Hon SIMON POWER (Minister of Commerce)
: I move,
That the Securities Trustees and Statutory Supervisors Bill be now read a first time. At the appropriate time I intend to move that the Securities Trustees and Statutory Supervisors Bill be referred to the Commerce Committee, that the committee report finally to the House on or before 30 June 2010, and that the committee have authority to meet at any time while the House is sitting, except during oral questions, and during any evening on a day on which there has been a sitting of the House, and on a Friday in a week in which there has been a sitting of the House, despite Standing Orders 187 and 190(1)(b) and (c).
This bill establishes a licensing regime for trustees and statutory supervisors who supervise certain issuers of securities or retirement villages. It also provides for the Securities Commission to be notified by trustees or statutory supervisors when any issuer they supervise gets into difficulties, and gives the Securities Commission enhanced power to intervene in these circumstances. The role of trustees and statutory supervisors is vitally important in ensuring that the interests of investors are properly protected. Their role is to monitor the issuers of certain types of securities to ensure that the issuer is complying with the terms of its offer to investors and other obligations. Where the issuer fails to comply, the trustee or statutory supervisor has a duty to take appropriate steps to protect the interests of investors. However, in recent times serious weaknesses have been identified in the supervision of issuers by trustees and statutory supervisors. As far back as 2004, the IMF and the World Bank identified that New Zealand placed heavy reliance on private supervisors like corporate trustees, and that there was insufficient accountability for such supervisors. The finance company collapses have highlighted many areas of concern, including a failure by some trustees to carry out their role to the expected standard, due to a lack of capability and a lack of accountability to investors.
A well functioning financial sector needs to provide the necessary protections to investors while at the same time ensuring that businesses are able to access capital as easily as possible. Trustees and statutory supervisors have a key role to play in ensuring that the interests of investors are protected, and, in doing so, contributing to confidence in the market. For this reason I asked officials to break out development of a trustee supervisory model from the wider review of the Securities Act and put it on a faster track. The result is that this bill will establish a licensing regime covering trustees of issuers of debt securities, statutory supervisors of issuers of participatory securities, and trustees of unit trusts, as well as retirement village statutory supervisors.
The bill removes the automatic right of trustee corporations to act as trustees or statutory supervisors, and requires that all trustees be licensed by the Securities Commission. In deciding whether to grant a licence, the Securities Commission must have regard to a number of factors, including the applicant’s monitoring systems and processes, the experience and qualifications of the senior directors and managers, and the applicant’s financial strength. Licences may last for up to 5 years and may be subject to conditions imposed by the commission. Trustees and statutory supervisors will also be subject to stringent monitoring requirements, including 6-monthly reports confirming their ongoing compliance with their licence and any conditions imposed upon it. In addition, trustees and statutory supervisors will be required to report to the Securities Commission any actual or potential breach of the terms of their licence, and any material change in their circumstances that may impact on their ability to continue to carry out their role. In doing so, trustees and statutory supervisors will also be required to provide the commission with an action plan stating what steps they will take to address the breach of the licensing criteria or material change in their circumstances.
If the commission is not satisfied with the steps that the trustee or statutory supervisor proposes, it may direct the trustee to take a particular action or vary the terms of the trustee’s licence. In the most serious cases the commission may revoke the trustee or statutory supervisor’s right to act in respect of particular appointments, or cancel the licence altogether. There are also stringent penalties in the bill for trustees or statutory supervisors that fail to comply with their obligations, including fines of up to $200,000, and orders that will require the trustees to compensate investors for loss that arises out of their failure to comply with their obligations.
However, the bill goes beyond simply ensuring that trustees and statutory supervisors are competent to carry out their role. Part 3 also gives the Securities Commission the power to oversee how they act on behalf of investors in crisis situations. Trustees and statutory supervisors will be required to report to the Securities Commission if any issuer they supervise is likely to breach the terms of the offer or the trust deed, is insolvent, or is likely to become insolvent. At the same time, trustees and statutory supervisors will be required to outline to the commission the steps they intend to take in response. The commission will also have the power to require trustees or statutory supervisors to attest as to whether the issuer is complying with its obligations. The bill provides the Securities Commission with powers to intervene directly in circumstances where there is a significant risk that investors’ interests will be materially prejudiced and the trustee or statutory supervisor has failed to take the necessary steps. In these situations the commission may either direct the trustee to take a particular action, or apply to court directly for an order to protect investors’ interests. Amongst other things, these court orders may amend the terms of the trust deed, impose restrictions on the activities of the issuer, or require the appointment of a receiver or manager of the property that constitutes the security.
The bill also applies the licensing regime to retirement village statutory supervisors. The role of retirement village statutory supervisors in monitoring the financial position of a village involves a broadly similar range of skills as a trustee or statutory supervisor of an issuer. In addition, many of the concerns raised about the performance of some trustees and statutory supervisors have also been raised in respect of some retirement village statutory supervisors. These concerns include not working through the problems of financial inadequacy on the part of the village in an appropriate way with the operator, and in some cases a lack of proven analysis by some statutory supervisors of village operators’ financial reports. However, Part 3 does not apply to retirement village statutory supervisors as it is not intended to give the Securities Commission a role in overseeing the broader retirement village sector. Under the bill, the commission’s role
in respect of the retirement village sector is solely confined to ensuring that retirement village statutory supervisors have the capability to carry out their role to the required standard.
Finally, I note that the bill does not currently cover trustees of superannuation and KiwiSaver schemes. Although there are some differences in the role of superannuation and KiwiSaver trustees and other trustees and statutory supervisors, in light of recent events there is a legitimate question as to whether some or all superannuation and KiwiSaver trustees should be included within the licensing regime established by the bill. I am inviting the select committee to consider that issue in the course of its deliberations. I commend the bill to the House.
Hon LIANNE DALZIEL (Labour—Christchurch East)
: Labour will support the first reading of this bill and its referral to the Commerce Committee, but that is as far as I can commit our support. It is interesting that, with the benefit of hindsight and some distance from the pressure of ministerial deadlines, I find it hard to recall why we need to have trustees performing what is now clearly defined in this bill as the role of the middleman. I think there are way more important issues in terms of securities law that we have to be getting on with, but that is not a top priority for the Government.
I am extremely disappointed to find out that we have an early report back foisted on us by decree in the House. I am the chair of the Commerce Committee, and even I was not told that there is a report-back date expected for this bill—one of the most significant bills we have had to address as part of regulatory reform in this area—of 30 June. I do not know whether my deputy chair had been informed of that, but it would have been nice to receive a phone call, just to be informed that that was the Minister’s desire. I totally oppose that report-back date. This is a far more important issue than it would allow. It means that we can allow less than 6 weeks for the calling of submissions. We will have to hear the submissions very, very quickly, and then we will have to be in a position to report back to the House by 30 June. I do not think that is right or fair to the investors of New Zealand, who have felt utterly and completely hammered by the lack of regulation in this area. Regulating quickly does not actually assist them with the problem.
I remember asking the Securities Commission a question at a select committee hearing earlier this year about whether we needed trustees any more and whether the role of the trustee corporations was needed, having been exposed by the Companies Office at the select committee last year as having failed abysmally in their obligations to investors. I remember asking the commission why, if that was the role of the middleman that we now have, we did not just beef up the role of the Securities Commission. Of course, the Securities Commission were not in a position to respond to that. But they said that that was what happened in Australia in 1999. Australia did away with trustee corporations as middlemen, and the Australian Securities and Investments Commission has control of the supervision of the non-bank deposit-taking sector. So the finance companies are covered by the Australian Securities and Investments Commission and not by individual trustee corporations.
Maybe the events of the past 4 years demand something a little bit better of the Government and of this House than simply tightening the supervision of the supervisors, such as beefing up the role of the Securities Commission and exponentially increasing its powers. I favour that. I think our Securities Commission needs more teeth. I think that our Securities Commission needs more resources in order to take on the demands that it has in this very, very difficult market. The Government has already announced that it will look at the super-regulator that was proposed by the Capital Market Development Taskforce. Yet the golden opportunity to look at one aspect of the supervisory regime is being completely squandered by this bill—completely
squandered. To then say that we have to report back to the House by 30 June is just adding insult to injury. It is absolutely unreasonable for this House to debate this issue under those kinds of pressures. It is far, far too important.
I ask members when this bill was tabled. I think it was tabled in Parliament on 15 December last year. We are already in March this year. If it was so important, and if the time frame was so tight, why did the Minister of Commerce not put it up the Order Paper earlier on in the year? We could have got on with it before now. I think that all of the people who will want to make submissions on this important bill will be appalled at the Government’s arrogance and its lack of respect for the people involved in the industry by its allowing such a short time for the bill to be considered by our select committee, and then ultimately reported back to the House. The early report back for the bill has already excited enormous unfavourable comment from the financial sector. My view is that we have to take the time to get the legislative framework right. It is far too important to allow for a once-over-lightly response, which is what this Government seems to find acceptable.
What has happened in New Zealand should be a warning to all of us. I admit that I was the Minister of Commerce at the time that the finance companies failed. But at the time they were failing, at the very beginning, I was already in the process of regulating the financial sector. The Review of Financial Products and Providers was already out for consultation before the first of three finance companies fell over in 2006. I announced the main decisions arising out the Review of Financial Products and Providers in June 2007, a matter of days before Bridgecorp fell over. Then it was like a set of dominoes or a house of cards; they all came tumbling down. It was not surprising, because it was not like a run on a bank; those people had their money invested in term deposits, and they sat there holding their breath, waiting for that term to expire. Then they pulled out their money. Reinvestment rates plummeted. That is why we had a crisis on our hands. Getting people to reinvest in that environment was something that a number of individuals tried to continue to do, even though they knew that their companies were on the brink of failure. That is criminal, and it is unacceptable. I said this last week in a speech I gave as I launched my member’s bill. I think we should be ashamed at the behaviour of some of the individuals out there who call themselves our top business leaders and who were prepared to allow people to invest their money, knowing full well that it would never see the light of day again.
As for the moratoria that were imposed on a number of unwitting individuals, how can members in this House seriously think that people who did not have enough financial acumen to make the right decision for the original investment were going to make the right decision on moratoria? We have seen the results of that. I remember when the Securities Commission came to the select committee and we asked it about the moratoria. It said that people were in a state of shock, that they could not allow for the totality of loss to crystallise by agreeing to a receivership, and that is why they agreed to moratoria. I say to the Government that that is not good enough. We should be working together collaboratively to regulate this sector appropriately.
Last year we received a report from the office of the Registrar of Financial Service Providers and Financial Advisers, and he made it very clear what the problem was. He said that there was a lack of capability and capacity. He talked about weak trustees; he talked about a lack of role clarity; he talked about the potential for a lack of independence from the issuer; and he talked about weak accountability. That is not good enough. It is an indictment on people whom ordinary investors were entitled to rely on, but could not rely on. Making the supervisors subject to a tighter supervisory regime of their own does not fix the underlying problem.
This bill had no regulatory impact statement published with it, so I went away and printed it off, and I think it is utterly inadequate. I think that is why the Government does not want to print its regulatory impact statements in the explanatory notes of bills tabled in the House any more. There are only three options in it: the 2007 proposals, the central regulator, and this one. The central regulator gets the benefit of three paragraphs. Australia has a central regulator. I want to ask the Government to seriously think about that. Let us look at Australia, and let us look at the Financial Services Authority in the UK, which sets 11 “Principles for Business”. I know that I will run out of time to list all of the principles for business, but, essentially, a firm must conduct its business with integrity; a firm must conduct its business with due skill, care, and diligence; and a firm must take reasonable care to organise and control its affairs responsibly and effectively, with adequate risk-management systems. Yes, there are rules that sit underneath the 11 principles, and that is what this Parliament needs to give the people of New Zealand.
PESETA SAM LOTU-IIGA (National—Maungakiekie)
: I rise to support the first reading of the Securities Trustees and Statutory Supervisors Bill 2010. I rise to support the Minister of Commerce for introducing this legislation to the House. It is important legislation, as the previous speaker, Lianne Dalziel, alluded to. It is important legislation, because the changes in it are part of the Government’s comprehensive reform agenda in the financial arena. It is part of its comprehensive reform agenda, which looks at the work of financial advisers, at moratoria regulation, and at auditors. It is the Government’s action plan responding directly to the Capital Market Development Taskforce report.
- Sitting suspended from 6 p.m. to 7.30 p.m.
PESETA SAM LOTU-IIGA: As I stated before the break, I support the Securities Trustees and Statutory Supervisors Bill. It requires corporate trustees and statutory supervisors that supervise certain financial investments to be licensed. It allows the Securities Commission to oversee how trustees and statutory supervisors act in situations where investors’ interests may be at risk. This is particularly pertinent, given the number of financial company collapses we have seen in the last few years.
What does the bill do? Primarily, it does three things. First, it will require trustees and statutory supervisors to be capable; secondly, it will require them to perform their functions effectively; and, thirdly, and last but not least, it enables the Securities Commission, as the regulatory body, to hold them accountable for any failure to act according to the expected standards.
The new regime applies to trustees of debt securities, unit trustees, and statutory supervisors of certain collective investment schemes and retirement villages. The reason retirement villages are included in this regime is the recognition that they play a similar role to the trustees of other investment products in monitoring the financial position of retirement villages. The new licensing regime will help to ensure that trustees and statutory supervisors are competent, and the regime will fundamentally improve trustees’ performance. The Securities Commission, of course, will administer the new regime and grant licences to applicants, and it will also receive mandatory reports from these licensed trustees and statutory supervisors.
The commission, under this new Act, will have more powers to require information from trustees and to direct them to act in special or emergency situations. The commission will be able to seek pecuniary penalties and compensation orders where the trustees and statutory supervisors have breached their obligations under this statute. The bill also creates an offence of failing to comply with the commission’s directions, so that there is some enforcement power when trustees fail to act. This includes maximum pecuniary penalties of between $100,000 and $200,000. It is an offence for a person to
act as a trustee, statutory supervisor, or unit trustee without an appropriate licence and for a person to represent that he or she holds a licence that covers a security without holding such a licence. The penalties for such an offence will be a pecuniary amount not exceeding $300,000.
The bill sets out what the Securities Commission has to take into account in deciding whether to issue or vary a licence under the regime. Firstly, some of the factors include—and the Minister has already raised some of these—the experience, skills, and qualifications of the applicant. In particular, the commission will be looking at the skills of the directors and senior managers of a trustee organisation. Secondly, it will take into account the financial resources available to the applicant, as well as other resources, which may be non-financial, that are available to that applicant. That is particularly important in order to see the type of credibility, the type of support, and the type of resources that will support the trustee organisation during its operation.
The commission’s new power to oversee how trustees and statutory supervisors act in certain situations is one of the fundamental changes in this bill. The fact that the bill gives the commission the power to monitor the actions of trustees should provide an added level of protection for investors. This is one of the fundamental changes. It is particularly important because it should allow the commission to direct trustees or directly intervene if trustees are not taking adequate steps or urgent action as is required. Those are the basic tenets of the bill. I support the bill and look forward to the select committee where we will be discussing its particular provisions. Thank you.
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.
KEVIN HAGUE (Green)
: I rise to take probably a short call on the Securities Trustees and Statutory Supervisors Bill, on behalf of my colleague David Clendon, who I know is looking forward to speaking on this matter. The Green Party has taken quite an assertive stance in this House on the issues that have arisen relating to the serial collapse of many of our financial institutions during the course of the recession, and on some of the practices that came to light, and weaknesses that came to light, as a result of scrutiny of those occurrences. I think it is probably fair to say that what I have to say tonight dovetails very well with what we have just heard from the Hon David Parker.
The recession saw financial institutions collapsing like dominoes through New Zealand, starving good businesses of capital, and, for many investors, wreaking havoc with their savings, including the life savings of many New Zealanders. It is conservatively estimated that several billion dollars of wealth was simply wiped from the collective balance sheets of New Zealanders. The problem is that in the good times, the mark-to-market process serves to imbue the balance sheets of all with a rosy glow. That results in less scrutiny, greater risk-taking—as the Hon David Parker has just been discussing—and, effectively, the creation of wealth out of nothing. That then sets up positive feedback loops that seem to inflate the apparent value of those assets still further, which then creates greater risk-taking, and the whole thing spirals out of control until it does not any more—it collapses. I am constantly reminded of the treatment of Iceland by the International Monetary Fund, which, less than a year before the total collapse of Iceland’s economy, was lauding Iceland as one of the greatest success stories in the world economy.
Since everything has gone south, there has been much greater scrutiny of these investment vehicles and of the things that went wrong. Some of the things that went wrong have already been discussed in the House, but here is my little list. One of the things we discovered was that many of the schemes being operated were no more than Ponzi schemes. We discovered many, many shonky practices, such as when a debt was going bad and was not being repaid. Rather than having that bad debt appearing on the
balance sheet, it was simply being rolled into a new debt, which made the balance sheet look better. We also saw the practice of companies with bad debts, which would otherwise have appeared on their books, immediately prior to balance date selling off those debts to other entities, many of which were related parties. I agree with David Parker’s assessment that that was certainly one of the most shameful practices we saw from these companies. Only 2 days after the balance date, those same assets were sold back to the original entity. There were many other practices such as those.
We saw a whole series of practices that made the inquiry into financial institutions something the Green Party wholeheartedly supported. We saw a cynical use of moratoria, which may be something that my colleague John Boscawen wants to talk about in his contribution, because it is one of the things that he has very valiantly and admirably, in my view, pursued in this House and in the select committee. We saw what I would call “active deceit”, inappropriate disclosure, and inappropriate marketing. I have reminded the House previously of the report of the Morningstar Group, which found that New Zealand ranked absolute bottom of all the countries it assessed for investor friendliness. The reason we were ranked bottom was our inappropriate and inadequate disclosure and regulatory regimes. Most important in relation to this bill, we saw inadequate scrutiny by those trusted with that task. I use that word “trust”, because the business of trustee companies and official trustees is not simply a role; it is a duty that has a fundamental contract with investors. Investors have a right to trust that trustees will actually look after their interests. In many cases, they did not. I lost count of the number of financial companies that collapsed through that time. I think I lost count when it hit about 50. Again, John Boscawen may have an up-to-date number.
We then come to what progress the Government has made in dealing with all the inadequacies that became manifest. There are Leonard Cohen lyrics that go:
Sail on, sail on
O mighty Ship of State!
which refers to the terrible momentum of the State. We saw a little bit of that when measures that were proposed before the recession still came into this House. The Green Party was highly critical of the Securities (Disclosure) Amendment Bill and the Financial Advisers Amendment Bill, because in the face of this absolutely apparent inadequacy of the disclosure regime, the Government moved to relax the disclosure requirements, and we opposed that. But since that time, the Government has unveiled an agenda of measures to deal with some of the inadequacies of the disclosure and regulatory regimes. The Green Party has been pleased to support those measures. We have been pleased to support, for example, the inquiry into the collapse of finance companies. I know the issue of Lianne Dalziel’s member’s bill has come up in the House tonight, and I pledge the support of our party to that member’s bill. It will short-circuit the attempts to rob investors in the ANZ and ING frozen funds of their legitimate and moral legal remedies. That is disgraceful behaviour on the part of those companies, and I applaud Lianne Dalziel’s attempts to block off the sneaky escape route that they intend to pursue.
In relation to this bill, we will be voting for it at the first reading. We note the concerns Labour has raised about it, and to those concerns I add our caution that we wish to check with some of the smaller institutions like credit unions and similar institutions that this bill will not have unintended consequences for those institutions that, in general, do a fantastic job for New Zealanders. But with that proviso, we look forward to the scrutiny of the bill at the select committee and we look forward to the greater protection for New Zealand investors that they so richly deserve.
JOHN BOSCAWEN (ACT)
: It is a pleasure to rise and speak in support of the Securities Trustees and Statutory Supervisors Bill.
ACT will be supporting this bill. Like many in this House, ACT is very concerned about the massive losses that have been caused through the collapse of about 40 finance companies. About $4 million to $5 million is currently either lost or tied up in moratoriums. Those losses have had a huge impact on the lives of many New Zealanders.
I want to make some brief comments on the Hon Lianne Dalziel’s contribution this evening. But before I do, I would like to congratulate her on the launch of her member’s bill last Friday, which Kevin Hague just referred to. I had the pleasure of attending, with Lianne, a meeting of the Hawke’s Bay Frozen Funds Group, where her bill was launched—I understand with the full support of the Māori Party and Green Party. I was able to tell the assembled group that I would certainly be supporting the bill at its first reading. If two of my remaining four colleagues also did that, the bill would at least reach the Commerce Committee.
Lianne Dalziel expressed her opposition to the proposed report-back date of 30 June. Like Lianne Dalziel, I was surprised and, in fact, shocked to find out that, on a bill as important and complex as this one, the select committee would be required to hear submissions, debate the bill, and report back to the House in just over 3 months. I am pleased to say that I understand that the Government is now prepared to allow the committee a full 6-month period on this bill.
I was also interested in Lianne Dalziel’s comments about the beefing up of the Securities Commission and the greater role played in Australia by the Australian Securities and Investments Commission, the Australian regulator. I thought it particularly ironic that Lianne Dalziel referred to the fact that legislation was introduced into the House only 3 days before Bridgecorp collapsed. The irony of that is that the Australian Securities and Investments Commission prohibited Bridgecorp from raising money in Australia. If our own Securities Commission, which at that time was under Lianne Dalziel’s stewardship—it was her responsibility, as Minister of Commerce—had shown as much interest and as much teeth as the Australian Securities and Investments Commission did, it is quite likely that the large sums of money lost in Bridgecorp would not have been lost, or, certainly, the losses would not have been as significant as they were.
This bill establishes a licensing regime for trustees and statutory managers. The role of a trustee is to monitor the issuers of securities. Of course, issuers of securities are finance companies. Finance companies raise money from the public, issue bonds, and take security over the properties, or assets, of the people to whom they lend money. So the role of the trustee is to monitor the activities of a finance company and to ensure that that finance company reports accurately to its bondholders, to the people who have leant money to that finance company so that that company can in turn lend money to the people who would like to borrow from it.
Most New Zealanders would understand the concept of a first mortgage, a second mortgage, or a third mortgage. Typically, when we look to buy our first home, or any home, we go to a bank for a first mortgage—to lend us some money to help us purchase the home. When we come to sell that home, the first mortgagee—the bank—is the first party that has to be paid off. Sometimes, a first mortgage is not sufficient to enable the purchase of a house, and some people need a second mortgage. In that instance, if the house is sold, the first party to get the proceeds from the sale is the first mortgagee, followed by the second mortgagee. In some rare cases, a person may even go as far as borrowing a third mortgage, and therefore will owe three people money.
I would like to bring to the House’s attention one particular finance company that raised money on second mortgages. At least some of those second mortgages were
structured so that they were in two parts. If you like, they had a top part and a bottom part. Although it was called a second mortgage, the terms of that second mortgage were such that when the asset was sold and the funds were paid back, the people who lent on the top part of that second mortgage were paid in full before the people who lent money on the bottom half of the second mortgage. The effect of that transaction was that the people who were secured through the bottom half of the second mortgage were effectively lending money on a third mortgage.
Let me give members an example. Imagine someone borrowing $100 million. That person borrows $30 million on the first mortgage, and borrows $70 million on the second mortgage. Ordinarily, if it was a standard second mortgage, when it came time to sell that asset, the first mortgagee would be paid off in full and would get the full $30 million, and the second mortgagee would get the next $70 million. However, if there was a shortfall, if the company could raise only $35 million, the $35 million would be spread equally, at 50c in the dollar, to all the people who had lent part of that second mortgage. Imagine if, instead of it being a standard second mortgage, it was arranged in such a way that it was in two parts: the top part had priority for $30 million, and the bottom part had priority for $40 million. So when it came to sell that asset—let us say it sold for $65 million—the first mortgagee would get $30 million, the people who had the top half of the second mortgage would get paid in full—the next $30 million—and the people who remained at the bottom would get the last $5 million. Even though they were owed $40 million, they would get $5 million. That may seem a rather academic example, but the tragedy is that that is substantially what happened in the case of a loan from Strategic Finance to the Hilton Denarau project.
I tabled a letter in the House last week in which I acknowledged to the Minister of Justice that I knew Mr Neville Mahon—I had known him for many years—who had borrowed money under those terms. But the tragedy of this situation, the thing that concerns me, is that when Strategic Finance—a company that went into receivership just 10 days ago—prepared its 2008 accounts, rather than showing mortgages that were in substance first, second, and third mortgages, it showed only first mortgages and second mortgages. A year later, when Strategic Finance did its accounts to 30 June, they now showed, for the first time, what the company called a second mortgage with a subordinate position. It defined that as a second mortgage where the company participates with other lenders and investors but the company’s position is subordinated. So Strategic Finance lent money on a second mortgage, it got part of that money from people who were outside the normal bondholders of Strategic Finance, and those people took precedence.
In my view, the accounts that were presented by Strategic Finance for 30 June 2008 were misleading at the time. I believe that the people who voted on the moratorium may well have been misled. That situation was not corrected until the 30 June 2009 accounts were prepared and Strategic Finance went back and told people the true facts retrospectively—15 months after the end of that financial year and after the vote on the moratorium. I wrote to the Minister of Justice, Mr Simon Power, on 14 December—although the letter was dated 14 December in error—and asked Mr Power to appoint a statutory manager. I asked the Government to take control of this company. I asked the company to make its transactions transparent. I was concerned about conflicts of interest. I received a letter from Mr Power on 21 January. He said that he had referred the case to the Securities Commission. I have confirmed with Mr Power this evening that we are yet to hear from the Securities Commission.
It is all very well to extend powers to the Securities Commission, but not if those powers are not enforced. What is the role of the Securities Commission if it is not to tell the investors of Strategic Finance that their $68 million in mortgages, which the
company has characterised as second mortgages, are, in substance, third-ranking securities? They may well be second mortgages in style, but the truth is that, in the case of Mr Mahon, he and his fellow bondholders will not get their money until the first mortgagee is paid $30 million and the top half of the second mortgage is paid approximately $30 million. They get the rest. I think that is a disgrace, and I think it is time for the Securities Commission to act. Thank you.
TE URUROA FLAVELL (Māori Party—Waiariki)
: Tēnā koe, Mr Assistant Speaker. Kia ora tātau katoa e hui nei i roto i tō tātau Whare, te Whare Pāremata o te motu i tēnei pō. Ko tāku i te tuatahi ko te whaiwhai haere i ngā kōrero, me kī, o te kaiārahi-tahi o te Pāti Māori i te rangi nei, kei a ia e poroporoaki ana i a Kahurangi Raihā Māhuta. I a tātau e kōrero ana mō tēnei mea mō te kaitiaki, ko ia tērā, te tauira o te kaitiaki. Nā, ko tāna mahi ko te tiaki i te pūtea, me kī ko te ārahi i te iwi o Tainui, ka mutu, ko ia tērā i eke ki tērā o ngā momo taumata. Nō reira hei whaiwhai haere i te kōrero a te Hōnore Tariana Turia, he tuku poroporoaki ki a ia. Ko ia tērā e takoto mai rā i runga i tērā o ngā marae o roto o Tainui waka, ki Waahi, ā, ka mutu, ā kō ake nei ka heria atu ai ki tōna ūkaipō i roto o Te Tai Tokerau. Nō reira e kui, takoto mai. Takoto mai i runga i ngā ringaringa o te wāhi ngaro. Me te mōhio anō hoki, ā kō ake nei ka tae atu koe ki tō hoa rangatira ki a Te Kotahi. Koutou ki a koutou, e te hunga ora, tēnā koutou, tēnā koutou, kia ora tātau katoa.
Ehara i te mea ko au te tohunga mō tēnei mea mō te pūtea. Heoi anō, ko au tētahi e mōhio ana ki tāku e kite nei, ki tāku e rongo nei. I roto i te komiti whāiti o te Commerce i te tau kua hipa, i ngā marama tata kua hipa ake, ko tāku i kite nei, ko te karu i kite nei, ko te mamae o te hunga ka tae ake ki roto i tērā komiti ki reira whakatakoto mai ai i te mamae o te ngākau mō ngā mahi nanakia a ētahi, arā, ko te hunga kei roto, me kī, e pāngia ana e tēnei o ngā pire. I kite au i te hunga kuia, koroua, pakeke, i tae ake ki te komiti me tā rātau riri, pōuri, tangi mō ngā mahi nanakia a ētahi. Koinei tāku e mōhio nei, tāku e kite nei ki mua i a au. Ka mutu, tērā kōrero tērā.
Ka hoki anō rā ki tētahi kuia i roto i a au, o roto o Te Waiariki. Ko tōna ingoa ko Īria Whiu. Ko ia tērā kei roto i tētahi rōpū. Ko te ingoa o te rōpū nei, ko Exposing Unacceptable Financial Activities. Koinei te ingoa o te rōpū. I puta tēnei rōpū i muri mai i te hinganga o Blue Chip, i tērā tau. Ka mutu ko tā rātau, ko te kimikimi haere i te hunga i rongo nei i te ngau o ēnei rōpū nanakia, ka mutu, ko ngā mea rāwekeweke i te pūtea. I pēnei rawa te kōrero i roto i te ao Pākehā, he financial advisors. Ko te aronganui o tēnei rōpū, he whaiwhai haere i te hunga e mahi nanakia ki ētahi, kia rongo rātau i te mamae nā runga i ngā mahi nanakia e kōrerohia ake nei. Nā, ko tā rātau, ko te kimi haere i taua hunga rā i te mea, te āhua nei kua whakakao mai rātau ki roto i tētahi rōpū nā runga i te mea, karekau tētahi i tua atu ki te āwhina i a rātau. Me noho pokohiwi ki te pokohiwi kia taea e rātau te kōrero i ngā take e pā atu ki a rātau, ka mutu, ki te kimi āwhina mēnā e taea ana. Nō reira, ā, kāti, ko tā rātau kaupapa e hāngai tonu ana ki tēnei momo hunga me te Kāwanatanga, arā, mō tō rātau ngoikore ki te tiaki i ngā kaihoko, te whakatikatika i te hunga kaitohutohu.
Ko tāku i tēnei wā ko te whakanui i tērā rōpū me tā rātau ngākaunui ki tērā hunga. He hunga i kaha nei ki te āwhina i te hunga e rongo nei i te mamae engari, ko te mea nui, ko te mea arohanui nei. E kore rātau e kite i te pūtea i whakapauhia e ētahi atu. Ahakoa pēhea, e kore tērā pūtea e hoki mai ki a rātau. Ko tāku, ko te whakanui i ā rātau mahi nā rātau tonu ngā take nei o ētahi o Aotearoa i whakairi ki te motu, ko ngā mahi taurekareka nei a ētahi o te hunga kaitohutohu. Te āhua nei kua whai take tā rātau akiaki i te take nei i te mea, ki te tiaki i ngā rawa o te hunga hoko kia whakanui i te whakapono o te tangata ki ngā mākete ā-pūtea nei.
Ko te aronga o tēnei pire, he whakarite i ētahi tikanga ā-noho mō te hunga e hiahia ana kia tū hei kaitiaki, hei kaitohutohu rānei kia noho matatau. Ko tā rātau, ko te kī atu
me noho matatau tēnei hunga kia matatau ki te whakahaere i ngā mea kia eke ki te taumata, ka mutu, ko te kimi i te hunga matatau. Mēnā kāore rātau i te matatau, panaia atu. Koinei te tikanga o tēnei o ngā pire. Mēnā kāore rātau e eke ki te taumata, tukuna kia haere i te mea, ko te tino aronga kia whai mātauranga, kia whai māramatanga, kia whai mōhiotanga te hunga ka noho nei hei kaitiaki. Ko tēnei pire he mea whaiwhai haere i ngā ture kua tautokongia e te Pāti Māori i ngā tau kua hipa. Āhua ōrite ana tōna aronga, arā, kia whakapiki ake, kia whakakake ake i ngā taumata, kia whakakaha ake i ngā pūkenga, ngā pūmanawa, e taea ai me kī, te motu, te kī atu, e whakapono ana au ki ngā tāngata ka noho nei hei kaitohutohu, ka mutu, hei kaitiaki i roto i ngā mahi mākete ā-pūtea ake nei.
Kāore e kore ka puta mai ētahi atu take mēnā ka eke tēnei pire ki te komiti whāiti. Koinei te mea pai o te haerenga ki te komiti whāiti, ka tae mai a tini, a mano ki te kōrero i ā rātau take ki roto i tērā momo komiti. Ko te aronganui o te Pāti Māori, ko te titiro ki ngā pānga o tēnei pire ki ngā kaitiaki Māori, otirā, ki a Ngāi Māori whānui tonu. I puta tētahi kōrero i te Minita i mua tonu nei i te rā nei mō ngā tikanga arotake. Ko tā mātau, ko te kī atu, pēhea te āhuatanga o tēnei pire ki runga i te āhuatanga o ngā kaitiaki ō nāianei, Māori mai, Māori mai. He mea pai ki a mātau te titiro hōhonu nei te ako nei, mēnā āe rānei, ka whai tikanga tēnei mea e kī ana i te reo Pākehā, ko ngā competency issuesi roto i te pire nei. Ko te tikanga o tēnei pire, e hāngai tonu ana ki tērā āhuatanga. Āe rānei e taea ana e te tangata te mahi tāna mahi, kāore rānei. Nō reira he mea nui tērā.
Ko tētahi mea o roto i ngā kaitiaki Māori, ko te nuinga ka kī atu he iwi tūpato te iwi Māori. He iwi whakakeke, he iwi āhua mataku ki te puta i te taiapa, he iwi noho taiapa mēnā ka kōrero whenua ngā tāngata nei. Nō reira ko tā mātau, ko te kī atu, tērā pea e tika ana kia whakaara ake ēnei take ki mua i te aroaro o te komiti whāiti i te mea, ko te mea nui o roto i tēnei pire he āta titiro ki te hōhonutanga o ngā mea nei.
Engari nā runga i te mea ko te iwi Māori he kore hiahia ki te whakapau moni, ki te whiu moni mō te kore take noa iho, ka mutu, ko tā mātau kī, me titiro ki te āhuatanga o ngā kaitiaki Māori. Nō reira, ā, kāti, ko tā mātau ko te kī atu, ko tētahi mea i wareware i a au i te mea, ko te nuinga o ngā kaitiaki Māori nei he iwi mahi mō te kore moni, tērā pea, he uaua rawa ki te whakatinana i tēnei ture. Heoi anō, nā te āhuatanga o ngā kōrero ka puta, tērā pea ka kitea mai ai mēnā he pērā anō, he raru nui ka puta i reira. Nō reira, kāti ake kua rahi tēnei.
Ko tāku, ko te whakakōpani i taku kōrero me te kī atu, āe, ka tautoko te Pāti Māori i tēnei pānui tuatahi ki te komiti whāiti, kia taea ai e te Māori, ā-whānau, ā-hapū, ā-iwi, te āta rongo i ngā kōrero, ka mutu, te whakatakoto kōrero ki mua i te aroaro o te komiti whāiti. Kia ora.
[Thank you, Mr Assistant Speaker. Greetings to us all assembled here in our House tonight. Firstly, I want to follow on from the tributes made by the co-leader of the Māori Party today in respect of the death of Lady Raihā Māhuta. As we talk about trustees, matriarch Rai is an example of one. Her job was to take care of the finances and to lead the people of Tainui. In doing that, she met those kinds of standards expected of a trustee. Therefore, to follow up the tribute by the Hon Tariana Turia, I bid farewell to Lady Raihā Māhuta, who lies in state at Waahi, one of Tainui’s marae, and will shortly be taken to her land of birth in the far north. Lie there, beloved matriarch. Rest there in the arms of the haven of no end, in the knowledge that you will soon reach your beloved husband, Te Kotahi. You who have departed remain there with each other, and we the living remain here with each other; greetings, greetings, and greetings to us all.
I am not an expert in matters relating to finance, but I do know what I see and hear. In the Commerce Committee last year, just a few months ago, I witnessed with my own eyes the hurt in those who came before that committee to express their pain because of the nefarious actions of some that this bill intends to deal with. I saw at first hand the
fury, disappointment, and grief of the elderly womenfolk and menfolk who came to the select committee, as they spoke out against the irresponsible action by some people. That is what I know about; that is what took place before me. That is that example.
I cast my mind back to another situation, relating to an elderly lady within my electorate of Te Waiariki, Her name is Īria Whiu. She is a member of an organisation called Exposing Unacceptable Financial Activities. Yes, that is what it was called. It was formed after Blue Chip collapsed last year. It seeks out those who have become victims of financial abuse, particularly by so-called financial advisers. Primarily, it seeks out those who have become victims of such nefarious actions as were referred to earlier, and have suffered as a consequence. It seems they come together as a collective because there is nothing out there to offer help. They have to work closely with each other, shoulder to shoulder, so that they can speak out on matters of concern that relate to them, and seek out assistance where possible, as well. Suffice to say, their philosophy relates directly to such an entity as the Government being inadequate at providing customer protection and making so-called advisers accountable for their actions.
At this time I want to acknowledge that group and the commitment of individuals who have continued to bring these issues to our attention, despite their own situations. These are people who had little hope of ever retrieving their funds. So I recognise their work, as well as the sacrifice of so many whose livelihoods have been threatened by shonky advice and disreputable advisers. It seems they have succeeded in their mission to protect the interests of investors and enhance investor confidence in financial markets.
This bill will require people who want to be a trustee, statutory supervisor, or unit trustee to be competent and effective in their function, and to be held accountable for failing to perform their functions effectively. This bill fits into a suite of legislation to which the Māori Party has previously given its support. Other legislation that we have supported has sought to improve standards, competency, and confidence in those with advisory and supervisory roles in financial markets.
Other issues are likely to arise if this bill reaches the select committee stage. The advantage of attending select committee hearings is that the public can come and speak on issues pertaining to them. In particular, we are interested in understanding how the bill will affect Māori trusts and Māori in general. The Minister talked earlier today about stringent monitoring requirements. Our interest is in knowing how this will impact on the continuing ability of Māori trustees today to carry out their role. We are also interested to learn more about the competency issues or the lack of sound knowledge in trust management that it appears this bill has emerged in response to. What is most important is whether a person can fulfil the role.
It is often said that Māori are risk-averse. Most Māori are often conservative when it concerns land. Perhaps it is appropriate that these issues emerge before the select committee, because it is important that the issues are examined closely. We urge that aspects of Māori trustees be looked into, so that they do not spend money needlessly.
One thing I forgot to say is that most Māori trustees work for nothing. Perhaps because of this it will prove difficult to implement this bill. Due to the nature of previous comments, if that continues to be the case, problems will arise.
In conclusion, the Māori Party supports this bill’s first reading and referral to select committee, so that families, subtribes, and tribes in Māoridom can listen to the talk around it and make submissions to the select committee. Thank you
MELISSA LEE (National)
: It is a pleasure to speak in support of the Securities Trustees and Statutory Supervisors Bill, and I would like to congratulate the Minister of Commerce, the Hon Simon Power. As all sides of the House agree, this is an important bill, and I am glad that the Opposition supports it.
I start by making the observation that I find it quite ironic that the chairperson of the Commerce Committee, the Opposition member the Hon Lianne Dalziel, complained about the time it has taken for this bill to come to the House. I find it ironic in the sense that the previous Labour Government had been in power for 9 years when the finance company failures happened, and I believe it was she who was the Minister of Commerce at the time.
This bill is about accountability. It requires corporate trustees and certain statutory supervisors to be licensed, thereby improving the quality of corporate trustees’ supervision. The Securities Trustees and Statutory Supervisors Bill is intended to protect investors’ interests and enhance market confidence by enabling the Securities Commission to hold trustees and statutory supervisors accountable for failing to perform effectively. It will be an offence to act as a trustee or statutory supervisor without a licence. If I can use the words of my colleague John Boscawen, it is about beefing up the Securities Commission.
We need to build the trust in capital markets of mum and dad investors, as it has been severely dented by finance company failures and the global recession. This bill is an important part of achieving that. This bill is about making sure that people are competent for the job they are doing and are improving their performance, and it enables the Securities Commission to hold them accountable for any failure to act according to the expected standards. This new licensing regime will apply to trustees of debt securities, unit trustees, and statutory supervisors of certain collective investment schemes and retirement villages. The Securities Commission will administer the new regime, granting licensing applications and receiving mandatory reports from licensed trustees and statutory supervisors. The commission will have more power to require information from trustees and to direct them to act in emergency situations. Retirement village statutory supervisors have been included as recognition of the similar role they play to trustees of investment products in monitoring the financial position of retirement villages.
The bill improves the accountability of trustees and statutory supervisors, and the commission will be able to seek pecuniary penalties and compensation orders on behalf of investors against trustees and statutory supervisors who have breached their obligations. This bill also makes it an offence for failing to comply with the commission’s directions, which include providing information about the trustee, statutory supervisor, or issuer. Maximum penalties will range from $100,000 to $200,000. It will be an offence for a person to act as a trustee, statutory supervisor, or unit trustee without an appropriate licence, and he or she is liable to pay a fine of up to $300,000.
The bill makes detailed provisions for licence holders to report at regular intervals to the commission—that is, between 6 and 12 months from when the licence is issued and once every 6 months thereafter. This monitoring system will be put in place to protect the interests of investors and make sure they have confidence in our financial markets. To me, that is fantastic news, especially given the financial climate that has been before us.
These changes are part of the Government’s comprehensive reform agenda in the financial arena, which also includes work around financial advisors, moratoria, regulation, auditors, and the Government’s action plan for responding to the report of the Capital Market Development Taskforce. Many in the Korean community lost a lot of money during the financial crisis and the finance company failures, and I am sure they will feel a sense of relief that this National-led Government is doing something about it. This is a great bill and it is an important bill. I commend it to the House.
CLARE CURRAN (Labour—Dunedin South)
: Labour will be supporting the Securities Trustees and Statutory Supervisors Bill, because it makes sense. Effectively, this bill is about trying to make sure that the interests of investors are protected, and that investors are made more confident in financial markets by ensuring that trustees, statutory supervisors, and unit trustees are capable of performing their functions, are performing those functions effectively, and are accountable for any failure to perform them. So the bill is kind of simple, really, and it is to be applauded. Introduced at the end of 2009, this bill is a continuation of the great progress that Labour made in tidying up the financial services sector, including the review of financial products and providers. As a member of the Commerce Committee, I look forward to scrutinising this somewhat lengthy and technical bill in the select committee deliberation. But I want to put on record that the bill is important. It is certainly not all that is required, but I give a tick to the Government for introducing it.
It is hugely important to build investor confidence in this country, after a series of financial failures, the collapse of a number of finance companies, and the effects on the number of people who lost their hard-earned investments. This bill follows on from the conclusions of both an IMF 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 too much reliance on private supervisors such as corporate trustees, and that those supervisors and trustees often lacked accountability. So this bill removes the automatic right for the six statutorily appointed approved trustees to supervise issuers of debt and some investment schemes, and it introduces a licensing regime for trustees that will be run by the Securities Commission.
The bill makes it an offence to act as a trustee or statutory supervisor without a licence, so that a person who commits such an offence will be liable, on summary conviction, to a fine that does not exceed $300,000. A trustee, statutory supervisor, or unit trustee must hold a licence that covers the debt security, participatory security, or unit trust to which the appointment relates, and a licence holder must comply with every condition imposed on the licence. Licences will ensure that the trustee, statutory supervisor, or unit trustee is a body corporate, and that their directors and senior managers must be of good character. This bill contains 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 penalty and compensatory orders against those who fail to comply.
These clauses are designed to address the lack of capability and accountability of supervisors and trustees in the current system, as I have already said, and 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. So when an issuer gets into difficulties, the trustee supervisor is supposed to take action, inform the investors, and engage expert assistance, or place the issuer into liquidation.
The finance company failures of 2006 to 2008 raised some important issues: firstly, the lack of capability or capacity, and the fact that trustees and supervisors have not been equipped to deal with the size and complexity of the securities they supervised. There have been the issues of weak trustees, of the role of trustees and supervisors not being defined properly, and of the potential for their lack of independence from the issuer—trustees and supervisors are funded by the entities they supervise. There has also been weak accountability: individual investors can take court action, but that is the only form of accountability. Concerns have been raised in respect of similar issues relating to the performance of some statutory advisers of retirement villages, as well.
To give some context to the situation that has resulted in this legislation, I will read extracts from a couple of articles that appeared in late 2008. The first is from the
Sunday Star-Times. It is entitled “Business reality behind smooth assurances”, and it is written by Greg Ninness: “Trustee companies are fond of emphasising the trust part of their name more than the company part and this is reflected in the way they promote themselves. Words such as ‘integrity’ and ‘experience’ often feature prominently in their promotional material and they frequently promote themselves as a bulwark which can shelter a family from financial turmoil. But look beneath the veneer of prudently old-fashioned values and you will find a modern, commercially-oriented business. … A core part of the activities of most trustee companies is managing family trusts, usually for many years after the person who established it has died. Often this will involve investing the trust’s money to provide an income for its beneficiaries. Trustee companies could invest this money directly in property, or shares or any number of the managed funds which are available to the general public, and sometimes they do. But many trustee companies have also formed their own managed funds into which they can channel money they are investing on their clients’ behalf. Where this happens, the trustee company gets fees and its funds management arm generates also levies fees. The third leg of most trustee companies’ business is acting as a corporate trustee. The law requires certain types of investment vehicles, such as finance company debentures, unit trusts and organisations such as retirement villages, to have a trustee or statutory supervisor to protect investors’ interests. Although the trustee’s powers are limited in such situations, many people are questioning the value they provide to the investing public …”.
A brief excerpt from another article, also written in 2008, from the
National Business Review
in August, written by Sarah McDonald and Fiona Robertson, starts off by stating: “In 2004
National Business Review
published a double-page spread titled ‘A matter of trust’, detailing major concerns held by many in the finance industry abut the effectiveness of trustees at protecting retail investors. The carnage that has ensued since then, with more than $5 billion either frozen or lost completely in failed finance company fund or mortgage trust investments, has done nothing to assuage those anxieties. And the consensus amongst finance and investment industry professionals that
National Business Review
spoke to is that trustees are underpaid, in some cases ineffectual, and in others plain incompetent.” The point I make is that this bill goes a long way to addressing this situation, but there is a lot more to be done.
In closing, I will mention the work that is currently being done by my colleague the Hon Lianne Dalziel, the previous Minister of Commerce. She has recently launched a member’s bill to better protect investors. The Illegal Contracts (Unlawful Limitations on Regulators’ Powers) Amendment Bill will ensure that investors will not miss out on the benefits coming from a regulator taking action against an investment company that has breached the rules. The issue was brought to her attention through the ING issues, when people were forced to sign away their rights to gain any benefit from someone else taking action against ING, including the regulator. Over half a billion dollars was stranded in the ING product funds, with a lot of that sum representing the life savings of elderly people, who continue to be angry and confused at the way they were treated. This bill makes a move to ensure that Kiwi investors get a fair deal, worthy of the consideration of Parliament, and I hope that members from all sides of the House will give it a fair hearing if it is drawn from the ballot.
I think that members have heard tonight from my colleague the Hon David Parker that there is also more to be done in beefing up the Securities Commission to better regulate the space and in not just relying on trustees. He also said that the Capital
Market Development Taskforce reported and recommended on that, which mirrors similar things happening in the UK and Australia.
As I said earlier, Labour supports this bill. We do not think that it goes far enough, in that there is a lot more to be done, but we think that it is sensible, will protect investors, and will help to restore confidence in the financial sector.
JONATHAN YOUNG (National—New Plymouth)
: I am pleased to speak on the Securities Trustees and Statutory Supervisors Bill, which, as we have heard tonight, is intended to protect investors’ interests and to enhance market confidence. At least 6 years ago we were warned by the International Monetary Fund and by the World Bank that there were some weaknesses in our system. As the previous speaker, Clare Curran, mentioned, the Ministry of Economic Development repeated those warnings and identified weaknesses in our regime. Those weaknesses, as set out in the explanatory note of the bill include: “a lack of capability or capacity: trustee, statutory supervisor, and unit trustee company resources and expertise have not always matched the size and complexity of the securities they supervise: —weak trust deeds: there are insufficient minimum protections for investors in some trust deeds: —a lack of role clarity: a lack of clear definition of trustees’, statutory supervisors’, and unit trustees’ role has resulted in inconsistencies”, and the list goes on.
We understand that we are coming through a time of recession and are still fighting our way back to strength in our economy, and that as a nation we are short of investment in capital markets. A tremendous amount of investment in the past has gone into the property market, which, though it generates income for property owners, does not build accumulating wealth that can go on to create jobs for the future. It does not build the real wealth that this nation needs. It is a debt-hungry sector that drives borrowing, mostly from overseas. But one substantial disincentive for people to shift from a borrowing-based way of thinking to an investment-based way of thinking is a lack of confidence in a system that fails to ensure professional, effective, ethical, and accountable oversight of that system. Earlier this year, on 9 February, the Prime Minister in his statement to Parliament stated: “The Government will be focusing this year on ways to promote investment in capital markets while also strengthening protection for investors. We want New Zealanders from all walks of life to be able to invest their savings in productive businesses, either directly or through funds, with more confidence in the regulation of those capital markets, and with the knowledge they need to make informed choices. That is important if New Zealanders are to diversify away from their heavy reliance on property investment.”
The Prime Minister also spoke of an opportunity for New Zealand. Referring to the report from the Capital Market Development Taskforce, he stated: “The Taskforce also concluded that there is an opportunity for New Zealand to become a hub for financial services in the Asia Pacific region, specialising in providing high-value middle and back office functions for the funds management industry. The Government is keen to see if this or similar new industries could be developed here and we have asked officials to determine what steps we would need to take to make that a reality.” When we shore up our regulations and build a robust, credible, effective, ethical, and accountable sector, this sector will not just protect New Zealanders and give them confidence to invest in those capital markets; it will be able to export itself.
We can take this one step further and look at the possibility of becoming such a financial service hub in the Asia-Pacific region. When it comes to investment, the most highly valued commodity is trust. A robust licensing regime will promote trust. Trust is based on the integrity of a system from the top down and from the bottom up. Tonight we have heard the word “guardianship”. It will require trust for New Zealanders to move from a borrowing-based thinking in terms of property to an investment-based
thinking in terms of business and investment in infrastructure and the future of this country. In order to have trust, a strong system of guardianship is required. This bill proposes that.
I turn now to the provisions of this bill. The first thing the bill does is create accountability through a licensing process. The bill requires corporate trustees, statutory supervisors, and unit trustees to be licensed. It also requires the Securities Commission to oversee how trustees and statutory supervisors act in situations where investors’ interests may be at risk. Greater accountability will ensure that corporate trustees and statutory supervisors act in the best interests of investors. Licensing will require trustees and statutory supervisors to be capable—it sounds so basic, does it not? It will require them to perform their functions effectively. It will also enable the Securities Commission to hold them accountable for any failure to act according to the expected standards. The new licensing regime will help ensure that trustees and statutory supervisors are competent. This regime will fundamentally improve trustees’ performance around this country. This bill will lift the bar. For those who are already performing to a very high level of proficiency and standards, this bill will enhance their already professional manner. Those who are performing well below the bar will either lift their standards or be weeded out. This is how investor confidence will grow—by having a very high standard of capability and a very high standard of accountability, where substantial penalties await those who contravene such standards. The Securities Commission will administer the new regime, granting license applications and receiving mandatory reports from licensed trustees and statutory supervisors. The commission will have more powers to require information from trustees and to direct them to act in emergency situations.
The future is as bright as we want to make it. This Government is focused on building an economy that will deliver to New Zealanders real wealth that will improve our access to medical care, our access to high-quality and world-class education, and access to social services that support every New Zealander. I am very pleased to commend this bill to the House.
RAYMOND HUO (Labour)
: The Securities Trustees and Statutory Supervisors Bill may sound very dry to many members of the general public. Helpfully, I will record a short conversation I had with my senior partner on a similar subject years ago when I was practising law in Auckland. He asked me to explain particular issues either by showing graphs or by telling stories. A story by the
Sunday Star-Times newspaper of 28 November 2008 was right to the point: “Lending role questions for NZ Guardian Trust and Hanover Finance” was the headline. Guardian Trust provided mortgage funding that was part of a property development. Its main funder at that time was Bridgecorp. Guardian Trust then provided additional finance with a first mortgage, which meant that it ranked ahead of Bridgecorp’s loan in the event of a default. When Bridgecorp went—to use the language of the newspaper—“belly-up” last year, Hanover Finance stepped in and took over its mortgage on the development, making it the second mortgage on the land secured by Guardian Trust’s mortgage. This put Guardian Trust in an unusual position because it also acted as corporate trustee for Hanover Finance and had a supervisory role over that company’s affairs. The story went on to say that Hanover Finance was forced to exercise a mortgagee sale and Guardian Trust was forced to follow suit. Both companies were in default on their obligations to investors—both suspended repayments to their investors. Hanover Finance then tried to put together a restructuring plan, and the plan had to first be approved by Guardian Trust in its role as Hanover Finance’s corporate trustee. Guardian Trust insisted there was no conflict of interest in its roles as trustee and mortgagee, citing Chinese walls within the company.
That is to say that the firm had developed or implemented polices and procedures to safeguard insider information and to ensure that no improper trading occurred.
There is no need for us to follow up the story, which is nearly 2 years old, but it is a story that explains well why the law is being changed. The regulatory impact statement states that Treasury supports the proposed legislation “except for the requirements for the trustees to report breaches in trust deeds … in real-time and for the Commission to have the power to direct trustees to take a particular course of action to remedy breaches”. It fears that the power to direct the trustees how to act will blur the clarity between trustees and the Securities Commission, and it says it does not fit well with the proposal to give the regulator the ability to take legal action against trustees, which would likely be exercised at the same time. The requirements for trustees to inform the regulator of breaches in real time could lead to significant compliance costs, which are likely to be borne by firms seeking to raise capital. The other aspect—or the elephant in the room—that this bill ignores, according to Chapman Tripp, is the dynamic created by the changing nature of the trustee and issuer relationship. The trustee, as front-line regulator, is in the unusual and potentially unhealthy position of having to negotiate its regulatory mandate and its remuneration with the very party it is charged with regulating—namely, the issuer.
Another article I wish to quote is from the website www.depositrates.co.nz, which was published on 4 March 2010: “Commerce Minister Simon Power included trustees in his review of the Securities Act after a report by Companies Registrar Neville Harris in March last year”—2009—“slammed finance companies for acting like ‘Ponzi schemes’ and raised concerns about trustee diligence and accountability.” Interestingly, that article attracted a comment that was posted the following day: “From the past experiences we have all just very recently witnessed would you really support Trustee companies continuing with any power what so ever to oversee finance/investment companies. Where have these Trustee companies been when the investors have needed them the most?????? Whilst the Securities commission have appeared to be near useless I feel they are the lessor incompetent of the two. Get real take note how the Australian Securities Commission work, they aren’t pen pushers with wet paper towels to beat you with!”. The name of the commentator is Craig; the family name is not available.
This bill, borrowing the words of Chapman Tripp again, reflects both regulation and deregulation at the same time. On the one hand, the trustees and supervisors will need to be licensed and to comply with ongoing requirements—namely, the regulation—but, on the other hand, the preferred position that existing trustees enjoy will be removed, opening the way for others to enter the market, or deregulation. According to McDouall Stuart’s
New Zealand Finance Companies Report 2008 New Zealand’s financial system is worth $431 billion, of which registered banks are worth $345 billion, non-bank financial institutions $22 billion, savings institutions $4 billion, and managed funds $60 billion.
I am very pleased to rise to support this bill in its first reading because the bill purports to protect the interests of investors and to enhance investor confidence in the financial market through various measures. The law has to be changed because New Zealand places too much reliance on private supervisors and because, as evidenced by these real-time stories, they are not accountable enough. Other problems with our regime were raised by the string of finance company collapses, including the lack of independence and capability of some trustees. The previous Labour Government made great progress in tidying up the financial services sector, including the Review of Financial Products and Providers. I am very pleased to see that this bill, which is a continuation of those efforts, is now being progressed.
This is a complex, technical, and very important bill. We will be keenly involved in scrutinising it at the Commerce Committee. However, as madam chair, the Hon Lianne Dalziel, pointed out earlier in the House, the time frame and the way the bill has been presented may hamper submission efforts from stakeholders, professionals, and the general public, and the extent the bill is to be scrutinised. Thank you very much.
CHRIS TREMAIN (National—Napier)
: Most Thursday nights, when we leave this Chamber and go back to our electorates, we go back to the real world. We go back to the world that is inhabited by all our constituents in the Napiers, the Kaikōuras, the Northcotes of this world, out to where the real people live. They work damn hard in this country, pay their taxes, seek to put a roof over their heads, and look to save money for their retirement so they can live a comfortable life, supplemented by their savings, through to their retirement. When we go back to our constituencies, we get back to the real world. We get back there on a Friday or a Monday, or in the weekends, and we deal with the real issues. We deal with immigration issues, or accident compensation issues, or Work and Income problems, or Child, Youth and Family issues, or local issues faced by people that are pertinent to each electorate. All of us will have empathy with them or be able to understand what is going on.
I am a relatively new member to Parliament but when I think back over the 4 years of going back to my constituency in Napier, and think about some of the issues that I have had to deal with in clinics, I tell members that probably the more difficult meetings—and I have had a number of them in my electorate office and out in people’s homes—have been around the financial collapse of companies in this country and the loss of savings that hard-working Kiwis have experienced. I tell members of one occasion when I had eight people come into my office—four hard-working couples—mums and dads in their mid-to-late 50s who had worked their guts out all their lives to save for their family homes, who had gone out and had their homes geared up, and basically lost their entire equity in their family homes. They were looking down the barrel of another 6 years before what they had looked at as their retirement. They now had no money saved apart from what they would get from national superannuation. That is not good enough. It is not good enough that we have had a financial market in this country that has not got in behind people and provided the safeguards that hard-working Kiwis needed to support them in their investment decisions.
I am proud to see the Securities Trustees and Statutory Supervisors Bill before the House. I am proud to see Simon Power and members of this House bringing this legislation forward. I accept that it is a small step in terms of turning our financial markets around from the Wild West into what can be seen as a sustainable investment market that people can understand and trust. It is what the member for New Plymouth, Mr Jonathan Young, spoke about—a market in which we can build trust. Let us accept that we will not build up trust quickly in those markets because of the situation that we have got to over the last couple of years, but this bill is a step in the right direction. It will protect investors’ interests and enhance market confidence. If that is a step that we can take via this bill, then that is a step in the right direction. I commend this bill to the House.
referred to the Commerce Committee.