Parker David: Financial Markets (Regulators and KiwiSaver) Bill — In Committee 
Parker David: Financial Markets (Regulators and KiwiSaver) Bill — In Committee 
[Volume:671;Page:17693] 
Hon DAVID PARKER (Labour) 
: 
 I rise to take a call on Part 2 of the Financial Markets (Regulators and KiwiSaver) Bill. I will move to a topic that I do not think has been addressed yet in the debate on Part 2. It relates to the ability of the Minister under clause 20 to request the Financial Markets Authority to inquire into an issue that is of concern to him or her. Under clause 20 “The Minister may by notice to the FMA request that the FMA inquire into and report on any matter relating to the financial markets financial markets participants or other persons engaged in conduct relating to those markets.” I want to explore that issue a little and to inquire of the Minister in the chair the Minister of Defence whether those are the sorts of issues that are being talked about. 
I think it was evident to quite a few people in New Zealand and quite a few people in Parliament that problems were afoot as a consequence of the property bubble that developed around the world. There was a property bubble that was inflated during the heady days when credit was easy in various parts of the world; we were not immune to it. We were one of the worst in the world but we were not the worst. The Government of the day which was a Labour Government pushed against the bubble in a number of ways. We tried to take the heat out of it a little by increasing interest rates through the Reserve Bank which does that independently. We also took the heat out of it by running Government surpluses so that the Government was saving money and effectively taking out of the economy money that would have otherwise further inflated that property bubble. 
I suppose at this juncture I should put on record the fact that of course for every one of those Budgets that we ran as a surplus the National Opposition complained that— 
Hon Maurice Williamson 
: How did the Government increase interest rates? 
Hon DAVID PARKER 
: No I said it was done through the independent Reserve Bank. The Government did not increase interest rates. 
Hon Maurice Williamson 
: I thought you said the Government did it. 
Hon DAVID PARKER 
: No. We ran surpluses which were opposed by Mr Williamson and everyone else on the National Opposition. It said we were being greedy and that those surpluses should have gone back to people in tax cuts. If we had done that we would have had not only bigger problems in the finance companies but also a terrible Government balance sheet. We would now be like the so-called PIGS—Portugal Ireland Greece and Spain—which have such high levels of Government debt that they are really in the mire. The third way we pushed against it was by introducing KiwiSaver which introduced private savings. 
None the less it is true that despite all of those measures there was a property bubble in New Zealand. One of the symptoms of that property bubble was excessive lending into some risky propositions by finance companies. That symptom was evident for some time before the crash. Warnings came from the Governor of the Reserve Bank and warnings came from various other commentators. Of course some self-interested people in the property sector including a number of real estate agents said there was nothing to worry about. The finance companies themselves presented a very rosy picture of the future in a way that understated the risk that was out there. 
It would have been good if the Minister had had the power at that time to look a bit deeper into some of these things. I think it was evident to a number of people that related party transactions that were of concern were proliferating in the finance sector. By that I mean transactions in which the people who were ostensibly acting as independent managers of finance companies were lending money for the benefit of the finance company in a way that returned interest to the people who were investing in the finance company through debenture stock. They were presenting themselves in a way that was in my view dishonest. They were effectively saying they were not self-interested in those things when we now know that a lot of them had loans from the finance company using the money that people had deposited into the finance companies. They were using those moneys to lend into ventures that were highly speculative and in which they members of their family or related family trusts had an interest. Those related party transactions were not properly disclosed. 
I would have liked to see that sort of issue inquired into at the time or indeed even now. There is a systemic issue of why that matter was not picked up by the people who already had statutory obligations to supervise those organisations. Finance companies always have a debenture trust deed. In respect of that debenture trust deed there is always a statutory supervisor. The statutory supervisor is generally a trustee company and it is one of the roles of that statutory supervisor to supervise the conduct of the finance company under the deed of trust that governs the terms of their debenture stock. I think that is an area where that provision could be used and I am interested in the Minister’s view. 
I will give members another example: our accounting standards. I do not know what other people in this Committee think but I think some of our accounting standards have become so hideously complex that even people who have a degree in accountancy as I do struggle to read them. They have become so complex that they no longer make common sense to people. Therefore people do not bother to read them properly. In fact most people cannot read them properly and even those who could read them do not bother to go to the trouble because they would have to spend a day or half a day to read it and get to the bottom of it. 
Not only that but as my colleague Charles Chauvel just said the standards have become instruments in tick-box compliance rather than in fair provision of information to people who are making investment decisions. Although they have become more complex they have actually become less useful. They have also driven up compliance costs. They are no cheaper. In fact accounting costs and audit costs—the audit of those practices—have become in some cases hideously expensive. The added complexity firstly has not protected people; secondly has become more expensive; and thirdly does not serve the purpose for which it was originally intended. 
I get a bit tired of some accountants in society when they are asked for a comment from the newspaper forever calling for a reduction in compliance costs. In fact they are perhaps one of the centres of greatest compliance cost in our economy. I attest to that from my own private experience in respect of both the cost of putting together prospectuses and the costs of audits and accounting fees as the increasingly complex accounting standards take longer and longer to comply with. 
There is a need for an inquiry and a report into how we can appropriately provide realistic information. We went the wrong way with investment statements. Investment statements dumbed things down and anyone with a bit of knowledge went to the prospectus anyway. But in the prospectus itself we have gone too far the other way. We ended up with the worst of all worlds which is some very complex things that no one reads or few people read and few people understand and investment statements that were too superficial. 
The third thing that I suggest we look into is how these rules have been applied in practice. I might come back to this issue in a later call if I have the opportunity and do not have the time to finish it in this call. The issue relates to how organisations that wanted to make due provision for risk which was inherent somewhere in an investment portfolio were effectively being stopped by the trustees and the auditors from doing so. If someone wanted to make a provision for what effectively we would call a doubtful debt they could not do it because the trustee would say that they did not yet have a provable loss—they cannot point to a particular loss. Therefore if that person was making a provision for a doubtful debt they were effectively keeping capital back from the people it should be distributed to and the trustee would force them to revalue their unit up. If someone has made an allowance for an inherent but unspecified liability in the investment portfolio of a finance company an investment trust or a mortgage trust the auditors would come along and say to them that they had to put up the price to $1.10 instead of $1. That would completely defeat the purpose of the provision for doubtful debt. 
That issue remains a very very real problem because it was an absolute disincentive to people acting prudently. It was caused again by the people who were meant to be protecting the interests of the depositors. It was unworldly I would say but it happened on more than one occasion and that sort of thing should be inquired into. That is the sort of thing that the Financial Markets Authority can help with and I am interested to hear from the Minister whether he supports that inquiry.