Parker David: Financial Markets (Regulators and KiwiSaver) Bill Securities Trustees and Statutory Supervisors Bill — Second Readings 
Parker David: Financial Markets (Regulators and KiwiSaver) Bill Securities Trustees and Statutory Supervisors Bill — Second Readings 
[Volume:671;Page:17515] 
Hon DAVID PARKER (Labour) 
: 
 Labour supports both of these bills the Financial Markets (Regulators and KiwiSaver) Bill and the Securities Trustees and Statutory Supervisors Bill. In my contribution I will focus on the Financial Markets (Regulators and KiwiSaver) Bill. 
As the Commerce Committee notes in the commentary on the bill and as the Minister of Civil Defence has already outlined the Financial Markets Authority is established by this bill and it has responsibility regarding the regulation of the financial sector. It takes over some of the existing functions of the Securities Commission which is disestablished; it assumes some of the responsibilities of the Government Actuary and the Registrar of Companies; and it has a role in the oversight of securities exchanges. The bill also makes changes to improve the Government’s arrangements for KiwiSaver schemes. 
It is quite clear that following the collapse of finance companies in New Zealand that caused billions of dollars of losses to New Zealand investors there was a need for improved regulatory oversight of the sector. This bill which was brought forward by the Government and is supported by the Opposition gives effect to some of the necessary changes. 
I will focus on an area where the select committee considered the issues thoroughly and which relates to the rights of the new Financial Markets Authority to in some instances take over rights of action on behalf of injured depositors in for example a finance company or investors in unit trusts or group investment funds. 
In the company situation which is perhaps analogous to the situation for finance companies a company can be controlled by the directors of the company or by a number of shareholders of the company. Those shareholders might effectively control the company and take decisions through the company in their role as directors to block the company itself suing directors when the directors might have breached their duty to the company. Directors of the company owe fiduciary duties to the company to act in the interests of the shareholders of that company. On occasion they can breach their duty and cause a loss to the company which is to the detriment of the shareholders in whose interests they are meant to be acting. 
The difficulty that those minority shareholders face is that the company that ought to be suing the errant directors can be under the control of those very directors. The law in the companies situation under the Companies Act allows for what is called the derivative action. The shareholders who feel aggrieved can apply to the High Court and ask to be put in the shoes of the company to sue the errant directors when the company because of those errant directors will not commence an action to recover the losses that have been occasioned by the directors’ breach of their fiduciary duties to the company. Through that derivative action route the minority shareholder is effectively protected against abuse by the management powers by the court allowing those minority shareholders to stand in the shoes of the company and sue the errant directors. 
We had a gap in New Zealand’s law. We did not have a similar right of derivative action in respect of the likes of some of the finance companies and issuers. There could have been poor practice on the part of a financial participant. A financial markets participant is defined in the legislation to include “a person who participates in an offer of securities to the public as an issuer or a promoter”. In terms of the Securities Act those issuers and promoters effectively include the class of people who have controlled the offer of investment securities to members of the public. Sometimes those issuers make misrepresentations or breach their duties under the Securities Act. 
Sometimes those breaches mean that a person suffers a loss. The investment entity and indirectly the investors in that investment security who have made investments in the company—they might have loaned money to the company; they might have invested in shares in a company—have suffered a loss. The amount of their loss might be relatively small—it might be $1000 or $2000—but there could be a thousand of those people. The total losses could be very large despite the fact that the individual suffering the loss might have suffered a small fraction of that total loss. 
In practice it can be the case that none of the individual participants have a sufficient financial interest to justify them going to the expense of bringing to justice the people who have caused their loss even if the actions that caused their loss were irresponsible and illegal. This legislation fixes that situation by saying that just as one can have a right of derivative action for a company under the Financial Markets (Regulators and KiwiSaver) Act the Financial Markets Authority can apply to the court for authority to sue a financial market participant on behalf of those classes of people who for whatever reason are not doing it themselves. 
That can also apply in respect of trustees: unit trustees of a unit trust or a trustee of a group investment fund. Again those entities theoretically are in control of the right of action sometimes against themselves. Just as a company director can act in breach of their duty but can block the company suing them for breach of their fiduciary duty effectively the unit trustee or the statutory supervisor can have an interest in not seeing themselves brought to justice because they would be forced to make a civil payment back to the unit trust or the group investment fund for the effective benefit of the investors in that unit trust or group investment fund who have suffered the loss. 
Again the legislation defines in Subpart 3 that they are a financial market participant in respect of whom the Financial Markets Authority can go to the court and say: “It looks like these people have been errant. They’re not going to police themselves. We the Financial Markets Authority want to apply to the court to stand in the shoes of investors and take an action against the people we think have acted improperly.” If they are found to be correct through a subsequent court action and the civil remedy of the court is found in favour of the Financial Markets Authority on behalf of these people who have suffered a loss it may well be that they can get a remedy for the effective benefit of the investors who have suffered a loss and perhaps even more important establish a standard of conduct to discourage that sort of irresponsible behaviour in the future so that those losses to investors become less likely. 
In practical terms what are some of the things that have gone wrong in the finance company sector and need to be pursued at times? It is clear that there has been some terrible conduct on the part of some of the participants who have lent money to entities that are related to them effectively to profit themselves and related entities—and in “related entities” I include family trusts and the like. Such participants have taken the upside of some of these transactions for the advancement of their personal wealth yet they have not taken appropriate securities from the family trusts and things. When things have gone haywire the related family interests of some of the people controlling these finance companies have managed to escape liability. The risks are being taken effectively by the person who invested in securities in those entities—be it equity or debt securities—and they are the ones who end up bearing the loss. 
The Labour Party supports both of these bills and commends them to the House.