Borrows Chester: Financial Markets Conduct Bill — Second Reading 
Text is incorporated into the Bound Volume 
Borrows Chester: Financial Markets Conduct Bill — Second Reading 
[Sitting date: 25 October 2012. Volume:685;Page:6255. Text is incorporated into the Bound Volume.] 
Hon CHESTER BORROWS (Minister for Courts)  
on behalf of the Minister of Commerce: I move  
That the Financial Markets Conduct Bill be now read a second time 
. The Financial Markets Conduct Bill is a major overhaul of financial markets law in New Zealand. It has been referred to by me and others as a once-in-a-generation opportunity to make New Zealand’s financial markets more effective. Its main purposes are to promote the confident and informed participation of businesses investors and consumers in the financial markets and to promote and facilitate the development of fair efficient and transparent financial markets. These are crucial objectives that we must promote in order to achieve long-term growth in our economy. 
The bill has been through an extensive consultation and collaboration process to get this far. It stems from reform work begun in 2005 and it gained momentum from the Capital Market Development Taskforce particularly its excellent 2009 financial report. It was informed by the global financial crisis and the failures of our financial companies sector. It owes a nod to our Australian cousins and I expect that it will facilitate greater harmony in financial market regulation in our single economic market. It has been supported by all or almost all submitters at every stage in the process with the divergence of views being limited mainly to the detail. 
In the course of the bill’s development the most urgent and clearly needed reforms were split out by this Government. This critical work included the establishment of a new regulator the Financial Markets Authority; key reforms of KiwiSaver governance and disclosure; better regulation of non-bank deposit takers; and licensing of trustees statutory supervisors and auditors. This process has ensured that this bill which contains the core—the complex detail the hard stuff—would not be rushed. In June 2010 a 200-page discussion document was released which was followed up by a 400-page exposure draft of the bill that was released in 2011. The bill was introduced to this House in October 2011 at 560 pages plus the explanatory note. 
The bill has been reported back by the Commerce Committee with a unanimous recommendation that it be passed with amendments. The committee has done excellent work. Dealing with a bill of this size and complexity is not easy. It is pleasing that the select committee unanimously supported the bill continuing a tradition of cross-party support for financial sector reform. 
I wish to make some brief comments about the committee’s amendments and some key matters in the bill. The committee’s proposed amendments improve clarity of the bill particularly around liability. It is crucial that the bill strike the right balance between holding people to account and encouraging businesses to come to the market. The bill places more focus on civil liability and compensation and reserves the main criminal sanctions for those users and directors who are guilty of serious wrongdoing. The changes made by the select committee essentially set criminal liability at the same level as for the Crimes Act and provide broader defences to civil liability. These are important improvements. 
I wish to reiterate that the bill is intended to encourage capable and prudent people to become directors. We want companies to be able to attract directors with diverse skills and backgrounds. Although directors should supervise capital raising and exercise due diligence regarding offer documents their primary focus should be on devising business strategy and supervising management rather than on compliance and liability. For that reason I agree with the committee that directors should be liable for civil pecuniary penalties and should compensate investors when they fail to perform their duties but should not be liable for imprisonment where there is not a criminal fault element. Likewise accessories such as senior staff and advisers should be directly liable to investors only if they are truly involved in the contravention in the sense of being an intentional participant in the primary contravention with knowledge of the essential facts and all those who are civilly liable including directors should have appropriate and consistent defences to that liability. The select committee has made important clarifications in this area. 
The final liability issue I would like to touch on is the fraud on the market concept in the bill. This approach which borrows from US law creates a rebuttable presumption about the causation of loss. Under the bill the court will first determine whether there has been a misstatement in an offer document that is materially adverse to investors. Then if the products have declined in value the court must presume the misstatement to have caused the loss to the investors unless the contrary is proven. The reason for the presumption is that it is unrealistic and wrong to require each investor to prove that they have personally relied on a misstatement. Investors get their information from a variety of sources including market commentary financial advisers the media and friends as well as offer documents. A disclosure misstatement can influence these sources causing the market to misprice the risk thereby causing the loss to the investor. It is important to note that the amount of compensation is still a matter for the court’s determination and that the presumption is rebuttable. 
 The bill also sets out the basic standards of conduct expected in financial markets and by financial markets participants. These rules replicate key provisions of the Fair Trading Act but are paired with the enforcement and liability scheme in the bill. These basic rules will be enforced by the Financial Markets Authority. As a result the core rules need to be kept in sync with the Fair Trading Act. So as noted by the select committee changes proposed in the Consumer Law Reform Bill will result in equivalent changes to the fair dealing provisions in the bill. 
This bill will be a success if investors are in a position to make confident judgments about the potential risks and returns from their investment decisions informed by high-quality disclosure and where they want it quality advice. The key part of the reforms to achieve this is to improve disclosure through the use of single-product disclosure statements that tell investors what they need to know backed by a public register that contains richer detail and facilitates comparison between products. 
But improved disclosure and conduct rules are not sufficient. The bill also seeks to implement consistent and reliable governance rules that will be enforced by a proactive regulator. For example managers of all retail managed investment schemes will both have direct fiduciary duties to investors and be supervised by a licensed supervisor who is responsible for the custody of the assets of the scheme. 
I want to reiterate that all investment carries risk and part of taking risks is that sometimes investments fail to deliver a return and regrettably there will also always be fraudsters. The rules in the bill are intended to provide a boundary to these risks so that investors can focus on business and investment risks. Investors should at the very least expect that the people in charge of their investments are required to comply with best-practice governance obligations and these obligations will be promptly and effectively enforced. 
As part of this improved governance the bill introduces licensing of key financial markets participants most notably fund managers. Licensing brings New Zealand into line with internationally expected norms of financial markets regulation making these institutions more internationally recognisable and therefore internationally competitive. Licensing does however bring risks of high barriers to entry and of insulating incumbents from competition. Because of these risks licensing under the bill is expected to be relatively light. It is primarily focused on ensuring that the unscrupulous are excluded from the industry rather than ensuring that every participant has a gold-plated compliance regime or that no one fails. 
I would like to conclude by thanking members of the select committee for their work in considering the bill and to acknowledge the contributions of those who provided submissions on the bill. I commend the bill to the House.