Power includes trustees in review after damning Harris report

By Paul McBeth

Wednesday 25th March 2009

Commerce Minister Simon Power will include corporate trustees in a review of the Securities Act following a damning report by the Registrar of Companies on the country's failed finance companies.

Power's statement comes after the report likening the management of the failed lenders to "Ponzi schemes" raised concerns over trustee diligence and accountability. The role of corporate trustees will form a significant role in the Ministry of Economic Development's review of the Securities Act. To ensure investors' interests are adequately cared for, Power is considering fast-tracking a trustee supervisory model which would see the Securities Commission play a bigger role in supervising trustees.

"Many hard-working New Zealanders have lost money in failed finance companies," Power said in a statement. "It is important we learn all the lessons from these failures and take all necessary steps to address them."

Perpetual Trust and Covenant Trustee, the appointed trustees of at least 25 failed companies, were singled out in Registrar Neville Harris' report to the Commerce select committee as part of the Ministry of Economic Development's 2007/08 financial review. He concluded that trustees "were slow to detect adverse financial issues developing and they responded too timidly".

Some 30 finance companies were in receivership, liquidation or moratorium as at last month, with more than. $6 billion of deposits at risk. The finance company sector in total is worth about $22 billion.

A select committee inquiry will be held into the failure of the finance companies, with the terms of reference yet to be confirmed.

The role of corporate trustees will also be considered by the Capital Market Development Taskforce, which aims to improve the nation's financial system, when it reports later this year.

The Reserve Bank is imposing a new regulatory regime in relation to finance companies, and the Securities Commission is reviewing corporate governance, to assess the current level and quality of disclosure and bolster investor confidence.

The auditing of the finance sector "lacked the rigour and analytical depth one would expect for entities managing substantial public investments," Harris said in his report.

The 'big-four' accounting firms, Deloitte, Ernst & Young, Pricewaterhouse Coopers and KPMG, were uninterested in finance company audit appointments, the report said. That left the task to second-tier accounting firms which lacked the capability and experience to review the complex and elaborate company and business structures, the report said.

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