Some good may come from Access default

By Peter V O'Brien

Friday 10th September 2004

The paradoxes ingrained in the nature, operation and control of securities markets suggest some good could eventually flow from Access Brokerage being named as a defaulter this week and placed in liquidation.

That probably seems strange, even outrageous, to the firm's clients who lost money and to people involved in New Zealand Stock Exchange (NZX) as "participants" (particularly brokers), shareholders in our corporatised "sole registered national stock exchange" (its words) and the organisation's directors, staff and members of its advisory, regulatory and disciplinary bodies.

Responsibility for the Access debacle lay with people involved in that firm. Nothing can dilute the strength of that fact.

The exchange's regulatory arm, NZX Regulation, declared the firm a defaulter on Monday and there are no ifs or buts in such a declaration. It has always meant the end, from which there was no return, in a business where "my word is my bond" has always supposed to rule and "honour" was the oil lubricating market operations of brokers and traders.

Deals were done on the basis that all parties would honour their commitments, often beyond the level of proof required in many other commercial activities.

It was immaterial that sharebroking and share trading worldwide has been littered with examples of people's word being worthless and honour a euphemism for dishonourable conduct.

Liquidators, official agencies and others will deal with the Access case, but the situation raised issues for NZX.

In passing, NZX chief executive Mark Weldon said in various interviews this week that the affair had sickened him.

Weldon can be assured that when he retired or moved on from NZX he could go happy and have done well if Access was the only situation to sicken him. Many businesspeople would be content with just one sickening event in their careers.

That was the lesson for NZX and the source of the possible good.

The exchange company has been on a roll since corporatisation and becoming a listed company, to the extent that it seemed to have developed a culture of divine right to presumed perfection.

Objective criticism about the ornate, subjective language used in statements drew complaints, rather than a change to presentation.

For example, even on Monday when referring to Access, a quote attributed to Weldon said NZX over the past 12 months had implemented a comprehensive compliance programme and strengthened its surveillance and inspection capabilities in the area of maintaining the confidence and integrity of the market.

"NZX is therefore extremely dissatisfied that these events were able to occur."

The usual footnote to NZX announcements was attached, saying NZX was committed to "developing and ensuring the integrity and international competitiveness of New Zealand's securities markets."

We learned later on Monday and on Tuesday that NZX relied on monthly signed declarations and (apparently) annual audits that accounts, including client balances, were in order.

Reliance on monthly signed declarations would obviously be valid in almost all cases of brokers, but where were short-notice, spot checks as opposed to, in the Access case, a yearly audit?

Investors discovered the Fidelity Guarantee fund was "about $500,000." That was ridiculous, irrespective of a suggestion NZX might cover Access losses from its own funds. NZX is a public, listed company with shareholders other than sharebrokers.

Private investors could therefore see part of their equity paid out to cover a broker's losses, because NZX apparently decided a fund of "about $500,000" from brokers was sufficient.

The only "blame" attached to NZX over the Access affair was the exchange's possible assumption of perfection. It will have realised that.

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