Hon Lianne Dalziel
Minister of Commerce, Minister for Small Business,
Minister of Women’s Affairs, MP for Christchurch East

25 October 2007 Speech Notes
NZ Credit & Finance Institute 2007 National Conference
Speech to NZ Credit & Finance Institute 2007 National Conference
James Cook Hotel Grand Chancellor
147 The Terrace
Wellington
9.30am

Thank you David for your introduction and thank you to the Institute for inviting me to address your conference today. Since you gave me a very broad brief in terms of what you wanted me to cover today, I looked to your website for inspiration. I found a paragraph that did that for me and it reads:

"The Credit Manager plays an increasingly valuable role in our economy. While a high level of competency in finance is important, this needs to be balanced with a clear understanding of human nature set within a commercial framework. An experienced and professional Credit Manager plays an important role to ensure that risk is identified and controlled in the overall achievement of business goals. It is the goal of the NZCFI to support its members to achieve this by providing training and resource to help contribute to a healthy economy."

Every aspect of the issues where your industry has intersected with government regulatory reform since I have been Minister is covered in that paragraph – the need for a high level of competency in finance, while understanding human nature; the importance of identifying and controlling risk; a professional body committed to providing training and resources to its members; and all of this within the context of contributing to a healthy economy.

The motivating feature of this government’s approach to regulatory frameworks within the financial sector has been to provide a proper foundation for investor confidence. Let me just give you a quick overview of what we have achieved:-
• The introduction of the Takeovers Code;
• The introduction of Securities Markets legislation providing for a co-regulatory framework involving registered exchanges, subject to the supervision and oversight of the Securities Commission;
• The strengthening of the rules around insider trading, market manipulation and continuous disclosure obligations;
• The Insolvency Law Reform package, which modernises the law around personal and corporate insolvency;
• The Review of Financial Intermediaries and the Review of Financial Products and Providers, the results of which were announced in June.

If there is a single word upon which I hang all of these efforts – it is confidence. If investors think they are not going to be treated fairly; if a group of shareholders can be cheated by those who are in the know or get offered less for their shares than the major shareholders; if unsecured creditors are left with no avenue for redress when they see the company’s principal living the life of Reilly; if investors are encouraged to invest all their money in a single product, without any warning of the risk and without knowledge of all the relevant facts, including the commission the adviser is being paid – then it all affects confidence.

What has worried me over the last few months, has been the effect of the media coverage on finance company failures. As I said recently, when these matters shift from the specialist hands of the business page journalists to the front page headline writers and non-specialist commentators much can be lost in translation.
Investors could be forgiven for believing that there is no regulatory framework in place now to protect the interests of those who invest in finance companies, such was the response of some of the commentators.

Of course there is an existing framework and we acted quickly with the Securities Commission and the Trustee companies to strengthen the obligations within the Trust Deeds that govern their relationship with the finance companies.

The results of the RFPP will strengthen the existing requirements even further and in the case of what will become known as Registered Deposit Takers the added prudential supervision of the Reserve Bank and their requirements for credit ratings and other mechanisms will increase assurance around this comparatively small but important part of the economy.

But, and I have made this point many times now, the government cannot regulate to eliminate risk; we can minimise inappropriate risk by ensuring that we have a robust framework that benchmarks favourably against international best practice and ensures that investors have access to all relevant information before they decide to invest and can rely on people who describe themselves as financial advisers to be professional in every sense of that word.

And that is the approach that we have adopted as a government – responsible regulatory frameworks that are proportionate to the risk we seek to manage – not eliminate.

And it is in that broader context that I am going to talk to you about the Insolvency Law Reform legislation passed last year, which is taking effect over the next two months, first with Voluntary Administration and then with the personal insolvency provisions in December.

But first I want to talk about what all of the recent issues around finance companies and insolvency say about New Zealand's levels of financial literacy. In doing so, I will be following the comments made by John Roberts, the New Zealand country director of one of your national sponsors – Veda Advantage – and a speaker at this conference later today, who just last week highlighted the problem of young people seeking easy lines of credit. John reported that 18 to 27-year-olds, the Generation Ys – are responsible for a quarter of all credit enquiries but a third of all defaults lodged with his company. He identified this disproportionate level of defaults as a result of poor financial literacy, coupled with a level of complacency towards debt that older generations are not so willing to tolerate.
Most importantly, he highlighted that many young people simply do not seem to understand that a failure to meet financial obligations at this stage in their life can have serious consequences later in life. A bad credit rating is a difficult hurdle to overcome, when you want to buy something you need as opposed to want.

New Zealanders' poor level of financial literacy is something that has worried me for some time now. The findings of last year's ANZ/Retirement Commission survey of New Zealanders' financial literacy showed that while most New Zealanders have a reasonable understanding of personal finances, many still do not know basic facts about everyday financial matters such as mortgages and investments. Most people, for example, weren't aware that it would cost less over time to pay off a mortgage fortnightly rather than monthly.

The recent failure of certain finance companies over the past 18 months has also highlighted the need for improved financial literacy among investors due to the clear mis-pricing of product by finance companies; some of whom lowered the rates of return in order to hide the level of risk their potential investors were taking. This is utterly deplorable and I hope that improved financial literacy, coupled with increased supervision will see an end to that practice.

The Retirement Commissioner has been tasked to bring all the parties together, who are working on financial literacy, in order to ensure that we get the right approach streamlined across the sector. The Commissioner has been talking with a wide range of stakeholders in order to develop a draft strategy document, which will be presented at the 2007 Financial Literacy Symposium, here in Wellington on the 9th of November. I know a well co-ordinated national approach will deliver the most benefit for all concerned.

Insolvency Law Reform Update
Moving onto the area of insolvency law reform, this is clearly an area of interest to your members, given that the Insolvency Law Reform Bill which was passed last year is now only days away from coming into effect. I thought it would be useful to remind you what objectives we set for the law:

• To establish a predictable and simple regime that can be administered quickly and efficiently in the event of financial failure, which does not impose unnecessary compliance costs or stifle innovation and responsible risk taking;
• To establish a regime that distributes proceeds to creditors in accordance with their pre-insolvency entitlements and maximises returns to creditors, through flexible and effective methods of administration and enforcement;
• To encourage early intervention when financial distress becomes apparent by providing alternative avenues of administration and opportunities for individual bankrupts to participate fully again in the economic life of the community; and
• To promote international co-operation in cross-border insolvency cases where assets are being held in different jurisdictions.

Because I know that Ross van der Schyff from the Insolvency & Trustee Service will be talking about personal insolvency and the No Asset Procedure, I am going to comment on corporate insolvency, the opportunities the new voluntary administration scheme will bring and the benefits of the cross-border insolvency regime when it comes into effect.

Voluntary administration, which is the Australian version of the US’s Chapter 11, is coming into effect on 1 November. It is essentially a business rehabilitation tool, which provides an alternative to liquidation for financially distressed companies, and will mean that financial failure does not necessarily translate into the demise of a company.

I am aware that several submitters on the original discussion document and the subsequent Bill wanted the IRD to relinquish its preferred creditor status as has occurred under the Australian regime. We have chosen not to go down this path for a number of reasons, however the IRD has undertaken to work flexibly with administrators.
They've quite sensibly taken the view that a company that can be successfully rehabilitated will deliver greater tax revenue over time than one that has been wound up.

And I think that this will be the key to the new regime’s success and that is that the IRD will take a long-term view – not just a short-term one. What a lot of outsiders don’t realise is the extent of arrangements made by IRD behind the scenes to enable companies to get back on their feet - those who argue that IRD should lose its preference often don’t factor in the effect this would have on these more informal arrangements. It is in IRD’s interest that all options are explored and if there is a realistic opportunity for the company to be rehabilitated then it will support the arrangement. However we will all be watching what happens in practice.

Often those that argue for the Australian regime forget that it also includes Director Penalty Notice (DPN) provisions, which make the director of the company personally liable for company’s tax debts if he or she does not take the appropriate action to pay the Australian Tax Office within a certain time period. This would amount to a significant increase in directors’ liability, as well as eroding the concept of limited liability, which is a fundamental premise of our company laws. If we were to go down that track then considerably more attention would have to be given to the potential ramifications of such a change.

Cross-border insolvency arises where an entity is subject to insolvency administration in one country, but has assets or debts in another. This can lead to a number of problems, such as:

• difficulties in applying to a foreign court for assistance;
• complex legal arguments; and
• high litigation costs.

All of this makes it very difficult for liquidators to secure and safeguard the assets of overseas companies and carry out their duties.
In response, the United Nations Commission on International Trade Law, or UNCITRAL, has developed a Model Law aimed at providing a uniform approach to resolving cross-border insolvency proceedings. It does so by:

• securing cooperation among the courts of different countries;
• providing rights of access into a country for foreign insolvency practitioners; and
• recognising foreign proceedings in participating states.

New Zealand's cross-border insolvency law will come into effect when the Model Law is adopted in Australia. Although a bill proposing this is currently before Parliament in Canberra, the impending Australian election means that this legislation will not be in force before the end of the year. Officials on both sides of the Tasman have also been discussing the potential for closer trans-Tasman co-operation on insolvency. Adoption of the Model law will give that process a strong basis.

CONCLUSION
To conclude, the government is committed to developing and maintaining efficient and robust regulatory frameworks to help achieve our economic transformation objectives. As I've outlined, we have a significant regulatory reform agenda, but our focus is firmly on the quality of that reform, which involves process as well as content. Your Institute has played an important role as a valued contributor to the consultation and submission processes in a number of these areas and I thank you for that.

You have a busy and interesting programme ahead of you over the next couple of days. I trust that you will enjoy the opportunity it provides to consider matters which are of importance to your Institute and to the economic wellbeing of New Zealand.

ENDS

© Scoop Media