Financial Markets Conduct Bill Financial Markets (Repeals and Amendments) Bill — Third ReadingsText is incorporated into the Bound VolumeFinancial Markets Conduct Bill Financial Markets (Repeals and Amendments) Bill — Third Readings[Sitting date: 27 August 2013. Volume:693;Page:12999. Text is incorporated into the Bound Volume.]Financial Markets Conduct BillFinancial Markets (Repeals and Amendments) BillThird ReadingsHon CRAIG FOSS (Minister of Commerce): I moveThat the Financial Markets Conduct Bill and the Financial Markets (Repeals and Amendments) Bill be now read a third time. The legislation is a major milestone in the reform of New Zealand’s capital market regulation. It modernises and makes substantial changes to New Zealand’s securities laws. These set many of the rules for how financial products and financial services are offered to the public and how they are governed and operated.The legislation has two main purposes. It aims to promote the confident and informed participation of businesses investors and consumers in the financial markets and it aims to promote and facilitate the development of fair efficient and transparent financial markets. These are vital outcomes for New Zealand businesses vital to have access to the capital they need to grow and they are critical for investors to benefit from financial markets.The current securities laws are not fit for purpose. The main law this legislation replaces the Securities Act 1978 is 35 years old. The legislation consolidates five other pieces of legislation. As well as responding to the massive changes that we have seen in the financial markets over recent decades this legislation is informed by more recent lessons of the global financial crisis and our experiences with the collapse of the finance companies. It implements many of the recommendations of the industry-led Capital Market Development Taskforce.I will mention some of the main changes this legislation makes to financial markets regulation. The legislation replaces the requirement for issuers of financial products to prepare a prospectus and an investment statement. Issuers will now prepare a single product disclosure statement which will set out the key information that retail investors need to know before they invest. The legislation proposes a system of escalating liability from infringement notices for minor breaches through to civil pecuniary penalties of up to $1 million for individuals and $5 million for companies. There are criminal penalties of up to 10 years’ imprisonment for the most egregious conduct. A new licensing regime is established for specific financial sector participants. These include fund managers discretionary investment management services and derivative issuers. The legislation also overhauls the regulation of managed investment schemes such as KiwiSaver schemes by providing a consistent set of duties on fund managers and supervisors and stronger governance requirements. These are vital steps to bring retail investors back into the markets and make more capital available to growing firms whatever their size.The legislation makes a number of changes to make it easier and cheaper to raise capital. It enables the introduction of new forms of capital raising such as peer-to-peer lending andcrowdfunding and it provides new exemptions for small offers and employee share schemes which will be of particular benefit to small growing companies. The legislation introduces a new system for the regulation of securities exchanges. This will include allowing the development of low-cost exchanges that support capital raising by small and medium sized enterprises.In summary this legislation aims to strike a balance that works for both issuers and investors. Only by providing the right kind and degree of regulation will we see our financial markets make their full contribution to the New Zealand economy. I commend this legislation to the House.Hon DAVID PARKER (Labour): Can I begin by saying that I think we agree on all sides of the House to a response to some of the terrible behaviour that we saw in respectof debt securities where finance companies pretended to be safe when they were not. They pretended that they were secure investments when often the debt security that was being offered was a secondary security with a first mortgage security lying ahead of the effective security that investors had when investing in finance companies. There were often earlier debentures and earlier mortgages over the properties that the finance company lending was itself secured over when the finance company lent out the money that the people invested. After those problems we had to do something.Some of the problems that we had in respect of finance companies were in breach of the existing securities law and were just poor practice under that. We had related party loans that were not properly disclosed. We had misrepresentations. We had false prospectuses being signed off by directors and some of that has had criminal and civil consequences for some of the errant directors involved. We had poor audit practice at some times and some of the statutory supervisors who oversee finance companies under the existing regime did not cover themselves with glory either. Having said all of that it was also obvious that we needed to strengthen the law in respect of debt security offerings. We also needed to update the law relating to ordinary capital raisings.There are a couple of issues that have been raised in the Committee stage that I should comment on. One is a reference to Ross Asset Management. My understanding is that the essential problem in respect of Ross Asset Management is still not fixed. I do not think this legislation addresses it. This is no criticism of the Minister of Commerce. But the essential problem with Ross Asset Management is that we had one person who was effectively acting as a manager for lots of different people and he did not have any requirement to have any board structure or other people overseeing his decisions. He was effectively sitting there as an agent for these people and giving them individual advice. When you have lots of money effectively under management tens of millions of dollars—Hon Craig Foss: He was also custodian.Hon DAVID PARKER: He was also a custodian?Hon Craig Foss: That’s in here.Hon DAVID PARKER: So he might be caught as a custodial trustee but my understanding is that there is no obligation for someone who has got management of lots of different people’s moneys—and it could be all of their life-savings—to have some sort of decision-making structure that would involve a board. There is no prospectus involved because he is not offering securities to the public or whatever the new offer document equivalent is—Hon Craig Foss: Changes to the DIMS regulations which affect that.Hon DAVID PARKER: Sorry there are changes to?Hon Craig Foss: DIMS regulations which affect—there are—Hon DAVID PARKER: Discretionary investment management services regulations partially affect that. I have been contacted by a member of the financial services sector who is saying that this is still an area that needs further reform because notwithstanding those changes the Ross Asset Management debacle could actually occur again and not be prevented by the legislation that we are about to pass. It is not a criticism of the Government or the prior people who started this work which was started by Labour. You cannot think of everything. You cannot deal with everything in respect of one bill. But I do not think that we should pretend that the Ross Asset Management injustice that has been caused is completely fixed by this legislation.In respect of getting the balance right between properly protecting unsophisticated investors and debt securities you have to at the same time not be over-regulating ordinary capital raisings. I have heard the response in respect to my question as to what the position is in respect ofcrowdsource funding was. I have been referred to clause 388of the Financial Markets Conduct Bill which then refers to clause 6 of schedule 1 of the bill saying that through that route there is an ability to exempt some forms ofcrowdsource funding from some of the requirements of ordinary capital raising.I would say with respect that I think we actually will in the future have to revisit that because I do not even see why you should have to run that gauntlet in respect of raising from members of the public small amounts of money not much more than some people waste at Lotto shops in the weekend. I do not see why people should have to crawl through and obtain exemptions and show that they come within those exemptions rather than just having a statutory exemption that sayscrowdsource funding—somehow defined—of $100 or $200 per investor is not caught by these regulations. That would be a really simple way to carve out that. So maybe we should come back to that. Again this is no criticism of the Government because effectivelycrowdsource funding is just something that has sprung up as a consequence of the internet in the last year or two. I did not know that it existed until about a year ago.Hon Craig Foss: A lot of that’s in theregs.Hon DAVID PARKER: A lot of that is in the regulations. So the regulations might actually be able to do that in a simple way. It would be really good. Thank you Minister for that intervention. It might be that the regulations can actually have a very simple solution that just completely exempts that sort of capital raising for ordinary capital for small amounts without any regulatory burden. That would be fantastic.Hon Craig Foss: There’s some but not as nearly as heavy.Hon DAVID PARKER: Right. The Minister says some. I am not sure that there is a need for any in respect of that. I certainly do not want them to have to have issuer audits going into the future or higher director duties than would apply to companies that had not raised money from the public.As you will hear from my interventions now and earlier I have a real concern that in a country of small businesses we do not over-regulate ordinary capital raising and that includes at all levels of the capital raising. With those comments I congratulate the Minister of Commerce and the prior Ministers from both sides who have been involved in bringing this to fruition. I hope that as a consequence New Zealand investors in debt securities can have more confidence that they are not going to lose their life-savings if they invest in debt securities and that we facilitate the prosperous expansion of the New Zealand economy through appropriately regulated—but not over-regulated—capital raisings.JONATHAN YOUNG (National—New Plymouth): I am very happy to stand and speak on the third readings of the Financial Markets Conduct Bill and the Financial Markets (Repeals and Amendments) Bill. They are certainly significant—not only in their size but in their importance in terms of legislation for this country. We know that the backdrop to this was the collapse of the financial markets and the global financial crisis that happened in 2008 and 2009. The fact is that many New Zealanders not only lost their savings but lost their confidence in the markets and also in investment and it dried money up certainly during that period of time. I guess in many regards people returned to bricks and mortar and sought to invest in areas where they had some sense of security which I suppose contributes to some of the housing affordability issues that we face.This legislation has taken what has been termed a once-in-a-generation opportunity to rewrite our securities laws. I believe that we have come up with a very coherent and comprehensive set of laws that will be supported I believe by regulation that will work well in the market place. That is so important because we want the market place to be free to be accountable and also to have the effect of being able to attract and release investment from people but into companies.The Financial Markets Conduct Bill is a key pillar in the Government’s Business Growth Agenda. It helps to achieve one of the Government’s keys to building a more competitive and productive economy. It is a very important part of that. This bill—this law when it comes to pass—will promote informed participation of businesses investors and consumers in our financial markets. It will foster fair efficient and transparent financial systems that are crucial to our future prosperity as a country. It is good to see that we have progressed so quickly tonight through these stages—the Committee stage and now the third reading.It is crucial that we ensure that this legislation strikes the right balance between holding people to account while encouraging businesses to come to market. Vibrant financial markets must work for all participants and that has been one of the driving factors behind this legislation. Key proposals in the Financial Markets Conduct Bill have included in Part 2 an introduction of prohibitions on misleading and deceptive conduct generally in financial markets. I think New Zealanders out there generally would say it is a good thing that we have that and would welcome those changes.Part 3 replaces a requirement for issuers to prepare a prospectus and investment statement with a requirement to prepare a single product disclosure statement tailored to retail investors and prohibits false and misleading statements in product disclosure statements. That is very important. It is important that people out there can get something concise but also very informative about the product they are going to invest in. There is nothing like receiving 150 pages and thinking: “That is just so intimidating. I am not going to be able to read through it so I will not try.” There is nothing like receiving a document that is full of jargon and abbreviation as well to confuse people. So these product disclosure statements will be concise clear and coherent to retail investors. I am sure that there will be sophisticated professional investors out there who will not need that level and who will be very happy to proceed with perhaps even what they have been used to. But certainly we want to make information accessible to retail investors.Part 4 strengthens the governance of regulated products. It introduces stricter requirements for managed investment schemes including new duties on fund managers and supervisors and stronger governance requirements.I believe that there is much that can be said and will be said by different speakers in this debate but by and large the Commerce Committee worked on this not only with officials—and I say thank you to them; they did a tremendous amount of work—but also with people in the market place with investors and also with issuers and professionals. There was a tremendous sense of working together to try to find the right solution in this particular area. I believe that we have done a good job that will serve New Zealand well in times to come. Thank you.Dr DAVID CLARK (Labour—Dunedin North): I too want to congratulate those who have worked on the Financial Markets Conduct Bill following on from that contribution from the chair of the Commerce Committee Jonathan Young. I identified with his comments about 150 pages of jargon. It sounds like our select committee papers that we get on a Thursday morning. No one wants to wade through that if they do not have to it is fair to say.This legislation is an attempt to make sure that retail investors and ordinary folk who do wish to get into this space have the kinds of protections that they ought to be offered. It is about transparency and the efficient functioning of markets. So I want to congratulate Ms Dalziel Ms Curran and others who have worked on this over a period of time and the Minister of Commerce Mr Foss for guiding this through the House. There is a huge amount of detail in these bills the Financial Markets Conduct Bill and the Financial Markets (Repeals and Amendments) Bill and in the legislation relating tosecurities law—over 700 pages as many have pointed out—here in this pamphlet that we have before us.The purposes of the bill are commendable being to promote the confident and informed participation of businesses investors and consumers in the financial markets. That cannot be argued against. Nor can the other main purpose which is to promote and facilitate the development of fair efficient and transparent financial markets. Markets are after all a source of information to guide capital flows so that capital flows to its most efficient point. That underpins good economic development so we commend the purposes of these bills. The way it flows out means that Labour will be supporting these bills through their third readings.Of course there are plenty of other areas that the Government is neglecting. This is a part of the economic picture. The markets and the effective functioning of markets are the starting point for many but there are other policies that guide the economy as a whole that are not contained within this legislation.It has taken 5 years to get this particular legislation to the House and it is strange that we are passing it under urgency. That perhaps speaks to some poor House management as with the previous bill the Patents Bill. Nevertheless we commend the actual material within it.Peseta Sam Lotu-Iiga: You said that last speech. Say something different.Dr DAVID CLARK: Mr Lotu-Iiga is right. I need to raise this new material about the general direction of Government policy which does not deal with the bigger issues of monetary policy reform. It does not really shape an export-led recovery and it does not deal with savings and the capital depth issue. We are talking about transparency here—where capital flows to—but the actual capital depth problem that we have as a country where we do not have the savings that other countries have to support an export-led recovery is a concern that this Government seems to sidestep time after time after time.Likewise with pro-growth tax reform we know—a capital gains tax—that the OECD the IMF every other Western country a former Treasury head and so on all say that New Zealand should have that kind of pro-growth tax reform. It should have a capital gains tax and it should have research and development tax credits. But this Government has its head in the sand. At least it is sorting out these nuts and bolts and for that I want to commend this Government’s work.Of course it was started by a Labour Government and let us not forget that. Labour started the financial markets reform process and we are pleased that the Government is continuing our good work. Of course Lianne Dalziel set up the Capital Market Development Taskforce. This will be something of her legacy as she leaves this place. That was set up in 2008 to develop a blueprint and an action plan for the development of New Zealand’s financial system. So we are pleased that the Government is acting on this and acting on the recommendations of the task force’s report one of which was a single market regulator.The Labour-led Government of course took a number of measures in the wake of the financial crisis and the spate of finance company collapses which accelerated these measures. The Crown Retail Deposit Guarantee Scheme is of course still fresh in people’s minds as the Government bailed out South Canterbury Finance to the tune of $1.6 billion in taxpayers’ funds. That was largely due to poor monitoring. We do not know the extent that that was due to poor monitoring. We do know that the company’s dodgy loan book increased 25 percent in 4 months at one stage and that the Minister of Finance did not have oversight of that and did not request the appropriate briefings although he could have got them through Treasury and from the Reserve Bank about thestate of those dodgy loan books and the kind of risky lending that was being done against the blank cheque of the Government.So we know taxpayers have forked out hundreds of millions of dollars unnecessarily in the case of the Crown Retail Deposit Guarantee Scheme. Of course Labour put in the scheme. Let us not forget that Labour put it in in a 24-hour period to address the issue of a run on banks. The basic premise was sound. We know that but it was not monitored and it is the failure of monitoring by this Government that has cost the taxpayer hundreds of millions of dollars.Unfortunately the Government was too afraid to investigate it. It did not really want the light of day on that poor monitoring because it would have reflected badly on the current Government and I think it owes New Zealanders an apology on that front. It really does owe New Zealanders an apology on that. I hope that some member from the National benches will apologise for the hundreds of millions of taxpayer dollars that have been lost unnecessarily through that Crown Retail Deposit Guarantee Scheme and particularly through the failure of monitoring of the Minister of Finance.Peseta Sam Lotu-Iiga: I’ll apologise for Cullen. Cullen brought it in.Dr DAVID CLARK: No no Mr Lotu-Iiga. It is the failure of monitoring that is the problem not the scheme itself. Of course this Government did not remove the scheme because it knew it was a good scheme. But it did fail to watch it closely. Of course I do not say this on my lonesome. This is something that the Auditor-General Lyn Provost drew attention to in her report. That begs many questions and it has just been swept under the carpet. This poor poor oversight of the scheme has been swept under the carpet by this Government because it knows it would be incredibly embarrassing to see exposed to sunlight those hundreds of millions of taxpayer dollars that went away without any real investigation.Of course the Finance and Expenditure Committee did request that Treasury come before it to explain what had happened in that failure of monitoring after the Auditor-General’s report revealed the extent of the issue. The then chairman was very keen to sweep it under the table. I expect we may get an apology out of him later in the piece. I am certainly hopeful as I look across the floor.Hon Todd McClay: I’m sorry for the speech. A sorry speech.Dr DAVID CLARK: He says that he is sorry for the speech. That tells you that this is a Government that does not really care about these bigger issues about where taxpayer money goes. I say Government members should hang their heads in shame and I can see many of them there at the back hanging their heads in shame at the behaviour of this Government around this scheme.But back to the legislation itself—not what is not in it not the things that are not in it and that ought to be—and in its 700 pages it does implement a new one-stop shop for securities law. These are good steps forward. It is about time obviously 5 years after Labour kicked the process off that we had these things in. The regulations in the area of derivatives have been inefficient and Labour does welcome these measures and initiatives by the Government to address the problems. Derivatives have been brought within the framework of the four financial products which include debt equity and managed investment schemes.So I think we can claim that this is a success and a bipartisan approach. It is a shame that some of the earlier bills we debated yesterday were not subjected to the same test—the ones that look at where we go from here about responsible fiscal management—and were not developed in a bipartisan way. No doubt they will not stand the test of time in the same fashion. That is a shame because generally in this area we like to have a bipartisan approach. It is one of those great moments when we can celebrate across the House the value of transparency of appropriate regulation and of seeing that those whoinvest—retail investors—do not have the wool pulled over their eyes and that documentation can be clear and that capital can then flow to its best use for the long-term productivity of our country.So I commend the Government for bringing this legislation to the House. I commend it for getting it through. I would have liked to have seen it come a little earlier but transparency accountability and consequences are important in this legislation as they are elsewhere. They are important for the efficient functioning of markets so that markets become good and effective servants and not the terrible masters we know they can be if they are not properly regulated. Thank you.Dr RUSSEL NORMAN (Co-Leader—Green): I rise on behalf of the Green Party to speak to the Financial Markets Conduct Bill and the Financial Markets (Repeals and Amendments) Bill. There is a lot in this legislation. It has perhaps a number of points of departure but clearly one of the essential ones is the failure of the finance companies. The failure of the finance companies really stands behind this legislation though it is about more than that.I think it is important for us to remind ourselves of the scale. There were about 67 finance companies that ended up in the deep freeze. Some of them got out again but not very many. There was about $9 billion worth of deposits that was put at risk as a result. There were about 242000 or about a quarter of a million New Zealand investors whose deposits were threatened as a result of the failure of the finance companies. Some of these investors got all their money back some of them got some of it back and some of them did not get much back at all.So these finance companies which proliferated in an unregulated environment caused tremendous damage to the New Zealand economy and caused tremendous damage to those individuals. On top of that after the global financial crisis the taxpayer got involved in this as well and ended up losing hundreds of millions of dollars probably—we have not got the final number—through the Crown Retail Deposit Guarantee Scheme particularly associated with South Canterbury Finance.Essentially in some respects you could argue that the disaster of the finance companies was a failure of the Clerk-Cullen Government to regulate the sector. We saw the sector emerging through the early 2000s as a completely unregulated sector and one clearly in need of regulation but I think it is probably fair to say that the Clerk-Cullen Government was not willing to challenge many of the fundamentals of the neo-liberal economic order and simply let the finance sector get out of control. You could say the same thing about the housing market. I would note that the current Labour Party has learnt the lesson of the global financial crisis which I think is great. It is a pity that Clark and Cullen did not learn it earlier as we could have avoided the disaster that the finance companies became.On top of that we had the South Canterbury Finance bailout debacle. This was the fault of the current Government essentially. When those people who were close to the scene understood what was going on they realised that South Canterbury Finance was still making dodgy loans and still providing very high rates of return and it was entirely Government guaranteed so they rushed to put their money into South Canterbury Finance to get the high-interest payments that were being paid there that were entirely Government guaranteed. Unfortunately the Minister of Finance at the time did not intervene to close down deposits into South Canterbury Finance which is clearly what needed to happen so the taxpayer ended up paying far more in terms of the bailout there than they needed to.The question that I guess needs to be asked in relation to the finance companies then is: does the legislation before us makes it harder or easier to make those peoplewho were responsible for things like the finance company collapse accountable for their actions? I think that is one of the key questions that we need to face.If we are going to answer the question of whether this legislation makes it easier or harder we need to look at what the existing situation was. In this regard there are many points of departure but you could look at the Serious Fraud Office investigation into Hanover Finance which was one of the companies involved. The Serious Fraud Office investigated Hanover Finance over 32 months I think it was. It was a massive investigation—100000 pages of evidence—and at the end of the day it came to the conclusion that it could not prosecute. This was in spite of the other conclusions that it came to.I want to read from the Serious Fraud Office statement of April this year about the Hanover Finance investigation. It said: “SFO believes that serious questions arise as to: The consistency between the overall view of the nature and financial condition of the companies disclosed to investors in the period from December 2007 and the actual position of the companies;”—so what Hanover Finance told the market and what was the reality of the market. Secondly: “The solvency of the companies at the times that dividends were paid during the six months immediately prior to the suspension of payments to depositors in July 2008;”—so were these companies solvent? Thirdly: “The propriety of a number of transactions entered into in the three months immediately prior to the suspension of payments to depositors that appear to have provided little or no benefit to the companies while conferring some significant benefits on the related parties;”. This is of course the problem where related parties can benefit at the expense of the everyday depositor who ends up losing money. And fourthly: “The accuracy of the valuation of the companies’ assets in the financial statements supporting the Debt Repayment Proposal put to investors in November 2008.” Of course the accuracy of a statement with regard to the company’s assets is one of the key responsibilities of a director of one of these companies and so for the Serious Fraud Office to say that it has serious questions about it is significant.So those were the questions that the Serious Fraud Office asked and believed that it had serious concerns about. The report went on to say: “However in order for criminal charges to be successful it is necessary not only to prove beyond reasonable doubt that these circumstances occurred and that they breached the companies’ legal obligations but that identified individuals in control of the companies had both knowledge of the circumstances and caused them to occur with dishonest intent. ‘Recent decisions relating to other failed finance companies have highlighted how difficult it is to satisfy this demand’ said SimonMcArley.”The reason why this is significant is that that was the situation under the existing law before this financial markets conduct legislation appeared and what the Serious Fraud Office was saying was that it was pretty difficult to get prosecutions under that existing law. Then the Serious Fraud Office went on to talk about the Solicitor-General’s prosecution guidelines which led it to the conclusion that it was highly unlikely that it would get a successful prosecution with regard to the Hanover Finance case.The reason why this is important is that we need to ask ourselves: will the new law—which is very likely to be passed tonight on its third reading—make it easier or harder for those responsible for these kinds of activities to be prosecuted or not? I think what is pretty clear is that it will be harder to get a criminal conviction as a result of the new law. For those quarter of a million New Zealanders who lost money in the finance company disaster it is highly significant that Parliament will be passing laws that make it harder to get a criminal conviction under this new law in a similar circumstance than it was under the old law. I think that those quarter of a million New Zealanders who lost money in the finance companies would be surprised to learn that it is the intent ofParliament to pass a law to make it harder to get a criminal prosecution over the line under the new law. I find it surprising as well.Under the new legislation essentially there is a separate criminal liability for a director. So there is an element of criminal liability possible and that is where there is a disclosure defect as it is called—like a false statement in a prospectus for example—that is materially adverse from the investor’s point of view. So if there is a false statement made in a prospectus that has a negative consequence for investors then there is the possibility of criminal liability for the director of such a company. “The offence would be committed if the offer took place with the director’s authority permission or consent and the director knew of or was reckless as to whether there was a defect.” So that is the criminal provision. Basically the Crown would have to prove a guilty mind in order to get a successful prosecution.I think it is pretty clear that under the new legislation it will be harder to get a prosecution and a conviction over the line than it was under the old legislation and I think that the nearly quarter of a million New Zealanders who were stung by the finance companies would be surprised by that. Essentially what is clear is that under the new legislation the primary remedy for wrongdoing for things like inadequate disclosure is the civil regime rather than the criminal one so that civil claim is for cash. But even there there are some pretty strongdefences that directors will have if any civil proceedings are made against them so it is not at all clear to me that this legislation progresses the plight of those 250000 investors in terms of whether those who commit these acts such as misleading investors will be more liable for a criminal offence. I think it is clear that they will not be and that it will be harder to get a criminal prosecutionbut even a civil cash penalty will have its challenges as well. So I think those people would be scratching their heads as to why this Parliament will be passing this legislation tonight.I would also make the point as David Parker did about whether this legislation will actually make it easier for smaller companies to access capital to grow. I think that is a very valid point. It is very hard to see that it will but maybe it will; I could be proved wrong.Because of that particular problem with the legislation even though there are elements of it that we support—and we support significant elements of it—we will not be supporting it at this time. We hope that we get proved wrong and that the legislation actually turns out to have more positive effects but we shall see. Thank you.Peseta SAM LOTU-IIGA (National—Maungakiekie): It is a pleasure to speak on this legislation the Financial Markets Conduct Bill and the Financial Markets (Repeals and Amendments) Bill. As has already been stated tonight this is a significant step forward in terms of our securities markets. I want to thank the Minister of Commerce the Hon Craig Foss for getting it through the House tonight and also the chair of the Commerce Committee Jonathan Young and members from the National side Kanwaljit Bakshi Jian Yang and Mr Mark Mitchell who joined me and other members who deliberated on this bill. I also want to thank the Capital Market Development Taskforce because it did some great research on this area as did former Minister of Commerce the Hon Lianne Dalziel. I wish her well in her mayoral campaign and I just want to acknowledge her work on this legislation too.This legislation is important because capital markets legislation especially capital markets and securities legislation needs updating. It is 35 years since the legislation was first passed. Since then not only have the ways of raising capital changed across the board basically from phone to more electronic forms but also the products that are available for transacting in our capital markets have changed where we have various derivative products the number of market participants in our country has developedand now capital flows in and out of the country in terms of our capital markets. We need reforming of that legislation.This legislation actually adds to what has already been done under this Government. The Financial Markets Authority Act brought together a single entity to oversee the transactions in our markets. That was one of the recommendations of the Capital Market Development Taskforce and we took that on board. The Financial Service Providers (Registration and Dispute Resolution) Amendment Act and the Financial Advisers Amendment Act we enacted 2 years ago and again they regulate those who participate in the market who give advice and service provision in financial markets and with financial products. We again had to clean up the mess that was left by the last Labour Government in passing the Financial Advisers Act in 2008.I heard members opposite say that we are passing this under urgency. Well we are passing only the Committee stage and third reading under urgency. What members opposite do forget is that in 2008 they passed the financial advisers legislation which needed to be repealed in many ways under urgency under the Clark-Cullen Government. So I ask members to just think when they make such comments in the House and to look at their own house and get their own house in order.This legislation is about rebuilding confidence in the markets. We know that when the global financial crisis hit numbers of companies failed but those companies started failing as Mr Norman correctly said—and I do not agree with much of what Mr Norman says—under the last Labour Government. They failed in 2005 right up to 2008 and we have had to clean up the mess brought about by a lack of regulation in this area. I am glad that those members have come on board though. I am glad that they have joined us in regulating markets properly.This is about balancing between disclosure and reporting requirements under the legislation whilst also enabling our companies and organisations to get on with raising capital—both debt and equity capital—in our markets. Why? Because by gaining capital they invest in assets and resources—and Mr Jones knows this because he is in favour of these types of policies of investing in jobs in resources. They provide jobs and opportunities and that allows our families and our communities to look after themselves through job opportunities. What it does by having better trust in the markets is give investors confidence. It gives them the trust and confidence that they can with a fair degree of certainty make investments in the markets and understand what those products stand for. There is still risk and as the last Minister of Commerce stated during the legislating of other commerce bills we cannot in this Parliament regulate for risk. What we can do is provide a framework within which investment products can be better assessed for risk and better assessed for the pricing of those products.So I turn now to the Financial Markets Conduct Bill. Various parts of the bill are important and I want to touch on just two. Part 3 replaces a requirement for issuers to prepare a prospectus and investment statement with a requirement to prepare a single product disclosure statement. This is tailored to retail investors—mum and dad investors—whom we are trying to protect whom we are trying to promote. The partial floats of our State-owned enterprises promote the access and the ability of those investors to get into the market and invest in our companies.The final thing I want to just touch on is that this legislation—and Mr Norman touched on it—touches and modifies the liability framework for breaches of securities law. That is important because those who transgress our laws—and these securities laws are particularly important—have got to know that serious breaches of these laws will be enforced and criminal penalties will be imposed on those transgressors. It will be 10 years’ imprisonment and fines of up to $1 million for individuals and $5 million for companies for egregious behaviour. That is a Government that is acting on the wishes ofsubmitters that is a Government that is listening to mum and dad investors and the public and that is a Government that is promoting economic growth in our communities.Finally I say that we promote this legislation. It is a bit of a massive piece of legislation to have undertaken but we did it and it took a bit of time because consultation with the industry and consultation with the regulators the stakeholders the investors and the consumers was really important. I think given what we have gone through in the process here that we have come up with legislation that will work in future and will deliver for New Zealanders and deliver jobs opportunities and growth.ANDREW WILLIAMS (NZ First): I take a call on behalf of New Zealand First in the third reading of the Financial Markets Conduct Bill and related legislation. Can I firstly start by saying that it is a great disappointment this evening that we have not heard one single apology from the Government for taking 5 years to get to this point. It has not apologised to the 250000 New Zealand investors who lost their money many of whom lost their life-savings through the shonky markets the shonky financial institutions and the shonky governance that was in place in this country under this National Government for the last 5 years. Not one of the National members has stood up and made any form of apology to the many many hard-working people around New Zealand who have lost a great deal of money. They must be asking why it has taken so long for it to get to this point while other legislation under this Government has been rammed through with urgency.We have seen legislation for the likes of charter schools for the sale of State assets for the Government Communications Security Bureau spy bill for ripping the Local Government Act apart and for the Resource Management Act again being ripped apart. All sorts of other good legislation in this country has been pulled apart ripped apart and decimated while this legislation which had full support across the House from most parties apart from the Green Party to properly overhaul the financial markets in this country and turn a cowboy situation into a proper 21st century financial situation with our financial markets has been left by the Government to wallow for 5 years. This legislation was brought in by a Labour Government with the support of New Zealand First back in 2007-08. This was brought before this Parliament a long long time ago and it has taken 5 years to finally get to these third readings. And now we are doing it under what we call urgency. Well is it not just absolutely ironic that it has taken 5 years and now under urgency this Government wants to put it through this evening?New Zealand First is supporting this legislation because as we have always said good policy that is for the benefit of New Zealanders for the benefit of the New Zealand economy and for the good of all New Zealanders is what New Zealand First is all about and we thoroughly support this. We support the fact that it will ensure that fund managers and supervisors of schemes such as KiwiSaver will have tighter controls and regulations. And with so many people now investing in the likes of KiwiSaver it is increasingly important that the likes of this legislation is in place to ensure that the controls are there.We like the fact that directors and those who might be found to be wanting in this area and who may not wish to maintain the laws of this country could if they are found to be at fault be subject to up to $1 million in fines as individuals or $5 million as companies. Again it sends a strong message to many of these past perpetrators that this sort of activity and this way of acting in our financial markets will not be tolerated. It aims to strike a better balance between issuers and investors and the improvements in the controls and regulations will give greater confidence to our capital markets. It is most important at this time that our capital markets have greater confidence. Around theworld there is some level of uncertainty in many countries. In New Zealand we have been very fortunate because we are such a strong agricultural-based economy—we are a very strong export economy based on our rural agricultural history—and we have been sitting under the shadow of the Australian economy which has been very strong through this whole period. It is very fortunate that our big brother across the Tasman has weathered the global financial crisis in a reasonably sound manner and New Zealand has benefited as a result from that. It is very fortunate that we are in a position where we certainly have not come out at the end of the global financial crisis in a much worse state.But the 250000 New Zealand investors who lost a lot of money must still be wondering how it all happened—how it occurred that the likes of South Canterbury Finance ended up $1.6 billion in the red owing so much money and how it was that over a period of the last 6 months of that institution it was allowed to continue taking deposits and continue taking money off innocent investors while our authorities our Reserve Bank and our Treasury were completely blind to the whole situation and while the Government itself was also not aware of what was going on. More innocent investment money was lost as a result of people simply taking their eye off the ball and allowing these sorts of shonky cowboy financial activities to continue in New Zealand.The Financial Markets Conduct Bill is a weighty document. It is hundreds and hundreds of pages. I do commend all those who have been involved in putting it together. It has been a very good exercise in how it has been constructed. I congratulate the former Minister of Commerce Lianne Dalziel on doing this. I wish her well in her mayoral campaign in Christchurch and I do thank her for what she did in terms of getting this bill under way under the Labour Government. I also congratulate the current Minister of Commerce Craig Foss who is a recent Minister and who has seen fit to keep it moving and get this through.Once again I would repeat that this is the sort of thing where this Parliament does let itself down. There should be no excuse and this Government has no excuse for allowing this particular legislation to take 5 years to get to this point. We have known for years now that there were some significant problems in our financial markets and that we had in excess of 60 companies go belly up in the financial industry. As a result that should have been setting off huge alarm bells a long long time ago to get this legislation pushed through far sooner than the likes of charter schools State-owned assets and spying on New Zealanders. Thank you.CLARE CURRAN (Labour—Dunedin South): I acknowledge the work done by the members of the Commerce Committee who are sitting on the other side of the House on the original bill the Financial Markets Conduct Bill and in particular the chair Jonathan Young. I think it is important to show the respect that we have for each other when working on this sort of legislation. I would also like to acknowledge the sensible comments of Andrew Williams about the time that it has taken to get to this point.When a bill comes back to the House after a prolonged select committee process you have to ask yourself how it can sit on the Order Paper for another year before it gets to this point. That is a problem in this House particularly with legislation that is needed to put in place a regulatory regime to basically deal with the situation that saw 61 finance companies—12 months ago it was 61—fail in 4 years. Andrew Williams mentioned the 250000 investors. This was a very serious issue and it has taken another year for the legislation to get to this stage.I think it is also important that we look at this and we think that although this is dealing with the shortcomings of our regulatory system which was partly responsible for at least these financial company failures—no single entity took responsibility for theproblem—the fact is that it is not enough. This legislation ensures that the Financial Markets Authority has broad oversight of the sector and it ensures that Kiwi investors do not face this sort of disaster again. However as I said it is not enough and there should be other pieces of work going through this House right now. I say this with reference to the member on the select committee Sam Lotu-Iiga who has as I understand it a loan sharks bill that is sitting languishing at No. 40-something on the Order Paper. That bill is supposedly something that this Government made a big fanfare about more than a year ago—and it is not being progressed. The bill deals with our most vulnerable members of society and the way that they are being exploited. It is a key piece of legislation that should be being dealt with. It was introduced in April this year and it has still not progressed any further.The other thing that should be being progressed through this House right now is the issue of tax fraud. In respect of tax fraud and tax evasion this Government—that Government on that side of the House—should actually be bringing before us measures to address the issue of the $1.2 billion a year estimated by the Inland Revenue Department in tax discrepancies and the $140 million in actual tax fraud. Instead what we see is a focus on welfare fraud which is estimated at around $20 million a year in relationship fraud. The discrepancies and the prioritisation are extraordinary and I think that that Government should be held to account for its lack of attention to those two key pieces of work that it should be focusing on.I would like to make some comments about the Greens’ position on this bill. It disturbs me that I have heard them speaking in the second reading debate after the bill came back from the select committee and again tonight about opposing the legislation. They say they do not believe that the criminal sanctions in this legislation are actually going to be able to be implemented. I would like to acknowledge the officials who worked on this legislation. There was a lot of really hard work and they were put under the spotlight on measures such as whether or not those criminal sanctions would actually have an effect and I would like to make a couple of comments on that.The Commerce Committee received a number of submissions on the appropriate mental or fault element for criminal liability and the main issue that the submitters focused on was whether knowledge or recklessness was an appropriate threshold for the serious criminal offences in the legislation. A lot of submitters actually told us that they thought that was far too strict and that we should not be going there or that it was too low or too uncertain. Submitters either preferred knowledge alone noting that it included wilful blindness or suggested that there should be proof of dishonesty. We were told that the meaning of recklessness is not unclear. It has a standard element of criminal intent in criminal law. Its meaning is clear and well-established which is that there must be foresight of dangerous consequences that could well happen with an intention to continue the course of conduct regardless.The legislation does not criminalise reckless conduct or risk taking generally but what it does is impose criminal consequences only where a person is reckless as to a particular circumstance that attracts liability. This was very carefully thought through. The advice that we were given was very strong and clear. In the end the committee determined that this was the right approach to take. I think we are going to see an outcome with this legislation and to vote against it purely on that basis has I think an element of recklessness in it given the amount of work. Yes it has taken far too long to get to this point but given the amount of work that has gone into it the amount of thought that has gone into it I think that it is worthy of giving it the benefit of the doubt.The principal policy objective behind this legislation as you have all heard is to facilitate capital market activity in order to help businesses fund growth and to help individuals reach their financial goals but it is also about working for investors becauseinvestors must have confidence in the integrity of the financial markets. This weighty tome of legislation—a doorstopper the bigkahuna or whatever you want to call it—actually represents integrity in our system. It was begun under a Labour Government in the work that Lianne Dalziel did in the Capital Market Development Taskforce. It is ultimately about ensuring that investors particularly those everyday investors can be reassured that there is a system in place that brings all of those parts of the system together that there is accountability that there is responsibility and that ultimately there are sanctions in place if things go wrong. That is the objective of this legislation.I also want to acknowledge the work of Clayton Cosgrove in the development of the significant and substantial amendment that he produced. I would also like to acknowledge the work of the Minister of Commerce in pushing this legislation through. Yes it has been pushed through its Committee stage and the subsequent third readings under urgency but it has taken too long to get to the House. I do hope that the Government will pay attention to the priorities that it needs to focus on next.Hon SHANE JONES (Labour): Ā kia oraanōtatou e nohoneii rotoitōtātou Whareitēneipō.[And so greetings once again to us seated in our House tonight.]I rise to support the Financial Markets Conduct Bill and the Financial Markets (Repeals and Amendments) Bill. I should note the contributions made by the current Minister of Commerce the predecessor Simon Power—who is somewhere up in Westpac’s parlour counting all the money—and also Clayton Cosgrove and Lianne Dalziel. It seems so long ago since this issue first came on to the horizon. There probably was a lot more that should have been done a lot earlier. We were constantly receiving accounts in 2003 2004 2005 2006 2007 and 2008 that people were promising extraordinarily high interest rates but there was an absence of sophistication from the owners of the savings and the providers of the capital to the various schemes of the time. I remember saying to one or three of them myself: “Look if someone is offering you that level of interest return rest assured great risk will be involved.”But the machinery of the State at that time to deal with that kind of problem—i.e. sucking money from retirees and from a host of other savers into the various schemes that turned to custard—really has been a blight. I know of many people who approached me who have had to sell their properties—in Kerikeri for example where there is a host of retirees who have fled from the super-city up to the temperate climes of Tai Tokerau. They have had to completely downgrade the quality of their lives because—if I could just focus for a moment on the finance companies—what money they had disappeared into the ether once those companies turned to custard. In fact I recall Dover Samuels bumping into a MrPetricevic one night in a restaurant in Parnell. He approached MrPetricevic and acquainted him with the fact that Dover had been an investor in one of those schemes. I think the night ended with the police almost having to be called to restrain one of those investors from Kerikeri orMatauri Bay who made his point in a pretty fulsome way as you would expect from our former colleague.All New Zealand has an investment capital deficit. We actually import so much of the money we use and recycle into mortgage housing or we rely on international investors in Christchurch for example although there are billions of dollars that the insurance industry has paid out. Without a doubt a lot of dough going into Christchurch is going to be sourced internationally.So when we go and promote our credentials internationally in order to overcome this deficit it is good that this legislation contributes to the enhancement of our reputation and that there is a regulatory framework in which people can have trust as they should given the favoured status that we have sought and currently enjoy in terms of OECD rankings. We have a stable Westminster parliamentary democracy contract law thatcan be enforced and a judicial system that remains utterly independent and neutral from the executive but hopefully with the efforts of the current Attorney-General and David Parker a judiciary that knows that the sovereignty of Parliament in our system cannot be eclipsed. That is another issue and it is something that I know has consumed the mind the time and the imagination of the President of the Supreme Court. But at the pith of our system this is where law is made that is where law is interpreted and No. 1 The Terrace Treasury is where law is executed. That is the importance of the hierarchy. So that is one of the credentials that we should burnish.This system allows new immigrants Kiwi citizens residents and overseas investors to trust that when a document is produced what that document promises to deliver on is actually enforceable. So what we have now with the supercharged Financial Markets Authority is no ambiguity that the organisation is empowered to make a call. It has the necessary powers of discretion to determine whether future innovations are in or out of the regime.I do think there should be some flexibility and I am glad that the Commerce Committee did address the importance of flexibility. The last thing we really want to do is stunt or impede the ability of the providers of opportunity and the providers of capital to come together but we cannot go back to the bleak times when thousands of Kiwi retirees families and others were fleeced. In fact some of those schemes had a Nigerian-like quality about them. I happen to know about some of those schemes given that I know some of the people who went to jail for putting the money ofMāori trusts into such schemes. So it is something that has swept—the member for Rotorua Todd McClay nods in acknowledgment. However having done the crime served the time hoki mai get on with life. That is my approach to these matters.Having said that this piece of legislation should command support from both sides of the House. Without capital there is no ability to grow our economy. Without trust—not so much in the executives but in the quality of the document and its ability to be enforced with criminally based punitive actions. That will gain the attention of those who have been prepared to take a risk and suffer civil consequences. The sobering prospect of ending up with the Mongrel Mob next door in theNgāwhā prison for breaking these laws I am quite sure will focus the minds of those folks who live in the leafy suburbs of RemueraKohimārama and other such places. It is not a pleasant experience to go to theNgāwhāhīnaki or prison. I am quite sure that those senior graduates in accountancy finance and legal studies will get a lifetime’s education in the event that they arrive there. I am only saddened that this did not actually come in earlier. I am also saddened that this was not around in the times when the last bout of the Wild West was acted out. But now that it is here I think it is important that the institution implementing it has a very effective education programme because many of the professionals will certainly search for ways to circumvent it.There is an important principle when dealing in these kinds of areas: execute figuratively one or three and educate a thousand. Rest assured once a couple of shonky characters caught under this regime go away and do a bit of time for 2 or 3 years the others in the Wellington club and the Auckland club will be suitably focused on the importance of adhering to these new rules. It sounds a bit rough the way I described it but it was actually rougher for the people who lost all their dough. It was rougher for the grandmothers the grandfathers and the parents who lost the majority of their savings when they unwisely trusted the quality of the commentary in the offer documents or they felt they could trust the lawyers the accountants and the financial planners giving them advice.This time round they will find that trust is not an emotional concept. Trust is something that once you violate it you go to jail and do your time. That surely mustimprove the prospect of investors gathering lots more confidence and people providing opportunity for investment capital owning their own obligations. We support the bills.Hon TREVOR MALLARD (Labour—Hutt South): I raise a point of order Mr Speaker. You did indicate that the next person who used one of the rating cards would be expelled from the House. Jonathan Young just did.Mr SPEAKER: I did indicate during question time yesterday that I would take a very dim view if I saw any member continuing to use those cards. Does the member want to make a contribution to this debate?Hon Trevor Mallard: Yes certainly Mr Speaker. I thought I had the call.Mr SPEAKER: I call the Hon Trevor Mallard.Hon TREVOR MALLARD (Labour—Hutt South): I am pleased to make a contribution in this debate on the Financial Markets Conduct Bill and the Financial Markets (Repeals and Amendments) Bill. There are a couple points that I do want to make in relation to this legislation but first of all I want to do some thankyous. Lianne Dalziel did a lot of work on this. Clayton Cosgrove did as well. I was lucky enough to meet with the Capital Market Development Taskforce on I think four or five occasions when I had a variety of associate finance and economic development - type roles. There was a very firm view amongst people on our side of the House and I think it was shared on the other side as well that it was important that we develop a system of capital raising in New Zealand that reminded us a bit less of the Wild West. I think that those of us of our generation will remember some of the problems in the late 1980s—in particular in 1987—around the crash there when fortunes were made and lost with almost no relationship to the underlying value of shares in the market. Certainly what happened in the 1980s caused a massive migration of investors out of the stock market because essentially there was a lack of trust in the vehicles that were being used at the time.There is a view that it is important for New Zealand to have a variety of arrangements where people can put their money—whether it is shares whether it is bonds whether it is a variety of savings arrangements—and they can have a clear indication of the level of security involved. I have had some considerable experience over most of my life in the sharemarket. One thing that is very important is that people are aware that whenever they invest especially in anything that does not carry a substantive guarantee there is a possibility of losing part or all of their money. What I hope this legislation does is get us to a point where risks are clearer because again as all of us know if there is real money to be made then there will be a risk that sits in behind that as well. The more transparent that risk the better.I have related to the House in the Committee stage the experience of a number of my constituents who live inWainuiōmata. I pointed out that because of its proximity toIndustrial Research Ltd the fact that land prices and house prices are relatively cheap and the fact thatWainuiōmata is surrounded by bush that has been regenerating for well over about 25 years and it has the coast and the forest park it is a place where a lot of the scientists and technical people from the old Industrial Research Ltd which is nowCallaghan Innovation tend to live. There is a very high proportion—one would not expect it in a decile 4 community—of PhDs because they know that it is a great place to live.What is also interesting is that when you have a community of about 17000 people when people start talking about investments quite a big proportion of the community finds out about it. The case I related was a case ofBioCryst Pharmaceuticals which is a Nasdaq-listed company and which has I am not saying a significant proportion of the shareholders or the shareowners but a disproportionate number coming fromWainuiōmata compared with most Nasdaq-listed companies. The reason that they come from there is that the underlying intellectual property that is owned byBioCrystPharmaceuticals was developed at Industrial Research Ltd. It was sold by Industrial Research Ltd—and I cannot remember the amount—for $10 million or $20 million or $30 million. It was significant. It made a big difference to Industrial Research Ltd.My view is that it is a pity that it could not have formed some sort of financial arrangement to retain some of the value and to have the possibility of some of the upside but that did not happen. But because people inWainuiōmata knew of the potential of this intellectual property and because a number of their friends and neighbours had been working on it or worked with people who had worked on it it created quite a sense of excitement. You had people going to the local brokerage houses. Back in the day there used to be minimum brokerage fees which meant that making investments of $200 or $300 was not really economic but these days a lot of it is much more on a percentage term and therefore people can make relatively small investments. So the community ofWainuiōmata was involved—and I understand is still involved—in investing in this Nasdaq-listed company.What that led me to think was that there are probably lots of other things that are developed or invented in New Zealand where local communities if they had the right vehicles would like to put some of their money. I just want to make it clear that I am not promotingBioCryst Pharmaceuticals. I just want to say to people investing on the Nasdaq that it is slightly safer than the TAB but not much and I do not want to be seen to be doing a promotion. But what it does say to me is would it not be better than putting money into a casino or putting it into the TAB or even—and I say this with some reluctance as a member of the Lottery Grants Board—putting it into Lotto if there can be arrangements where relatively small amounts can be wagered or even one might like to say invested in vehicles that mean that good New Zealand ideas have the ability to be developed? That was part of the objectives of the legislation.I want to say that I have not dealt with the current Minister of Commerce on this legislation but I certainly dealt with the Hon Simon Power over a period of time. I think it is fair to say that he had some reasonable vision in that area and it has been continued through into this legislation.But the point I will come back to is that it is important especially for these New Zealand - based investments that there is transparency that people are told what they are about that the risks are set out clearly and that this is done in plain language so that people know what they are getting into. I think it is useful if we can do as I indicated earliercrowdfunding—thecrowdsourcing of funding using the internet using Facebook or using a number of different vehicles for getting money in. Again the evidence that I know of is that for bands who want to produce what I would have called records in the old days and who want to produce and share music quite a lot of the funding of the studio and other production arrangements is now done through thatcrowdfunding. Well that is good for bands but I would like to see it being done more and more for areas that are likely to create jobs and wealth for New Zealanders and I think that this legislation has the potential to do that.A party vote was called for on the questionThat the Financial Markets Conduct Bill and the Financial Markets (Repeals and Amendments) Bill be now read a third time.Ayes104New Zealand National 59; New Zealand Labour 34; New Zealand First 7;Māori Party 2; ACT New Zealand 1; United Future 1.Noes16Green Party 14; Mana 1; Independent: Horan.Bills read a third time.