You may wonder why someone from the Securities Commission would be talking to the Institute of Banking and Finance. At first sight there would not seem to be much in common between the operations of securities markets with banking and finance markets. However the fact is that a number of the retail activities of finance houses and of banks and bankers are affected by various of the provisions of the Securities Acts. For example the provisions requiring disclosure about securities apply not only to the issue of debt securities by banks and other organisations but extend to the sale of life insurance products, unit trusts and to other managed funds and collective investment schemes. These, and other products, are increasingly being offered by banks and finance organisations either as their own products or as agents for other suppliers.

Activities of bankers can also be affected by the requirements of other legislation of interest to the Securities Commission such as the Investment Advisers (Disclosure) Act. A range of bank staff including counter staff and private bank staff give investment advice in the course of employment and as a result have certain obligations under that Act. Some of the other activities of banks and bankers are covered by requirements in the Securities Amendment Act to notify substantial security holdings and, of recent topical interest, to obey insider trading rules.

Of course, a number of the provisions of securities legislation are modified in respect of registered banks. A registered bank, for example, need not appoint a trustee for debt holders of bank deposits, a bank can refer in advertisements to the bank's disclosure statement rather than a prospectus and there are some other exemptions. Such relaxation of the strict legal rules is based on the fact that registered banks are subject to some overview by the Reserve Bank, are required to observe some rules about capital adequacy, and therefore deserve some relaxation from the rules applying to other issuers. In other cases relaxation of the rules is merely a recognition that finance institutions including banks are often subject to the Securities Act by reason only of holding assets as security for repayment of a loan or other obligation. That can be distinguished in certain aspects from the position of a true owner of securities.

Banks are now offering a much wider range of product to customers and potential customers than what was once regarded as usual bank services. A number of these products are "securities" for the purposes of the Securities Acts. These can include, as I have already said, providing access to equities through sharebroking activities, the issue of debt securities, selling collective investment scheme units and life insurance issued by the bank or by organisations other than the bank itself. As a result financial institutions including banks and their staff should be familiar with the law covering the issue and sale of those products.

The Securities Commission has very cooperative relationships with banks in New Zealand. Banks are the conduit by which money raised from the New Zealand public by fraudsters is sent offshore. This money is sometimes sent directly overseas as a result of phone calls or internet activities of overseas fraudsters. In other cases the money passes through the hands of a New Zealand agent on behalf of the overseas fraudster. Of course New Zealand fraudsters also use banks as conduits for money they have received offshore.

In a relatively recent case the Commission sought and obtained the cooperation of the New Zealand registered banks, or at least the major ones, in identifying the amount of money that had been sent to a particular account offshore over a period of three or four months. This account had been identified by the Commission as being the place to which money was being sent by victims of what appeared to be a fraud. The purpose of the exercise was to try to determine the amounts lost to the New Zealand economy as a result of this sort of activity. The results of that one case were that in the three to four month period under review approximately US$275,000 had been remitted from New Zealand to this particular account. While that may not sound a great amount it should be remembered that this represented the results of the activities of only one agent and was for a short identifiable period of time only. I would expect that the US$275,000 was only the tip of a large iceberg of fraudulent funds sent during that period. It is very difficult to be more precise about the effect of these frauds. Complainants (or those that should complain) are often too embarrassed or ashamed to allow investigations to proceed. In a number of cases such victims of fraud may be frightened by the apparent legal consequences of complaint - fraudsters often have victims sign confidentiality and "non circumvention" agreements and then threaten legal action if complaint is to be made. It also makes prosecution of fraudsters more difficult where complainants will not allow their names or their evidence to be used because of the effects of publicity on those people.

The Securities Commission can and does publicise these fraudulent activities on the Securities Commission website (well worth a visit). It also refers cases to the Serious Fraud Office or to the Police for prosecution of those involved in the fraudulent activities where they reside in New Zealand.

The New Zealand agents used in these frauds are not always fraudsters themselves. Some of course are out and out crooks but others are innocent dupes where acting as agents for overseas fraudsters. We have had cases where, even after the fraud has been exposed, gullible New Zealand agents still believe that the promises made to investors can be fulfilled by the overseas people and that somehow or other the Securities Commission or other agency has prevented the promised returns from being realised. A number of these frauds are so-called prime bank instrument trading programmes. These are sold as extremely lucrative programmes available only to some insiders in the banking fraternity and available only through the top 10 or top 20 banks in the world (whatever that might mean). They are available only to traders who have minimum amounts of US dollars available, some referring to a figure of US$100 million but some much less than that. Investors are invited to join a group organised by such a trader and are promised returns varying to 80% per annum (a recent one promised 400% per annum). The programme is dressed up with references to a top 10s bank stand-by letter of credit, deposit receipt, blocked account receipt, commercial bill or other official sounding technical language, refers to the International Chamber of Commerce rules for non-disclosure and non circumvention and threatens severe legal action to any investor who discloses to anyone else their participation in the programme.

This brings me to the first item I was to talk about today which is prime bank instrument fraud, one of the more prevalent and insidious of the frauds which have bedeviled the New Zealand market over the last five or six years. I exclude Nigerian scams which require the victim to assist so-called government officials in Nigeria to commit fraud and where, as a result, there can be little sympathy for those who lose money.

In some cases it is hard to recognise the scam as being a prime bank instrument fraud. Some refer to joining a "trading programme" with very little definition of what the programme itself is. The documentation uses legalese and banking jargon to give it an air of authenticity. Sometimes professional firms become involved in the sale of these frauds. Legal firms and chartered accountants can be used for these purposes. Some of the lawyers involved may be innocent dupes whereas others may be more involved in the promotion of the scam and may be involved in it for the sake of commission income that can be gained as a result.

Sophisticated investors can also be caught by these scams. In those cases however the documentation is rather more complex and will ideally involve (either innocently or by design) the participation by a bank employee or employees. Bank officers are sometimes tricked into providing signatures and authenticity to bogus schemes. The International Commerce Committee Commercial Crime Bureau has provided guidelines for banks worldwide. The most important one of course is Know Your Customer. Fraudsters will attempt to use the good name of banks, legal firms or chartered accountants and other bodies in order to influence investment in their schemes. It is very tempting to think that a new customer has been obtained for the bank only to find that the bank's name later is being used in some nefarious activities. There are a number of other rules set out by the Bureau most of which are commonsense when the potential use to which a bank connection can be put is realised. They include being careful about responding to inquiries, in particular unsolicited letters or faxes, not signing documents which have not been prepared by you or by the bank unless you are very certain of the purpose for which the document is to be used, not being too helpful in forwarding messages where the bank is not directly involved, confirming letters of credit or other paper unless completely satisfied of the authenticity as well as the legitimacy of the credit, and so on. It is merely a matter of keeping a close eye on any arrangements to which you lend your own name or the name of the bank.

Of course this does not stop deliberate fraud by bank employees. I am sure that none present in this room would be contemplating such a matter.

Incidentally, I should say that we get a great deal of cooperation from the banks generally in terms of assisting the Commission in its investigations. We are always grateful for that attitude from the banks. I should also mention that banks themselves take steps to warn clients when they are aware that money is going to an account operated by a suspected fraudulent operator. It was notable that in the material that we received from the banks that I referred to earlier there were some investors who had attempted on several occasions to send money offshore in spite of being warned on each occasion by the bank concerned about the likely loss of money involved to the customer.

I now turn to a few thoughts about insider trading. I would like to address one particular aspect which relates to the perception in the market place of a lack of adequate enforcement of insider trading laws.

Insider trading of course is inherently difficult to detect. It is usually carried out through nominees often in off-shore jurisdictions and even when detected it is extremely difficult to obtain and present the evidence necessary to establish the fact of insider trading in any court proceedings. This is not a problem unique to New Zealand. Overseas jurisdictions also struggle with the same problems and it is generally recognised as being an extremely difficult matter to detect and to prosecute.

The Securities Commission however has one procedure in its armory which is shown to be most effective in obtaining results in insider trading matters. That is the Commission's power to review and comment on market practice. This does not require the establishment of any offence of insider trading. Any report put out by the Commission may comment not only on strict legal criteria but on matters of market practice. This approach has been particularly effective in the case of McCollam Printers. In that case Mr Eric Watson was not found to have been involved in insider trading because of the particular definitions of insider trading contained in our insider trading laws. Nevertheless the Commission believed that the behaviour was not acceptable in New Zealand markets. We did not believe that the trading enhanced the reputation and standing of our securities markets.

That draft report was circulated to affected parties before publication. As a result of that Mr Watson offered to and in fact set up a trust fund to compensate those that had traded with him in the circumstances outlined in the report. This provided a cost effective and speedy compensation for those who felt they had been disadvantaged by his actions.

A similar result was obtained in the case of Mr Kerry Hoggard dealing in his Fletcher Challenge Limited shares immediately prior to a significant statement about the company's future.

This power of review and comment can therefore be seen to be an effective way in which parties can be encouraged to make compensation without the necessity of long and expensive court proceedings.

Of course such compensation does not address the wider issue of whether there should be additional sanctions against insider traders. If a thief does not suffer anything other than the return of the property stolen then that does not say anything about society's outrage at the theft in the first place.

That does raise the question of criminal liability for insiders. I personally have ambivalent views about that. It does on the one hand show society's strong views about insider traders, the effect it can have on our securities markets and brings us into line with overseas practice. Overseas investment has always been important to New Zealand and therefore the perception that overseas investors as well as New Zealanders have of our markets is of concern.

On the other hand providing proof of insider trading to criminal levels is extremely difficult to obtain. I fear that the community expectations of results would far exceed the ability of any enforcement agency to obtain the necessary convictions if insider trading becomes a criminal offence.

That of course is quite apart from any question of difficulties with the definitions. I will not this morning go into how insider trading is defined but I believe that in some cases the definition can be far wider than those dealing in the market would expect and in other cases is far more narrow than it should be and where what would generally be regarded as insider trading or market manipulation is not covered by the definition and where no sanctions would apply.

I would like to conclude with a few thoughts about the question of global standards for banks and securities markets.

We have heard a lot in the last few years about the need for new global financial architecture. The driver for international standards being adopted generally comes from examples of contagion of market failures from one jurisdiction to another. This is seen to be a comparatively modern phenomena. Of course there have been examples over the centuries of huge financial and market failures going back to Tulip Mania, South Sea Bubbles, Mississippi Land Companies and so on. These had devastating local consequences. More modern market failures have resulted in countries well removed from the centre of the failure suffering as a result of the fallout. This has led to a plethora of international bodies becoming interested in redesigning the global financial architecture around global standards for banks, for securities markets, insurance markets and other markets of that type.

You will have seen in the banking industry the review of the Adequacy Framework for the Basel Committee on Banking Supervision, the intention being to update the supervisory review of banking institutions' capital adequacy and the effective use of market discipline as a lever to strengthen disclosure and encourage safe and sound banking practices. The International Organisation of Securities Commissions has adopted 30 objectives and principles of good securities market regulation which are now being adopted by International supervisory bodies such as the IMF and World Bank as the standard by which securities market regulation will be judged.

There is no doubt that the adoption of strong regulatory measures can be helpful in reducing major financial crises. They can also assist in reducing the risk of contagion from jurisdiction to jurisdiction and from organisation to organisation. However I do have a word of caution. Such international standards tend to be applied to institutions and to countries on a "one size fits all" basis. Since the main effort in setting these standards is driven by the larger jurisdictions it tends to be assumed that the rules and the structures for bank and securities market regulation that apply in those countries are appropriate world wide. This has the potential to ignore the way in which small sophisticated markets, such as New Zealand, can be adequately and properly supervised without all of the infrastructure and regulatory requirements of large markets. The risk is that such small markets are required to adopt the standard requirements and impose unnecessarily large compliance costs on market participants or alternatively do not adopt those requirements and run the risk of being seen by investors as being risky markets with consequent higher cost of raising capital. The Securities Commission, together with other agencies in New Zealand, has been active in attempting to have the standard international rules flexible enough to accommodate the interests of a variety of type of jurisdiction and of market including of course New Zealand. This will be an ongoing requirement for New Zealand regulators and for government.

Thank you for the opportunity to speak to you today.