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Dalziel: EUFA Recovery Roadshow

Hon Lianne Dalziel
Minister of Commerce, Minister for Food Safety,
Associate Minister of Justice, MP for Christchurch East

23 April 2008 Speech Notes
EUFA Recovery Roadshow

Commerce Minister Lianne Dalziel's speech to the EUFA Recovery Roadshow
Wanganui Race Course Celebrity Room
Wanganui

Thank you for inviting me to speak to you today. This road show has travelled the length and breadth of New Zealand and ends today in Wanganui. Suzanne and her brother Gray have undertaken to provide me with the proposals they wish to put to government as a result of everything they have learned from listening to their members through these meetings and from other sources. Although the Blue Chip collapses have added to the range of attendees at these meetings I think it is fair to say that the original focus was on the failed finance companies and the financial intermediaries, who advised people to entrust their hard-earned money to them.

I am pleased that these forums have provided a sounding-board and support system for those who have suffered financial losses as a result of these collapses. It is important that people can talk about how they are feeling – a lot of people have potentially lost their life savings; others surely will. People have been looking for answers to a whole range of questions: why me? Why did I do it? How come my adviser was not better informed? How can people get away with this? Why didn't the government do more to protect me?

Naturally, it's the last question that is my concern. But before I address that, I want to respond to the challenge that EUFA has issued in a statement they made about a recent address I gave to the Institute of Financial Advisers. In so doing, I want to state that I do feel for those who have lost money in these collapses.

EUFA said that my suggestion that New Zealanders need to become "more savvy" about investments was a ‘total copout’. From my perspective as Minister of Commerce it is neither a suggestion nor a copout. It is an imperative if we are to become a nation of savers. And anyone who doesn’t think this is vital to New Zealand’s economic future is putting their head in the sand. New Zealand’s track record on savings is abysmal and I firmly believe that KiwiSaver offers New Zealanders the best chance we have had in decades (since 1975 to be precise) to add diversity to our investment portfolios beyond the historic reliance on property.

Remember it was an electioneering ploy in 1975 that led to the termination of New Zealand's first workplace savings scheme and I often ask at meetings like this how many people voted for that act of economic sabotage. Very few put their hands up, but it was a landslide election result driven mainly off that one campaign to deny New Zealand the chance to have deep capital markets and a much more financially literate population. One follows the other as night follows day – just look at Australia, which has had a workplace savings scheme for nearly two decades now – they have the 20th largest economy in the world but the 4th largest capital market. And Australia’s level of financial literacy has risen exponentially as a result.

The bottom line is that we are all individually responsible for the investment decisions we make and when I say people have been too naïve and trusting, I am not saying, as one e-mail writer suggested, that people are stupid; I am saying that we all need to sharpen our ability to distinguish between the nature of the risks we are presented with and to determine exactly what level of risk we are prepared to take with our hard-earned money. Because not every investment will yield the expected return and this needs to be factored into the decision.

As I said in that speech there is no such thing as a ‘sure fire bet’ or a ‘safe as houses’ investment and I did say that I struggle to see why the government would even be asked to provide a legislative backstop to risk.

Why would we? If there is no risk, there is no rate of return – and if there is no rate of return, there is no incentive to invest and therefore no innovation, which is the driver of economic growth. If we are not equipped with the tools for understanding such basic matters as risk and return, then how do we make sound decisions? So although I am totally sympathetic to the circumstances of those who are suffering now, I believe that far fewer people will face such devastation in the future if we improve our overall financial literacy as a nation.

Returning to the question of why the government has not jumped in to retrospectively protect investors from failed investments, it is important to note that the decision to regulate financial advisers – and strengthen the regulatory framework for finance companies was made well before the finance companies experienced problems. It was work in progress when the first three companies fell over in 2006 and the government's decisions were announced about three weeks before the Bridgecorp collapse occurred. A lot of the media commentators have said the government acted because of the collapses, but in fact we were well down the track when problems emerged.

The question I have is: why is there a perception that we haven't been doing anything? The answer, I suspect, is that with several years now of a strong economy, a rising housing market and relative prosperity, no one really cared enough to ask. In fact, this work is stage four of the most extensive and comprehensive regulatory reform programme conducted by any government in this field.

We began our work with the implementation of the Takeovers Code, an internationally accepted standard for protecting the interests of minority shareholders. New Zealand didn't have one in 1999.

This was followed by the Securities Markets legislation, which introduced a co-regulatory framework for supervising registered exchanges, with the registered exchange, (currently only one, NZX), providing frontline supervision and the Securities Commission providing oversight to protect investors’ interests. These rules provide the level of protection that international investors would expect to see.

This was followed by changes to the Securities Act which introduced continuous disclosure obligations, strengthened rules around insider trading and market manipulation, and gave the government the authority to regulate greater protection for investors through changes to the Investment Adviser regulations.

The Review of Financial Intermediaries and the Review of Financial Products & Providers made up the fourth stage of this major regulatory reform programme. These were designed to deliver an effective and consistent framework for the regulation of financial advisers, non-bank financial service providers and financial products.

It was vital that we addressed the capital markets' environment first because New Zealand needs to attract investment and that means we need to have rules that protect that environment. It might not seem like a great thing when things go pear-shaped internationally but, in reality, we want to be part of the global picture. It is in New Zealand's interests to attract international capital. It enables our businesses to innovate and grow. It creates wealth and gives all of us a better standard of living.

That's why it is so important that we don't overreact and leap in to regulate before considering all the consequences. Over-regulating can stifle the market and lead to reduced opportunities for business.

I am not under-stating the importance of having a stable financial sector, but despite the fact that the fall-out from the failures of finance companies and investments such as Blue Chip has been devastating on a personal level for many people, the proportion of the total sector represented by the finance companies is very small.

This is one of the reasons why my role as Commerce Minister is limited at this stage to a watching brief. The last thing New Zealand needs is a politician interfering every time the market looks a little shaky.

My role is to work with the industry and investors to make sure that the rules for our finance sector are robust and transparent and that the regulatory environment encourages investment and growth while at the same time offering protection to consumers and laws that adequately punish wrong-doers.

It's a delicate balancing act but it is important that we get it right.

The reforms that we are introducing are not going to get anyone their money back; but nor would they have necessarily protected every investor had they been in place. We all know examples of people who invested in products against all of the advice they received.

What the reforms will do though is set higher standards of competence and accountability, better access to remedies for consumers by requiring financial advisers to belong to dispute resolution schemes, and they will allow for more discipline to be imposed on those who don't meet the requisite levels of knowledge, expertise and integrity.

I strongly believe that two important advantages of a professional body are that its members are subject to standards, rules and codes of conduct and ethics and consumers can expect that complaints about a member will be acted upon. I found it interesting that with all the collapses the Institute of Financial Advisers has received only 22 complaints.

I will work with any individual or any professional organisation that is in a position to make a positive and constructive contribution to the issues we are facing in the financial sector. That's why I was so pleased that the New Zealand Institute of Chartered Accountants came to the party recently in offering free consultations to Blue Chip victims. That hour's advice is also not going to get people's money back, but it will enable people to have an assessment of the financial situation they are in and point them in the right direction in terms of what they need to do next.

In terms of getting the new regulatory framework in place there has been concern that the co-regulatory model, involving Approved Professional Bodies as frontline regulators, will take too long to introduce. The Select Committee has just released a short discussion document proposing a model that involves the Securities Commission taking over the primary supervisory role and the professional bodies providing input into the development of standards and related matters. I know that some professional bodies will be disappointed, but if we were to adopt this model the establishment of Approved Professional Bodies is not ruled out forever, and it reduces the implementation time by two years.

The government is very sympathetic to the losses people have sustained but we cannot usurp the role of the independent regulators and enforcement agencies.

There are of course multiple investigations underway into the activities of financial advisers and financial institutions, involving all the relevant agencies, including the Securities Commission, the Commerce Commission, the National Enforcement Unit of the Ministry of Economic Development, and the Serious Fraud Office, as well as the privately appointed liquidators or receivers. These organisations have clearly defined responsibilities, but they are talking to each other and the spotlight will be turned on the relevant professional bodies if it is found that their members have behaved illegally or unprofessionally.

The Securities Commission has said that they believe that their investigations will lead to charges being laid in relation to some finance companies in the coming months. The Commission is assessing whether the public disclosures made by a company and its directors in fact matched up with the true state of affairs of these companies and with all the information available to directors.

But all these investigations will take time. I know that many of you will be frustrated by a seeming lack of action, but if you think that someone who has constructed a complex web of inter-related companies hasn't planned an escape route, then I can only wish that you were right.

The authorities and agencies have to construct meticulous cases that sheet home responsibility for gross negligence on one level and outright fraud on another to the individuals concerned. The receivers and the liquidators are at the same time looking for the money. Both of these activities take time but it is vital that the investigators get it right. No one wants to see legal action thrown out of court for want of a solid case, or reduced returns to investors because of a rush to get something – anything – back sooner rather than later. The media doesn’t give the same headline news, as they do for the collapses, to the repayments that are made to investors.

A number of commentators and affected individuals have asked me to use the statutory management powers and I remain available to consider such a recommendation, but none has come my way. The Securities Commission is the body that makes that recommendation and I know that they will not hesitate to make that recommendation should be required. In the present circumstances, as I understand them today, statutory management offers nothing more than is being achieved at present.

As I said at the start of my speech, organisations like EUFA have performed a useful role in providing a sounding board for those affected by poor financial advice. However, it is important that out of these meetings, constructive and realistic proposals are put forward to government.

One comment EUFA has made is that the government is not fulfilling its duty to enforce the laws that are in place to control the finance industry, citing Section 36 of the Reserve Bank Act. Section 36 enables the Reserve Bank to require a financial institution to provide information to the Reserve Bank, so it can assess the overall health of the economy, not the viability of individual finance companies and that is precisely what the bank does with its regular reports.

EUFA has also made recurrent calls for the government to instruct banks to "freeze" recovery action for individuals who have suffered a loss. This is not possible. And even if we could it would be wrong to set a precedent for government rushing to the rescue of individuals at the expense of legitimate businesses when investments go wrong.

But it does raise the issue about the sort of questions people get asked when they borrow from the bank. I did raise that with a banker recently, who said they don't get to have those conversations with their customers when the brokers refer the business to them. I am sure that responsible bankers would have warned of the dangers of borrowing against a mortgage-free asset to invest in a speculative venture.

I encourage each of you to work with your banks and your lenders to find solutions to your immediate situation. Delaying mortgage payments may be an option for some of you that will give you time to find a long term solution. I know this does not bring back your lost money but it does give you time to work through your immediate obligations. At the end of the day there will be those who have legitimate claims against the professionals you relied on for advice and if those professionals are insured then there are realistic expectations of getting some compensation that may resolve your situation. Groups of investors may negotiate settlements while others may have to wait longer for action to be taken on their behalf.

So that is my perspective on these matters. I totally sympathise with those who have lost hard-earned money, and it is for that reason I am committed to lifting our levels of financial literacy so there is less chance of people getting burned. There are processes in place for investigating the failure of the finance companies and the complex Blue Chip arrangements and they will take time. The government has introduced legislation to strengthen the rules around finance advisers and financial products and providers going forward, as part of a wider package of reform that has been introduced over the past few years.

So thank you for having me here today. I am more than happy to take questions at the appropriate time.


ENDS

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