Norman Russel: Financial Markets Conduct Bill — Second Reading 
Text is incorporated into the Bound Volume 
Norman Russel: Financial Markets Conduct Bill — Second Reading 
[Sitting date: 14 February 2013. Volume:687;Page:7882. Text is incorporated into the Bound Volume.] 
Dr RUSSEL NORMAN (Co-Leader—Green) 
: 
 This bill the Financial Markets Conduct Bill is an attempt to deal with some of the challenges of the out-of-control growth of the financial services sector over the last couple of decades. But of course it is a longstanding problem. As the previous speaker referred to the global financial crisis has drawn to the forefront the issue of how we regulate the financial services sector—not just the banking sector but more generally the financial services sector. The issue that stood behind the global financial crisis was fundamentally one of the expansion of money supplied by the private banks. There was a phenomenal increase in global supply created by the private banks and financial institutions in the lead-up to the financial crisis. That was part of the financial cycle that eventually led to the bust that we have seen most recently. The Bank for International Settlements in its recent working paper No. 395 looking at financial cycles tried to analyse what stood behind the financial cycle that we have seen just come to a bust looking particularly at the expansion of money supplied by the private banks. 
What we have seen since then is an attempt to try to constrain the ability of that dramatic expansion that we saw and there are strong grounds if you like—there are strong theoretical grounds—for the basis for constraining the expansion in the supply of money by the private banks. It goes a long way back. Henry Simons who was of course one of the fathers of the Chicago school—the Chicago school is what you might think of as one of the neo-liberal or quite far-right members of the economic theory constellation—said: “in the very nature of the system banks will flood the economy with money substitutes during booms …”. Simons is very clear that the nature of fractional reserve banking means that during the booms the banks and other financial institutions will flood the system with money. He did not see this as a good thing and of course the OECD— 
Peseta Sam Lotu-Iiga 
: I raise a point of order Mr Speaker. I understand where the member is going with this but this has got nothing to do with the bill at hand here. I suggest the member comes back to talking about the Financial Markets Conduct Bill. 
The ASSISTANT SPEAKER (H V Ross Robertson) 
: The member has not been going very long but it is a narrow debate and I would ask the member to just try to bring it into context. 
Dr RUSSEL NORMAN 
: It is unfortunate that that member does not understand the connection between the Financial Markets Conduct Bill and the regulation of the financial markets. That says an awful lot about the Government. 
So how do we try to constrain those financial markets? That has been the challenge for Government after Government. Henry Simons—unfortunately the member does not realise—is a very prominent economist who has been very important in economic theory and stands behind a lot of the thinking that sits behind this bill because that is what economic theory is about. But I would not expect the Government to know about that. Simons said why it was important to constrain the financial services. He said: “Private institutions have been allowed too much freedom in determining the character of our financial structure and in directing changes in the quantity of money and money substitutes.” So what Simons was trying to say was that we need greater regulation and that has become very clear of course during the last decade. Could it ever become clearer in New Zealand with the collapse of all the finance companies? Of course it is a larger problem than just the finance— 
The ASSISTANT SPEAKER (H V Ross Robertson) 
: Order! I am sorry to interrupt the honourable member. There is a member on my right and one on my left and they are actually interjecting on each other and neither of them has the floor. It is not permitted. 
Dr RUSSEL NORMAN 
: This bill is trying to deal with some of those issues in some ways but the question is whether it fundamentally deals with some of the outstanding issues we have to address. It works in combination with the financial markets regulators which is important. 
So as part of looking at this bill we have been looking at what the Financial Services Authority in the UK has been saying—Adair Turner Lord Turner who is the departing chair of the Financial Services Authority in the United Kingdom. What has been so interesting about the debate around the regulation of financial services has been the development of how we regulate the growth in private sector money what the role of public sector money is and the creation of public sector money which of course has gone under the term of quantitative easing and all sorts of other names globally. So Adair Turner who is the chair of the mirror regulatory agency of the one that this bill works alongside has been making some rather extraordinary statements in recent times about the regulation of it. Essentially he is saying—and Martin Wolf who is the lead commentator in the  
Financial Times 
 has also been making this argument—that although it is fine through fractional reserve banking to allow the private sector banks to create money there is also a case in certain circumstances for the public to be allowed to create money for public good as well. 
What Martin Wolf has been talking about in particular is infrastructure investment. He says it is fine to allow the private sector banks to create money for private benefit but in terms of the creation of money by the public sector—for infrastructure for example—that also is a legitimate purpose. This is of course what the Green Party was proposing with the use of quantitative easing to help pay for the rebuild of Christchurch. The regulation of the financial services sector which this bill is part of has cracked open a very large and interesting debate about the best way to regulate the sector in terms of trying to limit the growth of credit that is coming out of the sector. 
But it has also cracked open I think a fascinating debate which we are struggling to have in New Zealand about what the role is for public sector - created credit or printing money as the Government likes to call it. That debate I think is one of the defining debates of our era because of course of the problems that have come out of the private sector. So this bill is part of trying to regulate some parts of that sector. It goes alongside the debate we have been having about monetary policy—and clearly there is an overlap between the two—and it goes alongside the debate that Mr Cunliffe also referred to which is what to do currently in terms of some of the problems in the New Zealand economy. We have another housing boom. How do we control that housing boom without interfering with some of the other financial services in the operation of the economy? For those of you who have not seen it the Swiss central bank has just announced that it is going to require private banks to keep extra capital on hand for their loans to the property sector. The Swiss also have a housing boom problem so they are requiring extra capital to be put aside in order to try to take some of the heat out of their housing boom. All of these little pieces of the puzzle—this bill around monetary policy reform and how to deal with the housing asset bubble—are all parts of the picture. Of course the exchange rate and how to deal with the high New Zealand dollar is the other part of the picture. 
We welcome this bill. There is a lot of good stuff in this bill. We still however remain concerned around the issues of criminal liabilities for directors of finance companies. Essentially this bill weakens the current provisions. There is no other way to look at it I do not think in that the strict liability provisions that currently apply to the directors of finance companies and have resulted in a number of directors of finance companies going to jail are essentially weakened by this bill. I think the Commerce Committee did a good job in terms of strengthening the bill in terms of criminal liability and I welcome the changes there. But in terms of the strict liability for the actions of the directors of finance companies that has been taken away. 
People will be surprised by this. So if you are one of those people who lost money in the finance companies and then you said “Oh well at least those characters got sent to jail.” the chances are that there is less likelihood that they would be sent to jail under the current bill in front of the House than in the existing legislation because of the bill getting rid of the strict liability regime. Should the New Zealand Parliament be passing a law that essentially weakens the strict criminal liability regime that currently applies to the directors of finance companies? That essentially is what we are doing. The bill of course is a lot more than that and to characterise the bill by just that one element would I think be unfair. There is a lot of really good stuff in this bill but none the less when you look at that one element of it there is I think no question that essentially what it does is weaken that provision and make it less likely that the directors of finance companies would end up in jail if they misled investors. 
The response from those who support that bill is to say: “Oh well you can get some of your money back in civil damages.” The problem with that is that a lot of the directors of these finance companies will hide their assets in trusts and it would be very difficult for investors to get their money back from the directors of these companies. Clearly there needs to be some work done to fix up the trust regime—the legal framework around trusts. But it means that under this current Financial Markets Conduct Bill for those who say “Oh well you can always sue the directors to get your money.” actually the directors will not necessarily have enough money and the money will be hidden away in trusts so it will be hard to access. Thank you. For that reason we will not be supporting this bill.