Financial Markets (Regulators and KiwiSaver) Bill, Securities Trustees and Statutory Supervisors Bill

Hon JOHN CARTER (Minister of Civil Defence) Link to this

I move, That the Financial Markets (Regulators and KiwiSaver) Bill and the Securities Trustees and Statutory Supervisors Bill be now read a second time. Both bills are important components of the Government’s programme of reform to restore confidence in New Zealand’s financial markets following the global financial crisis and the failures of a number of financial companies. The Financial Markets (Regulators and KiwiSaver) Bill establishes the new Financial Markets Authority to replace the Securities Commission and to take on the responsibilities of the Government Actuary and some of the regulatory roles of the Registrar of Companies. The bill also makes changes designed to improve the governance arrangements for KiwiSaver schemes, and provides for better disclosure of fund performance. The Securities Trustees and Statutory Supervisors Bill addresses weaknesses in the supervision of issuers in retirement villages by trustees and statutory supervisors.

I will focus on the most significant recommendations of the Commerce Committee’s responsive and expeditious consideration of both bills. In addition to the Financial Markets Authority’s main objective of promoting fair, efficient, and transparent financial markets, the committee has rightly recommended the inclusion of a reference to the facilitation of the confident and informed participation of businesses, investors, and consumers in financial markets. An important regulatory tool in the bill is the Financial Markets Authority’s power to exercise a person’s right of action. The committee recommended changes to strengthen the rights of individuals by preventing the High Court from overriding an individual’s choice to opt out of the Financial Markets Authority’s proceedings. However, the Financial Markets Authority will be able to seek the leave of the High Court to exercise a corporation’s right of action, or to take over a corporation’s existing proceedings if the court is satisfied that it is in the public interest to do so. The provisions enabling the Financial Markets Authority to take action in the public interest are necessary to enable it to pursue negligent directors of a company.

In respect of the amendments the bill makes to the Securities Markets Act 1988, the committee has recommended the retention of the new statutory oversight regime, the new exchange rule approval process, and the Financial Markets Authority’s ability to request rule change and undertake real-time surveillance of market activity. The committee has also recommended the inclusion of amendments to the bill that target unsolicited offers, due to recent concerns regarding lowball share offers. The Financial Markets Authority will be able to use its enhanced warning powers to require a prominent warning to be included in such offer documents. The new regulation-making power is also recommended to allow rules to be set for unsolicited offers. Subsequent regulations could require a minimum offering and cooling-off periods, disclosure of a market price, and disclosure of other relevant information.

The committee has recommended a number of amendments to the KiwiSaver part of the Financial Markets (Regulators and KiwiSaver) Bill, including the shifting of responsibility for a range of functions from the trustee to the manager of the scheme. This change reflects the manager’s primary role in the marketing, operation, and regulatory compliance of non-restricted KiwiSaver schemes. As signalled in the explanatory note of the bill, further changes will need to be made by a Supplementary Order Paper with regard to retail KiwiSaver schemes, in order to require trustees to be licensed and to align the regime in the Securities Trustees and Statutory Supervisors Bill.

I turn to the Securities Trustees and Statutory Supervisors Bill. The committee has recommended that the maximum licence period for trustees and supervisors be extended from 5 years to 8 years to reduce uncertainty arising from the need to regularly reapply for a licence. In respect of the power to grant or vary a licence, the committee has recommended a regulation-making power to set out matters that must be taken into account when assessing whether directors and senior managers of the applicant satisfy good-character requirements. The committee has also made some important recommendations regarding the power to appoint a temporary supervisor, when the previous licence holder has been removed or no longer holds a licence. The Financial Markets Authority will be allowed to appoint any person it sees fit in the circumstances as a temporary supervisor, regardless of whether he or she holds a licence. This is essential, as there is a limited pool of licensed supervisors to call upon.

Although some submitters queried whether it was appropriate for retirement village statutory supervisors to come within the scope of the bill, the committee decided, on balance, that they should. Both the committee and the Government are conscious of not imposing unnecessary costs on the retirement village sector, yet it is justified there, given the benefits to residents from improved supervision. I note the committee’s recommendation that the Government undertake a review of all statutory fees that impact on retirement village residents. The Government considers that this would be a useful step, and it commits to undertaking its review within the next 2 years.

As I signalled earlier, I will table a Supplementary Order Paper that will align both bills by removing clauses from the Securities Trustees and Statutory Supervisors Bill that have been made unnecessary by the Financial Markets (Regulators and KiwiSaver) Bill. The Supplementary Order Paper will also provide for the licensing of KiwiSaver trustees, align provisions relating to classes of trusts and statutory supervisors, respond to some minor issues that have arisen since the committee’s report back on the bills, and provide for consistency in commencement and transition periods under both bills.

Both of these bills constitute very important steps in restoring investor confidence in New Zealand markets by establishing a new market conduct regulator that will promote fair, efficient, and transparent financial markets, and by providing better oversight of front-line regulators. I commend these bills to the House.

Hon DAVID PARKER (Labour) Link to this

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, and therefore 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 owned 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 $1,000 or $2,000—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 almost 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 these people 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 themselves, 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.

PESETA SAM LOTU-IIGA (National—Maungakiekie) Link to this

I am also honoured, as a Government MP, to stand to support the Financial Markets (Regulators and KiwiSaver) Bill and the Securities Trustees and Statutory Supervisors Bill. The Financial Markets (Regulators and Kiwisaver) Bill establishes a new financial sector regulator, the Financial Markets Authority, which will be a super-regulator, bringing a number of powers and functions from various Government bodies into a single body.

The work we have done in the Commerce Committee, particularly our inquiry into finance company failures, has made us realise as a group that there has been a fragmented approach to regulation of the securities and financial industry, and that such a move as the creation of this authority would be welcome. It is overdue, and we certainly welcome the establishment of the Financial Markets Authority to regulate the financial industry.

As has already been noted tonight, finance company failures continue to dominate our news. We saw another example this week in a court case that began with charges against directors of finance companies. This legislation is about maintaining the integrity of our financial system. It is about bringing together confidence and trust for mum and dad investors, as well as corporate institutional investors, in our financial markets and capital markets, so that we can have a fluid market and facilitate access to capital for our businesses. The National Government is focused on boosting growth and creating jobs, and fluid financial markets certainly facilitate a stronger economy, financial security, real opportunities for growth of our economy, and more opportunities for our people.

As has been mentioned, some changes were made to the bill during the select committee process. The bill addressed some really good work that was produced by the Capital Market Development Taskforce and issues raised in respect of the global financial crisis, as well as the finance company failures that I have already alluded to.

The bill ensures that the Financial Markets Authority has the right tools to keep our capital markets working for investors. As Mr Parker has said, it gives power to the Financial Markets Authority to exercise investors’ rights of action, when it is in the public interest to do so. That is an important criterion, because, as we saw with a lot of the inaction over the last 4 to 5 years in terms of finance company failures, the Securities Commission did not have the power to take action against some of the rogue parties in our financial markets.

So what does the bill do? One of the other important areas that were looked at was that of lowball, unsolicited offers. That is where predatory investors make lowball offers that are well below the market price for securities to mum and dad investors, who may or may not be ignorant of the market price, in order that they will take up the offer. Often those offers are unsolicited, and the result is a large degree of market loss for those mum and dad investors. This bill includes a regulation-making power that will enable greater regulation of unsolicited offers, including minimum offer and cooling-off periods, as well as the requirement to show on the offer documents a disclosure of the market price. I think that is particularly important. It will allow mum and dad investors to see through the predatory behaviour of some of the investors.

In summary, it is clear that New Zealand needs a single market regulator and a culture of proactive and timely enforcement, which has sadly been lacking in recent years in respect of some of the finance company failures. It is undoubtedly about market confidence for our investors—institutional, individual, and mum and dad investors—and the critical role that the Financial Markets Authority will play in the regulation of the industry. This bill will consolidate the functions of the Securities Commission, as well as parts of the Ministry of Economic Development and the Government Actuary, and the regulatory function of the New Zealand Exchange.

We will talk in the Committee stage about how the bill will do that. It is certainly a commendable bill. I am happy to see that there is multiparty support on the Commerce Committee for the bill and for it to proceed, and for the Financial Markets Authority to be established this year. Thank you.

CLARE CURRAN (Labour—Dunedin South) Link to this

As members have heard, the Labour Party supports both of these bills. I intend to direct most of my comments to the Securities Trustees and Statutory Supervisors Bill, but I would first like to make a few comments about the Financial Markets (Regulators and KiwiSaver) Bill.

This bill establishes the Financial Markets Authority and sets out the wider enforcement and surveillance powers that are to be available to regulators. It also makes changes to the regulation of registered exchanges and improves the regulation of KiwiSaver schemes. Labour believes that it is critical that we enhance confidence in our financial markets, and that having a single market regulator should contribute to that end. Labour launched the Capital Market Development Taskforce and is pleased that the Government is acting on its recommendations. We are concerned about a lack of transparency around the current securities commissioners. Labour supports this bill, as I said. We think that the concentration of power in the hands of the Financial Markets Authority means that all its officers must be beyond reproach and its processes must be fully transparent, and that the integrity of the markets depends on the integrity of the Financial Markets Authority and its personnel.

Labour started the financial markets reform process, and it is pleased that the Government is continuing that work. I would like to make a special mention of the Hon Lianne Dalziel with regard to both of these bills. She set up the Capital Market Development Taskforce in 2008 to develop a blueprint and an action plan for the development of New Zealand’s financial system. Out of this has come these bills. Labour believes, in terms of the Financial Markets Authority, that enforceable principles such as integrity, skill, reasonable care, and financial prudence are needed. Principles are flexible, unlike rigid rules that are made to be broken. It is important that ethics underpin the new regime, because that will help to rebuild trust and confidence in the financial sector. I think we have heard from all speakers on these bills about the absolute importance of having trust and confidence in the financial sector.

In speaking to the Securities Trustees and Statutory Supervisors Bill and the Financial Markets (Regulators and KiwiSaver) Bill, I should thank the Minister, Simon Power, for his work as well. I also again make particular mention of the Hon Lianne Dalziel and the work done by the Commerce Committee, which did enormous amounts of work on these bills and recommends that with certain amendments they be passed. I also thank the officials for their work and the consultation with the committee on the legislation.

Although Labour supported the Securities Trustees and Statutory Supervisors Bill at the time that it passed through the Commerce Committee, we did have some concerns about it. We considered at the time that it was a back to front bill. We felt that it needed to be considered at the same time as wider reform of the financial markets. So we are pleased that it is being read alongside the Financial Markets (Regulators and KiwiSaver) Bill. The Securities Trustees and Statutory Supervisors Bill seeks to address a number of weaknesses in the current supervision regime for trustees and statutory supervisors. It establishes a licensing regime for trustees and statutory supervisors who supervise certain issuers of securities, and for statutory supervisors of retirement villages. It amends several pieces of legislation, which include the Retirement Villages Act 2003, the Securities Act 1978, and the Unit Trusts Act 1960. That new regime was to be administered by the Securities Commission. We noted at the time that it was intended that the commission’s role under the bill would be taken over by the Financial Markets Authority once it was established. It appears now that that will happen.

It follows on from the conclusions of both the International Monetary Fund and World Bank report in 2004 and the consultations undertaken by the Ministry of Economic Development in the Review of Financial Products and Providers in 2006, which found that New Zealand placed far too much reliance on private supervisors, such as corporate trustees, and that those supervisors and trustees often lacked accountability. This bill removes the automatic right for the six statutorily appointed approved trustees to supervise issuers of debt and some investment schemes. It also introduces a licensing regime for trustees, which will be run by the Securities Commission. It makes it an offence to act as a trustee or a statutory supervisor without a licence, so that a person who commits such an offence will be liable on conviction to a fine that does not exceed $300,000. The bill also includes a number of provisions designed to ensure that trustees, statutory supervisors, and unit trustees comply with their obligations, and the Securities Commission may seek pecuniary penalties and compensatory orders against those who fail to comply.

Those clauses are designed to address the lack of capability and accountability of supervisors and trustees in the current system, as I have already said. The fundamental role of trustees, statutory supervisors, or unit trustees is to ensure compliance with the terms of the trust deed or the offer of security. When an issuer gets into difficulty, the trustee supervisor is supposed to take action, inform the investors and engage expert assistance, or to place that issuer into liquidation.

I would like to quote from a speech that was given by the Hon Lianne Dalziel at a conference, Reviewing Securities and Investment Regulation in New Zealand, on 30 August last year. In it she backed 100 percent the establishment of the Financial Markets Authority to absorb all those functions that have been talked about that are currently spread across the Securities Commission, the national enforcement unit within the Ministry of Economic Development, the Government Actuary, and the market discipline functions of NZX. She said: “The Minister has said it will have grunt and I welcome that. We need a single-minded approach that says that the risk of getting caught is high and the consequences of conviction are severe. I am constantly affronted at the discount our criminal justice system appears to afford the white collar criminal over all other criminals, even though the wealth they have destroyed makes the proceeds of house burglaries pale into insignificance by comparison. I think we should allow our courts to impose what I now call the Madoff sentence for the most egregious cases. And there are some people who should never be allowed to fundraise from the public ever again or to claim the protection of limited liability against creditors—and those are the people against whom fraud has been proven. There should be no second chances under these circumstances.”

Lianne Dalziel talked about the five key objectives that should underpin the Financial Services Authority framework. They are: market confidence, which is maintaining confidence in the financial system; public awareness, which is promoting public understanding of the financial system; financial stability, which contributes to the protection and enhancement of a financial system; consumer protection, which secures the appropriate degree of protection for consumers; and the reduction of financial crime, which reduces the extent to which it is possible for a business to be used for a purpose connected with financial crime. It is those principles and objectives that should underpin all reforms in this area.

The Securities Trustees and Statutory Supervisors Bill was referred to the Commerce Committee on 23 March last year—a year ago tomorrow. We received and considered 18 submissions from interested groups and individuals, and we heard eight submissions. Essentially, we support both of these bills. We think it is good that they are being read together, and I recommend them to the House.

KATRINA SHANKS (National) Link to this

It is my pleasure to take a call tonight on the second reading of the Financial Markets (Regulators and KiwiSaver) Bill along with the Securities Trustees and Statutory Supervisors Bill. First, I thank the officials for all the work they have put into this legislation. There was a fairly tight time frame and it is a significant piece of work. It was quite complex. It took the Commerce Committee a fair amount of time to get to grips with the extent of the legislation, which is far reaching and very important when we are looking at improving investor confidence in New Zealand.

The Financial Markets (Regulators and KiwiSaver) Bill establishes a new financial sector regulator, the Financial Markets Authority, and makes important changes to the governance of KiwiSaver schemes. It is clear that New Zealand needs to have a single market regulator with a culture of visible, proactive, and timely enforcement. On too many occasions, in finance company collapses, we have heard of investors’ money falling to the floor through gaps between regulators. The select committee has undertaken an inquiry, which is still ongoing, into the finance company collapses. Investors feel frustrated that they had nowhere to go because the regulations or the legislation were not strong enough to enforce some of the issues where money was lost, so those investors had no recourse to enforcement action.

That situation has undoubtedly damaged New Zealand and the confidence of our mum and dad investors. Once a sector has lost a significant amount of money, which happened with the finance companies—and these were the same investors who, in 1987, lost money in the stock market crash, and who lost it around 2000 in managed funds when they took a big dive—the confidence of those investors is damaged. Because those investors had been burnt on the stock exchange and burnt by the fund managers, they went to what was considered to be the next-lowest risk, which was the finance companies, only to be burnt in that sector. So the confidence of our mum and dad investors, of our retirees, is pretty damaged. It is important that we put some—