Stephen Franks: Govt favours obtuse over obvious

Prime Minister Helen Clark might have been sued for her insider's tip to Mum and Dad Air New Zealand shareholders to hold on to their shares.

Such statements might also offend against a market distortion law of the kind proposed in the Government's discussion papers. But such use of the law would have been wrong in principle and in practice. Even if there might have been other culpable conduct, securities law should not be over-extended to catch these honest, though foolish, statements to the media.

But that is what the Government is now planning. And people should ask whether there is any point in making submissions before spending too much time on it.

The plan is to imitate Australian securities law. Most of the 124 questions in the discussion papers are about loopholes or exceptions needed if we go ahead with Aussie-style law. Without a tangle of exceptions it catches innocent transactions. Myriads of Aussie lawyers live high off leading honest business people through it. The dishonest, as in most countries, find ways to turn complex law to their advantage.

Australian securities law has no coherent conceptual foundation. It has become a vast unanchored drift net, coiling through every stream and current of their capital markets.

There is a key distinction between markets that have a reputation for honesty, and those that do not. A rigorously enforced simple law that covers most conduct that most people consider to be dishonest is far better than an unevenly or infrequently enforced elaborate law that tries to catch all dubious conduct. Complex law is expensive and harder to apply and enforce.

These discussion papers are an excuse for three years of dithering. The main faults in our insider trading law were not mysterious.

First, there were too many technical obstacles in the path of the would-be enforcer trying to uncover the facts. A few simple words and liability for obstruction could have fixed that. Instead the Government is abolishing the enforcer's right to information through the Securities Commission.

Secondly, the would-be enforcer faces risks and costs which are not necessarily compensated even if the case is won. That too could have been fixed with a simple requirement that the courts pay to the enforcer the expected cost of proceedings, including a bounty amount to cover litigation risk, if insider trading was proved.

Instead of fixing what could be fixed the Government has put out two discussion papers two years apart. Meanwhile, it has brought in a continuous disclosure bill which is expressly part of Aussie insider-trading law. It pre-empts many of the decisions on which the Government is purporting to consult.

Why then do we have these papers? The Government and the regulators have used this pending reform for years as an excuse for not fixing what can be easily fixed. Most of us grasp intuitively that it should be illegal to misappropriate or convert to your own use information that is not yours.

This is not an argument against reform. Changes are needed. But not an elaborate charade to prepare us for doubling or tripling technical complexity when we adopt Australian law. No one can argue that Australian securities law will not cost everyone more. There has been no evidence that it has been any more reliable in stopping scams, collapses, crashes and unsuccessful enforcement actions.

Aussie law is not consistent with law in the US, the deepest and most vibrant securities market in the world. A knowledge economy sees price sensitive information as a company's most valuable asset, to be kept confidential for as long as possible so that the company can use it for the maximum benefit of the company and its shareholders. Instead, Australia's law would say, for example, that Air New Zealand must tell the market and Qantas as soon as it is finalised, its vital strategy for seeing off Qantas competition across the Tasman.

Many public-spirited people will worry through the 200 pages of detail without realising that the die is already cast by the new continuous disclosure rules and by where the Government is getting its advice. Unless the Government wants to be seen to renege on the law it is pushing through now, the next phase must adopt Australian law.

Before putting in that time submitters should ask the minister for an undertaking that his new continuous disclosure law will be repealed if insider trading law analysis shows that we should revert to a more focused US-style law. It would treat information as valuable property, and not as a free good for the benefit of competitors irrespective of the cost to shareholders.

* Stephen Franks, a former top commercial lawyer, is justice spokesman for Act.

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