Nash Stuart: Financial Service Providers (Pre-Implementation Adjustments) Bill — Second Reading In Committee 
Text is incorporated into the Bound Volume 
Nash Stuart: Financial Service Providers (Pre-Implementation Adjustments) Bill — Second Reading In Committee 
[Sitting date: 22 June 2010. Volume:664;Page:11968. Text is incorporated into the Bound Volume.] 
STUART NASH (Labour) 
: 
 I agree with my colleague Lianne Dalziel that the Financial Service Providers (Pre-implementation Adjustments) Bill is a technical bill. We are in the Committee stage and some very important technical issues need to be answered. I will address a couple of points made by Government members that I think need a little bit of clarification. 
Melissa Lee said the bill is here to protect people who have lost money. My answer is that it is a little bit too late for a lot of those people. I quote the introduction in the commentary on the bill: “The intent is to ensure that these Acts provide for responsible regulation of the financial services sector and robust consumer protection in order to restore confidence and trust in the financial services sector.” This bill is here to protect every single New Zealander who has any thought of investing money. It is not about those who have already lost money. I hope we do not stand up in this House again at another point in time to talk about another 30 financial institutions or organisations from the financial sector that have cost New Zealanders millions and millions of dollars. 
Another thing I would like to talk about is what Peseta Sam Lotu-Iiga said. He absolutely hit the nail on the head but he got it wrong—and I know that sounds like an oxymoron. Sam said that friends of his with a financial background find it difficult to wade through 75 pages of a prospectus. That is the hub of this whole argument. If friends of his with a financial background cannot read a prospectus in order to advise clients or prospective customers what the hell were people without any financial background whatsoever doing advising people where to put their money? They had no place doing that and ordinary Kiwis trusted them. I say to Sam that if people cannot read a prospectus they should not be investing and they in no way should be acting as a financial adviser to anyone. Prospectuses are put out by law. It is the law that people who offer securities to the public have to put out a prospectus. Every item in that prospectus is required by law—unless the offerer adds additional information. Nearly every single bit of information in that prospectus has been deemed by Parliament to be necessary information when making an investment decision. I say to the member that if his friends have trouble wading through a 75-page prospectus and they are financial advisers they should look at upskilling or look for another job or better understand how to read prospectuses or take a little bit more time before they advise their clients on where to invest their hard-earned money. 
The commentary states that the bill is “about protecting unsophisticated investors.” Those are the words used. Unsophisticated investors go to sophisticated financial advisers to seek advice. Their expectation which I do not think is unreasonable at all is that the financial adviser will have read the prospectus will understand the offering will understand the pitfalls in any investment that the prospective client is thinking about investing in and will be able to advise about the pros and cons. The member needs to advise his friends to get a little bit more education and to take a little bit more time to understand a prospectus. 
The other thing I would like to talk about is risk. Peseta Sam Lotu-Iiga also mentioned that it is not the role of the Government to legislate for risk. Well I take a little bit of issue with that. The development of risk and the understanding of risk are fundamental to the growth of the Western economy. I recommend any reader to a book called  
In the Lap of the Gods 
. It is the history of risk and was written by a man who is a Harvard professor and understands this issue better than anyone in this House ever will. It is a very good explanation in layman’s terms of how the art of assessing risk came about and was developed. It is difficult to regulate for risk but it is vital if we are to get the whole global economy up and running again. This financial crisis has come about due to the misinterpretation of risk or not understanding risk. For example Moody’s which is a credit-rating agency was giving a triple A rating to organisations that were carrying items on their balance sheets that were incredibly high-risk. So not even Moody’s was able to effectively assess the risk of a lot of the offerings. What is taking place is that Governments around the world including our own—and this bill is part of it—now understand that assessing risk and legislating for poor risk are an important part of getting the global economy up and running. 
There is something called the risk-free rate of return. US Treasury bonds are classed as the safest thing any investor can invest in because if the US Government cannot honour Government bonds we are in a hell of a lot of trouble. So that is the risk-free rate of return. Theoretically everything that pays a risk premium over and above US Government bonds has a certain level of risk attached. But I would argue and I have argued that the risk associated with incompetent negligent or unprincipled financial advisers is not a risk that investors should be forced to take on. However it was a risk associated with the financial services sector before this regulation came into place. It is not a risk that people should be asked to assess. 
Peseta Sam Lotu-Iiga 
: Nick Leeson. Bernie Madoff. 
STUART NASH 
: The member makes a very good comment. We should be aware that it was not just people operating out of the back of tin sheds who caused the crisis. People in glass towers were advising ordinary Kiwis on where to invest their money and they got it incredibly wrong—ING (NZ) is a classic case of that. So this bill is not just about regulating the fly-by-night guys; it is about regulating the whole industry. It was not just the fly-by-night guys who got it wrong. The ability to assess risk is vital in terms of having a robust economy. 
I said in the first reading of this bill that different groups of people have lost their money in finance companies and the difference is basically about savers versus investors. Investors are those who have knowledge or should have knowledge of risk and who seek advice from different sources and then make decisions. They are investors and they are after the highest rates of return they can get after assessing their risk. But then there are savers. Savers are people who acknowledge that they do not know much about risk at all. Therefore they seek advice. I am not a lawyer; I seek advice from a lawyer. I am not an accountant; I seek advice from my accountant. People who are savers are not financial investors; they are savers. Therefore they seek advice. It was those people who went to financial advisers and lost all their money—and they may have gone to only one adviser. They had no ability to assess risk. They were like Sam’s friends; they could not wade through a 75-page prospectus. They had no idea of how to assess risk. The prospectuses were there to give financial advisers the ability to assess risk. Savers went to those people because savers do not know how to price risk. They do not know how to price risk; investors are supposed to. Savers pay others to assess risk and they expect competence diligence and honesty. I ask whether that was too much to expect. Was it too much to expect? The answer is that no it was not. 
So this legislation amends a couple of Acts put forward by Lianne Dalziel to ensure that savers who want to put their money away but have no idea how to do it—they do not want to put it in a bank but are seeking a decent rate of return—and who go to a financial adviser will get honesty will get competence and will get diligence. As in any industry there will be unfortunately the odd rogue or two. But this bill promotes registration so that there will be recourse for people who are given incompetent or negligent advice. As with anything though risk is very important but we must come up with a process that allows us either to understand that risk or to go to people who understand that risk. I reiterate that prospectuses are there to allow financial advisers to assess risk and then to offer advice in a timely and correct manner. 
This is very important legislation for a whole lot of people. It will I am hoping allow confidence to slowly return to the investment advice sector and that is why I think it is fantastic legislation. Lianne Dalziel did a wonderful job. The Hon Simon Power by championing this bill has picked up the ball and run with it. As Lianne said it is a bit of a shame that the bill was not introduced under urgency a year ago.