A Government legal adviser says finance company directors would face a lower level of liability under proposed legislation designed to help clean up the investment market.
Submissions on the Financial Markets Conduct Bill are due to go to Parliament's commerce select committee by the end of next week.
The bill, which will replace 34-year-old securities law, is expected to pass by the end of the year and come into force by mid-2013.
But in a paper produced this month by the parliamentary library, which provides information to help politicians consider law changes, legislative analyst John McSoriley said the bill would "have the tendency to reduce the liability of directors of finance companies".
The proposed changes mean all directors would have to knowingly or recklessly breach disclosure provisions to be held criminally liable.
"Unlike similar 'strict liability offences' in the Securities Act 1978, this offence requires knowledge of recklessness," McSoriley said.
The change could mean a case such as that taken against the Lombard Finance company directors would not have allowed for criminal convictions.
Sir Douglas Graham, Bill Jeffries, Lawrence Bryant and Michael Reeves were sentenced last month but didnot get prison time.
Shareholders Association chairman John Hawkins said that after a lot of consideration the association had decided to support the proposal.
"The reason for that is criminal charges really need to be brought where you knowingly or recklessly do something. In those circumstances not only are there criminal charges but they have increased the penalties."
Hawkins said it was not fair to give someone a criminal conviction for an accidental oversight.
"As it stands at the moment you automatically get a criminal conviction - Lombard is the case in point. We are not sure that that is entirely appropriate."
The new legislation also imposed bigger penalties for civil cases, Hawkins said.
"So what this is doing is providing a layered approach which will encourage people to follow the regulations at every level and will breed into boards because even minor breaches can be pinged."
Hawkins said another positive was that civil cases tended to be easier to win and to get compensation for investors.
"With criminal cases you have to prove intent. We see it as being easier for regulators to come down on directors who are not properly discharging their duties."
Hawkins said it would turn the monitoring into a "top of the cliff" approach.
Institute of Directors chief executive Ralph Chivers said his organisation believed criminality should be reserved for knowing wrongdoing and recklessness, and that other offences should be civil matters.
The association did not want to comment further on the bill until it had finalised its submission but Chivers said it would be taking into account the risks and rewards for directors.
"We will also be concerned to ensure that the overall risk/reward equation doesn't get out of whack because, now more than ever, we need our top people at the top table.
"We also want to ensure that there is some equity with other professions such as lawyers, doctors and engineers in terms of the connection between professional wrongdoing and punishment."
Michael Pollard, a partner at law firm Simpson Grierson, said the bill made progress in punishing directors who fell short of the standards expected of them.
But he was concerned the bill did not go far enough to protect directors who were honest and diligent.
"Well-run boards, with honest and diligent directors, rely on the substantial and costly due diligence processes undertaken by them, by management and by their professional advisers in connection with any offering documents.
"The purpose of these processes is to make sure that those documents comply with applicable legal requirements and are not misleading.
"There remain questions as to the extent to which the bill permits a reasonable degree of reliance on third party advice in connection with these processes."
Proposed penalties under the Financial Markets Conduct Bill:
A director could face civil fines up to $1 million for individuals. This compares with a flat $500,000 maximum penalty under the present regime.
Under the new regime penalties go all the way up to 10 years in jail and/or a fine of up to $1 million for individuals. This compares with up to five years and fines of up to $300,000 now. Directors would have to knowingly or recklessly breach disclosure provisions to be held criminally liable.
CRIMINALS KICKED OUT
A group representing directors has decided to kick out any member who takes part in criminal conduct in their role as a director.
The 5000-member Institute of Directors held its annual general meeting in Hamilton yesterday and more than 75 per cent of those who voted supported a change to its constitution.
Chief executive Ralph Chivers said the institute was in the process of reviewing its overall disciplinary framework and the vote was an important interim step.
"The disciplinary provisions make the current provisions more comprehensive by ensuring that all criminal conduct as a director will result in automatic cancellation of membership."
Under its old rules the institute expelled members for breaches of the Securities Act and the Companies Act.
But Chivers said the case against Bridgecorp had included fraud charges which were not covered under either of the acts.
"We wanted to make sure our rules didn't have any holes."
In the last year the institute has cancelled the membership of two directors.By Tamsyn Parker Email Tamsyn