Norman Russel: Financial Markets Conduct Bill Financial Markets (Repeals and Amendments) Bill — Third ReadingsText is incorporated into the Bound VolumeNorman Russel: Financial Markets Conduct Bill Financial Markets (Repeals and Amendments) Bill — Third Readings[Sitting date: 27 August 2013. Volume:693;Page:13005. Text is incorporated into the Bound Volume.]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.