part and parcel of what they do.

💬 Clare Curran: Get with the picture there.

But if it is a smaller company, then the costs can be quite considerable. I know Clare Curran says she gets the picture, and I am pleased she is back so I can move on from this, but I suppose what I am saying is we are talking about an omnibus bill here. There are many pieces of legislation that this bill actually updates, and we just need to be aware of this, as no doubt a whole lot of company lawyers are but also the professional directors on companies when they are making decisions around governance as well as operations. Thank you very much.

Can I turn my attention to clause 21, in Part 1 of this bill, the Regulatory Systems (Commercial Matters) Amendment Bill, which was before the Commerce Committee. There were good discussions and quite a lot of debate around various parts, this one being one of them. Clause 21 actually relates to audit requirements, and it is an amendment to the Companies Act. It affects section 206 of the Companies Act 1993. It goes to the question of allowing large overseas companies with small New Zealand businesses or group businesses not to be subject—not to be subject—to an audit requirement if there is no audit requirement in the home country.

In the commentary on the bill, it says that this is because “this would have two benefits: removing excessive compliance costs, and promoting entity neutrality.” I just want to touch on this because it did actually evoke quite a discussion at the select committee, and I have a question for the Minister and I hope that the Minister is able to answer it at some point during the debate on this. The question is, ultimately: what analysis lies behind this part of the bill, this amendment to the Companies Act, in terms of the number of companies that this affects and the size of those companies? When I say “size”, I am talking about the size of those home companies where they reside, so that we have an idea of the scale of this and what it actually relate to.

We had a second departmental report to the Commerce Committee at the end of January this year, which addressed this particular clause in the bill. It was in response to questions from the committee on this, because the committee sought information about why officials had recommended that the Companies Act 1993 should be amended so that large overseas companies with small New Zealand branches would not be subject to an audit requirement if there was no audit requirement in the home country. It relates to a submission on the bill, from Staples Rodway, which is an accounting firm—actually, it is an Auckland-based accounting firm, because I have got it right in front of me. They spelt out a situation where excessive compliance issues could arise in which the only business presence an overseas company has in New Zealand, and they used the example of an airline, say—they use the example of a sales office in Auckland. Their submission included the example of a Japanese company paying ¥20 million to ¥30 million—the equivalent is $250,000 to $370,000—to have the company’s financial statements audited as a consequence of having a small New Zealand branch.

On the face of it, that sounded quite reasonable in terms of: if you have got a small branch in New Zealand, of a big entity, then should you have to be paying large amounts of money to tick the box to have an audit done? I do not think anybody is trying to impose, through this legislation or even in the discussions behind this legislation, any more compliance requirements on business. The issue that I have, though, is about what that leaves behind. Where is the accountability? Where is the assurance that there is tax being paid and that there is compliance with New Zealand’s law in all of those other ways?

We did have that discussion at the select committee, and I am not resiling from that. I know that questions were asked around this. I do recall the figure of $30 million being used as the cut-off point for the size of the company. I see one of the officials shaking his head. What would be good is if the Minister could clarify for the Committee what the definition of a small New Zealand branch of a company is —I could not find it in my papers tonight when I was rifling through them—and what the criteria and the analysis that lie behind that are. Do we know how many of these are operating in New Zealand?

I think I used the example in the select committee—I realise this is probably not applicable—of a kind of Compass Group situation. For those of you in the Chamber—and you all should know what Compass Group is—it is the organisation that is currently providing hospital food and Meals on Wheels, particularly in my area of the Southern District Health Board. It is a multinational company. It is based in the UK, but it is very good at, shall we say, tax fluidity in the way that it manages its tax requirements. Questions have been raised about that before.

We are concerned, I guess, about this particular clause in the bill, as to what potential impact the requirement not to have an audit has on compliance with New Zealand’s laws, rules, and regulations? I think that is a fair enough question to ask. It received quite a lot of debate in the select committee, and I think the officials were moved to give us a special report on that in their second departmental report.

It also related to entity neutrality. They told us that there is a difference in the treatment of large overseas companies depending on whether they are small New Zealand businesses, a branch of the overseas company, or a New Zealand - registered subsidiary of the overseas company. So does that mean that the New Zealand - registered subsidiary of the overseas company does have to provide an audit, but the branch of an overseas company does not? This disparity may encourage overseas companies to establish a New Zealand subsidiary or to restructure their New Zealand business by converting a branch into a company.

I am all for incentives, but if it means that there are fewer “eyes on”—given the issues around the Panama Papers and shelf companies and the ways that New Zealand can be used for purposes that are not necessarily in our best interests—I think there are some questions to be answered around this part of the bill. I hope the Minister will take a call.

I am pleased to take a call in the Committee stage of the Regulatory Systems (Commercial Matters) Amendment Bill. We are on Part 1?

💬 Hon Ruth Dyson: We are.

We are on Part 1—great. I can understand the intent behind the enactment of a lot of amendments to a whole lot of commercial legislation. Certainly, there is a voluminous amount of legislation that applies to companies—commercial entities transacting business.

But what I want to focus on is that I understand the purpose of the bill is to reduce the chance of regulatory failure and unintended consequences that harm the well-being of New Zealanders. Just from looking at the provisions in Part 1, particularly under the Companies Act, I would have thought that a lot of the provisions in the Companies Act—a company has a constitution whereby, basically, it can make its own rules to get around some of the positive obligations that are imposed under the Companies Act. There is an option there that a company’s constitution can modify them, and shareholders within their own business, who run their own business, can make their own rules. It suits them. I would have thought that the Companies Act—I know it has been going for well over 20 years now, nearly 25 years; I think it came into effect in 1993. Companies have, obviously, been used to putting in place constitutions, making their own arrangements, and working around the statutory provisions. This is basic stuff. Any basic constitutional lawyer will print off a standard constitution.

So, just from looking at some of these provisions, it seems that there are positive obligations that used to be imposed on companies that are now being taken away. I am just thinking: where is the balance? For 25 years, I guess, or close to 25 years, companies have been operating—no problem—with many of these provisions. Now, all in the name of expediency, certain of these provisions have been taken away, watered down within Part 1, with various reporting obligations or the holding of meetings and the like.

But we must always keep the interests of the shareholders in mind. Many shareholders in companies can be overlooked, particularly small shareholders, when you are looking at major companies or companies that are closely held, but there are some minority interests. Just looking at the provisions, I think we need to be very careful that in the haste to make everything quicker, more efficient, we do not overlook some fundamental rights that shareholders have within a company. I wanted to make that point. I hope that the Minister has given this a thorough check—that OK, if we are going to do away with certain obligations or duties that have been imposed on directors or companies, it is not at the expense of shareholders and their interests, particularly the minority shareholders, and that there can be a pressure imposed by major shareholders or by other interests, at the expense of the minor shareholders. So I just wanted to draw attention to that.

The other matter that I wanted to raise, when I was just having a cursory glance at the obligations around removing an overseas company, is this: as I understand it, an overseas company is exactly that—an overseas company that operates in New Zealand, conducts business in New Zealand, but not as a New Zealand - based subsidiary. They just register themselves as an overseas business or an overseas company so it is a lot simpler for them to just set up shop and conduct business in New Zealand.

With regard to an overseas company, I am just looking through the provisions of the section about the registrar being satisfied that an overseas business is no longer operating in New Zealand. I would ask the Minister in the chair, the Hon Amy Adams, whether she could elaborate a bit further as to what would give the registrar sufficient grounds, I guess, to remove that overseas company from the register. Is it the fact that they do not reply to any mail? Is it the fact that they do not have a telephone or up-to-date address? Given the fact that a lot of entities in New Zealand just operate under the radar, I guess, what grounds would the registrar require to indeed go ahead and remove that company from the register?

The other point that I wanted to make in relation to overseas companies is the removal of the requirement for the registrar to provide public notice that the registrar intends to remove that company from the register. I would imagine that even if the registrar has formed that opinion, that “This business ceases to exist as far as I am aware; therefore, I am just going to go ahead and remove it. I am so satisfied that I do not need to give notice.”, I still think there needs to be some safeguards in place and there needs to be some public notice in place, because, for all we know, that business could still be operating. It may not be a bona fide business, but it could be operating in New Zealand. Therefore, the public of New Zealand may still be doing business with that overseas company and the registrar may not know about it.

That is why, I guess, there has been a longstanding provision that there is a requirement to give public notice. All that would require is just a notice in the newspaper, or however they do it these days, just to say “I intend to remove XYZ Overseas Company Ltd from the register on such and such a date.”, I would imagine. I would say that that safeguard needs to be put in place purely to protect the public—to protect mums and dads or whoever may be transacting business. This business may be absolutely insolvent. They may be crooks. They may not actually be conducting legal business in New Zealand but they could be duping a lot of the public of New Zealand.

Those are the two points I would like to make to the Minister. How robust are the systems and the procedures that the registrar has to go through to convince himself or herself that this overseas company is no longer operating in New Zealand? And, secondly, why remove the requirement for public notice, because an overseas company may still be transacting business, and therefore it may just require an extra little procedural matter for the registrar to work through to provide that public notice, because, you never know, there may be members of the public out there who are indeed doing business with that company?

That all comes back to the fundamental purpose of this bill. The fundamental purpose of the bill is to reduce unintended consequences that harm the well-being of New Zealanders. Those are two examples whereby we must consider the well-being of New Zealanders. We must consider the well-being of not just the big boys, not just the big companies in town, not just the big overseas guys who can afford the big flash accountants and lawyers, but also the little guy—the little shareholder, the little person who holds a smaller interest. They need to be looked after as well. I just wanted to raise those particular matters because I think they are pertinent to the intent of the bill and we want to make sure that we get the balance right. I just wanted to raise those points for the Minister’s consideration.

I move, That the question be now put.

Mr Coates has been seeking a call for some time. I call Barry Coates.

I rise to speak to Part 1 of the Regulatory Systems (Commercial Matters) Amendment Bill. I was pleased to be part of the Commerce Committee, which considered this bill. My thanks go to the chair and members of the committee for good discussions. I think we made some improvements to the bill. I wish to comment on those and to raise a couple of questions. Firstly, the bill covers 16 different Acts, so it obviously has a wide scope. I am not going to comment on all the provisions that relate to those.

I would note, by way of starting, that the Green Party is a strong supporter of legislation that is about smart regulation. We want regulation for compliance that is relevant, fit for purpose, effective, and, particularly, not onerous. We believe that this bill has some welcome changes that will remove compliance obligations on small companies. From that perspective, we are broadly supportive. We particularly support the levies under the Commerce Act.

Under the Companies Act, there are a number of provisions that I want to just briefly comment on. The “Annual meetings of shareholders” provision seems to us to help with compliance on that, where companies would choose to truncate their annual meetings for good reason. Under clause 21, there has already been commentary on the audit requirements. We think it is sound that the branches of large overseas companies would be aligned with the treatment of subsidiaries for equal treatment. We would have a question on that, though. If there were concerns raised about branches of overseas companies, for example with regard to transfer pricing provisions, whether or not audit requirements could then be required by, for example, the Inland Revenue Department. The question to the Minister in the chair, Amy Adams, is about how that would work and whether such a requirement for audits for small companies would override the provisions of clause 21 in the bill. It seems to us that to treat small branches of overseas companies equivalently with subsidiaries is a sound way forward, but we do not want to see that becoming a way to lessen the accountability of overseas companies with regard to New Zealand’s tax provisions in particular.

There was a lot of discussion in the select committee on netting in clauses 27 and 28. After some discussion, we came to agreement on netting. I see that clause 2 of the bill allows for swift passage of the netting provisions, which, as we understand, are required, basically, to help New Zealand conform to the provisions internationally that relate to reforms of derivative trading. I would like to pose a question to the Minister around netting and whether or not the netting provisions in the bill will reflect international best practice or whether further subsequent changes will be required.

A particular concern about clauses 92 to 94 related to financial services providers. Previously, the Minister talked about the register of financial services providers as ensuring the integrity of providers. I understand that there have been a number of complaints against financial services companies on the register. My understanding is that some time ago there were 340 complaints from 83 different countries relating to financial services providers on the New Zealand register. My question to the Minister with regard to these provisions, which, I gather, include deregistering a provider if they are not a member of a dispute settlement scheme—my concern is that that change does not go nearly far enough. I understand that there is a consultation paper out, but my question to the Minister is: why could this opportunity within this bill not be taken to strengthen the integrity of this register? The impression is given by financial services providers that fulfil the very procedural requirements of the register that somehow they have gained approval from the New Zealand authorities for being a member of the register, whereas, in fact, that is by no means the case. So my question to the Minister, then, is: why was this opportunity not taken to strengthen the integrity of New Zealand’s reputation internationally with regard to the operation of the financial service providers register?

With regard to other clauses in Part 1 of the bill that we are considering, we are certainly in support of clauses 95 to 100 on the Friendly Societies and Credit Unions Act, and also the advice under the New Zealand Superannuation and Retirement Income Act, that the duty should also promote education about financial decisions and financial capability. That seems very sound, and we fully support it. So with those three questions, the Green Party is broadly in support of the bill. We have these concerns, and we look forward to hearing the resolution of these concerns on Part 1. Thank you.

I move, That the question be now put.

Motion agreed to.

The question was put that the amendment set out on Supplementary Order Paper 276 in the name of David Seymour to insert new subpart 3A be agreed to.