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Regulator hits back at company collapse claims

Thursday 2nd December 2010 7 Comments

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Securities Commission chairman Jane Diplock labelled as a "myth" suggestions the commission could have done more to limit the damage done by finance company collapses.

New Zealand Business Roundtable chairman Roger Partridge told Parliament's commerce select committee the Securities Commission had "nodded off".

Today he told Radio New Zealand the Securities Commission had a hard job to do and a wide range of powers.

"During the period when finance companies were borrowing billions of dollars, my view is that they didn't dig deep enough when they were looking at finance company disclosure. They had the powers to intervene and could have done a better job," Mr Partridge, who is also chairman of law firm Bell Gully, said.

"Our regulatory powers have been quite fragmented, so we've had a range of bodies -- the Securities Commission, the stock exchange, the Government Actuary, the Ministry of Economic Development, the Registrar of Companies -- all exercising some powers."

The move to bring all those regulatory powers together under the Financial Markets Authority super-regulator was a good one, Mr Partridge said.

Last week Institute of Directors president Kerry McDonald said regulators had been slow to respond, and should have looked at charging companies at an early stage.

Ms Diplock said the Securities Commission had done the job it was able to do under the Securities Act.

Under the structure, the commission's role had been to investigate what happened.

"When the prospectuses were out in the market and it appeared those companies were running successfully and investors were getting their returns, we had no trigger to go in and investigate," Ms Diplock said.

"Now I don't think the Business Roundtable or anyone would want the regulator to be able to walk into a well-managed company and just decide on a whim, or a rumour, to do an investigation."

Many of the prospectuses had been extremely well drafted.

"They were drafted by the best lawyers in this country," Ms Diplock said.

"So, it's impossible to tell before someone doesn't keep their promise that they're not going to keep their promise."

The Institute of Directors should look at the role played by directors in the company collapses.

"Fundamentally, it's the directors who failed here. The directors who misled the public in their advertisements and their prospectuses," Ms Diplock said.

"There's a myth out there that it wasn't the directors, it was the regulators, and it's just wrong and it needs to be busted."

Ms Diplock also noted there had been a failure of the regulatory structures, and lessons had been learned from that. She pointed out that some well-managed companies had failed for other reasons.



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Comments from our readers

On 2 December 2010 at 5:05 pm albert said:
So, Securities Commission don't have guidelines for finance companies - min. paid up capital, NPL level, liquidity ratio, rules on lending to related parties, etc? "Under the structure, the commission's role had been to investigate what happened", in other words, it is not even an ambulance waiting at the bottom of the cliff, but there just to tell you why you fell of the cliff, and no first aid given. There are loads of people who could do that for FREE. To put it another way, is the Security Commission like a "toothless snuggle puss"? Then ALL financial advisors who relied on the prospectus (approved by the Securities Commission) and rating agencies has become responsible & liable. "They are (prospectus) drafted by the best lawyers in the country", but they don't manage the funds, do they? Going by that argument, then all good story writers must be good directors, actors & actresses, right?
On 3 December 2010 at 8:41 am W. Barnfather said:
Sounds like the leaky homes saga where a Government Commission/Department failed to impelement proper regulations and enforce existing regluations. Investors should be compensated by the Government for their losses as in the leaky homes debacle.
On 3 December 2010 at 9:30 am Bruce said:
It seems as though the responsibilities of the commission are simply to consider what caused the debacle so unless this leads to further regulatory intervention or a law change the commission is wasting taxpayers funds and should be disbanded.I doubt if any tax payers who lost money to finance companies would be in favour of the commission in its present form and they should be asking government to disband it in its present form.
On 3 December 2010 at 10:31 am Grumpy said:
Did we really think Jane would come out and say "Roger, you hit the nail on the head with that, good call."
On 3 December 2010 at 8:19 pm Chartered Accountant said:
Against random checks - Jane Diplock Jane Diplock in her role as leader of the Securities Commission was known as the senior regulator in setting-up and monitoring investment control systems to provide some measure of protection for the thousands of investors in finance companies, investors like me. Jane over the years, has found several excuses for the way she saw and practiced her role - her performance inadequacies I believe. Principally however she claims she had insufficient powers to improve protections for investors. (She possessed little energy to seek and apply for additional powers when so obviously it seems, they were necessary. She could have looked overseas for guidance if necessary) Investors in Finance Company products I recall her saying, were just greedy for high earning rates, not worthy of respect. We deserved to be fleeced by directors and management. Jane apparently never attempted to distinguish between good, corrupt and/or incompetent directors. If they could be labelled "Finance Company," Jane was just not interested. We all remember Jane Diplock. We thought we could rely upon her, she had the power and the responsibility to ensure responsible complete ethical and pertinent disclosure on the part of companies & investor advisers, to require proper, useful and timely reports from Finance Companies, monitored by their trustees We were told by Jane and associates at the Securities Commission, trustees were appointed to represent us, to protect our interests. It turned out however that trustees had quite insufficient powers to carry out that role - timeliness of events reporting was critical and almost never achieved. Also, to monitor all operations, to locate company misdemeanours or errors of judgement. In reality however they were not entitled to attend most meetings - current operations commonly advised (certainly examined by them)to them months after a company's positive commitment. Trustees had few rights to documents - they were not staffmembers. Also the Trust Deed seldom provided even a few specific rights of access. Trustees had little in funds to pay for their monitoring - their communication with investors seemed limited to a cataclysmic event. The elapsed time after identifying an event, combined with the trustee usual lack of funds plus his lack of interrogatory power would act as a powerful disincentive against reporting old events to investors. Would he close his eyes and pray the event would go away? Looking back unsurprisingly to me, most trustees of the time seemed lazy, fixed fee controlled, not disposed to stir themselves. Jane Diplock and her associates were fully aware of these disfunctional appointments. What were they doing you might ask? She and her team apparently were quite satisfied with the lack-lustre or deficient performance of such trustees. Jane should have initiated strict reporting guidelines upon finance companies and insisted upon their 100% compliance. Jane could and should have demanded a re-negotiation of all Trust Deeds: trustee rights of timely access, funding for examination and other purposes, trustee obligations, the all-pervading requirement as to timeliness. Jane also should have insisted on much greater demands upon auditors - their timeliness and immediacy, cooperation with trustees, also could be critical in containing a cataclysmic event. Jane should have scrutinised the role trustees were playing, their lack of powers, the lack of timeliness, the manner in which they were cited in prospectuses. She should have widely reported trustee and auditor potential ineffectiveness under the pertaining reporting regime. Recognising some aspects of the financial circus investors were subjected to, I and others attempted at that time to induce Jane and/or her associates into performing a corrective, a useful role. Essentially at that time, we were unaware as to how weak and irrelevant the trustee role in a finance company could actually be. Relying upon Jane's thinking we had placed inappropriate reliance upon trustee statements, upon his perceived monitoring. The unreported: ulta vires acts of directors and management, the loans to associated parties, loans to inappropriate people, the very questionable growth of 2nd mortgages, - all would be examined we thought, and reported to us by the trustee. We placed our faith where it just should not have existed. And we were persuaded that this was the right thing to do, by Jane and the Securities Commission Jane Diplock at that time continued in her practiced role - really a continuation of the status quo - so long as nothing the financial world did or neglected to do put her to any inconvenience. I know now that Jane and her Commission members knew we were being deceived. She could not be bothered to tell us the extent and seriousness of our ignorance. Jane breached a golden rule within ICANZ and for any monitoring system. She positively states she does not believe in random checks of any operations. Trustees I understand were positively discouraged by her and her associates from ever conducting random tests unless first they possessed proof of wrong-doing to support such a check. One might well ask, "how can you establish wrong-doing in a general sense without first doing such checks." I fail to understand how any accountant or professional worthy of the name could say such a thing, it appears to breach all rules of commonsense. However, for the head of the Securities Commission, to come out so strongly against random tests seems absurd and totally abysmal. If this belief is typical Jane Diplock thinking, I now see strong reasons for the Finance Companies collapse. I and many others believe, the Securities Commission is and remains fundamentally flawed. Still making excuses, still achieving nothing. To conclude, I believe the Commission and its absurdities played a leading role in the widespread collapse of Finance Companies. Specifically, I have lost upwards of 75% of my life savings. The Securities Commission should immediately indemnify me my 75% and all the other investors who lost our billions of dollars We put our faith in and relied upon the Commission - the public watchdog, the public disgrace. Orchestrator: Jane Diplock
On 6 December 2010 at 10:57 am Tony Ryburn said:
Most finance comapnies that failed had inadequate capital, were poorly diversified, (often overweight in comercial property)inadequately secured, (second and third ranked mortgages)engaged in related party lending and were not staffed by people with the requisite experience in business credit risk assessment. And they only existed because they lent into situations that the Bank's were to prudent to touch with a barge pole. As far as I can see Jane Diplock and the Securities Commission did nothing about this over many years despite being fed a regular diet of finance company collapses. Was this wilfull neglect, ignorance, laziness or incompetence? If that's an unfair question I'm sure there are a lot of paople like me who would like to know why?
On 10 December 2010 at 9:47 am BTW said:
Two further points in support of the earlier comments, First, the trustee industry hides behind the inadequate documentation and powers argument. However, bear in mind that these trustees set the terms of the trust deed. If they didn't like the terms it was/is incumbant on them to not accept appointment. The liability claims should extend beyond the trust deeds to the fact of acepting appointment. Second, not all trustee companies were guilty. By far and away the great majority of finco collapses happened under the "watch" of just two trustee companies - Covenant and Perpetual. It is those two that should lose their licences and be found liable to investors.
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