Parker David: Securities Trustees and Statutory Supervisors Bill — First Reading 
Parker David: Securities Trustees and Statutory Supervisors Bill — First Reading 
[Volume:661;Page:9718] 
Hon DAVID PARKER (Labour) 
: 
 I rise to speak on the Securities Trustees and Statutory Supervisors Bill. As has been said previously on Labour’s behalf we support this bill as far as it goes. It makes some minor improvements to the current regime but we are critical of the lack of direction overall in fixing a more serious problem. 
I think we should reflect on what went wrong and on some of the problems that were not picked up by the system prior to the international financial crisis which affected New Zealand as well as most other Western countries and has had knock-on effects elsewhere in the world. An economist Hyman Minsky who died about 10 years ago in the United States said that the principles of financial regulation around the world were fundamentally wrong. He said they were based on a premise that financial institutions are inherently self-correcting and stable and that if one of them makes a mistake it gets cleaned out someone else in the system picks up its share of the market and everything self-corrects. He pointed out that that was a fallacy in respect of financial institutions as we have seen in recent years. Some financial institutions are so large—and collectively the importance of financial institutions is so fundamental to the operating of a modern economy—that if the financial sector seizes up or stops functioning properly then trade can cease and the effects on businesses and the people they employ can be very dire indeed. 
Hyman Minsky’s theory was that the longer the period of economic prosperity the more risk taking we see on the part of financial intermediaries. The longer the banks the finance companies and the trustee companies have a period of financial stability the more they are inclined to embark upon risky behaviour because they have forgotten about the last time they were cleaned out and they seem to be making hay by making more and more risky investments in the meantime. 
He said a couple of things as a consequence of that theory. He said economies need lots of financial institutions rather than dependence on a few. That is a very pressing problem in New Zealand given our disproportionate reliance on five large banks compared with most economies and the disappearance of many parts of our secondary finance sector in the form of finance companies and some unit trusts. Minsky said that firstly we need to take care in an economy to have a large number of financial institutions rather than too much reliance on the few because if the few then stop operating we create risks. He then went further and said that whatever the number of financial institutions the financial regulator has to keep ahead of them. The longer the period of financial stability the more risky their behaviour is and the more often they move to make money in balance sheet transactions in a way that is not caught by the regulator. 
The theories of Hyman Minsky have attracted a resurgence of interest amongst reputable economists and regulators around the world following the financial crisis because of course his predictions have proven to be true. We had a long period of prosperity in the world. We had what some people have called irrational exuberance in property markets. Banks and merchant banks were seemingly making ever larger amounts of money. We now know that the reality is that they actually did so through transactions that were imprudent to say the least. In respect of some of them they were close to dishonest and still others were seen to be completely dishonest once they were unpicked. 
In respect of the New Zealand situation finance companies generally operate under prospectuses that are issued under the Securities Act. It is a requirement of the Securities Act that the prospectus name a supervisor of the investment which is generally a trustee company. Those trustee companies have a supervisory role. They are meant to ensure compliance by the finance company the unit trust or the group investment fund with the terms of the trust deed and to generally oversee matters on behalf of the investors. They are paid a fee for that role which is how they make their money. It is pretty clear that there has been some failure in that system. I would say that there has also been a wider failure which is the wider failure on the part of the regulators to keep ahead of poor practice amongst financial intermediaries whether those financial intermediaries are banks finance companies unit trusts or group investment funds. Over the last few years we have seen poor practice by all of those groups. 
The New Zealand banks would say—and it is true—that in the global context they are quite strong backed as they are by their strong Australian parents. None the less the banks were partly responsible for the problem because they lent on ever higher security margins and fed the consumption boom as much as—in fact more than—any other part of the financial sector. The banks fed more money into the beast. That in turn pushed the finance companies into riskier lending propositions because their part of the market was being gobbled up by the banks which had themselves moved into a riskier part of the market. So the finance companies and some of the unit trusts moved into riskier investments than they had previously been making. 
All of those things I think point to some form of regulatory failure in the system. It is not all the fault of the banks the unit trusts the group investment funds and the finance companies although obviously if they are making the investment decisions they must bear first and most of the responsibility for the things that went wrong. But the regulators should have been ahead of them. The regulators should have been listening to the likes of Hyman Minsky and other people of his ilk who were warning of the tendencies that had been apparent for some time. The regulators are very good at coming along later and saying that someone was wrong but with due respect to the regulators I think that they did not perform adequately in terms of seeing some of those problems earlier. 
In the finance company area I personally am critical of some of the trustee companies and some of the other regulators including some of the regulators that advise the Government in terms of their failure to crack down on related party transactions. I think that the greatest shame of these finance companies was where they were lending to their own directors to family members of those directors or to family trusts that were related to the directors. Plenty of instances are now coming to light where there was lending to related parties. Appropriate securities have not been taken. Personal covenants have not been taken from trustees even though the lending has enriched the assets of those trusts. There have been plenty of other instances where the funds that were invested in finance companies by ordinary New Zealand investors have ended up in the pockets of directors or related parties of those directors without much apparent recourse under the securities that ought to have been taken at the time. There has been failure by trustee companies. 
One area where the Labour Party is critical of this bill is that although it goes some way to impose some greater duties it does not move to the model that is applied in both the United Kingdom and Australia where they have a central regulator that has more powers than the New Zealand Securities Commission. They effectively take some of those roles that have sat with trustee companies rather ineffectually at times and say that those roles should pass to a central regulator. That is similar to what was recommended by the Capital Market Development Taskforce which reported to the Government not long ago. Although this bill is not offensive it does not make the big change that is necessary which is to create a beefed-up regulator that could more properly make sure that the sorts of bad events that have occurred in the past are less likely to happen in the future. They can never be eliminated completely because we cannot remove investment risk. But we could do better on this issue than we have done in New Zealand in recent years and this bill does not seem to fix the fundamental problem. Thank you.