Can trustees really police fin coys?

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Friday, September 5th 2008, 11:07AM 2 Comments

by Philip Macalister

So the Reserve Bank is to oversee and regulate the non-bank deposit-taking sector to provide investors with more protection. As reported during the week Parliament has passed a bill to give the central bank powers to regulate a sector which has certainly had some cowboys galloping around in it. I do wonder whether this will make any difference, or if indeed it will provide the safety it is supposed to give. Firstly, market forces are tidying up the sector and by the time the bank is up to full speed with this new job (2010) the only ones left will be the good guys and the smaller firms with special niche markets. Secondly, a number of the finance companies are listed on the NZX and come under the continuous disclosure regime, however it would be fair to say the disclosure hasn’t been continuous, nor particularly transparent. The third point, and we have seen this many times before, is that regulation isn’t particularly effective when creative accounting or misleading information is provided. The sorts of names which come to mind here are Enron and in New Zealand it seems Bridgecorp had a questionable way of disclosing information to investors and advisers. Indeed I would suggest some advisers went out of their way to ask Bridgecorp questions about its operations and position prior to collapse, and it seems clear the information provided was misleading – at best. The other plank of these regulatory changes are that trustee companies remain the frontline regulators for the bank. There has been plenty of criticism over their performance and some of this is valid. One issue I have is that it appears some of these companies were happy to take on the role, collect the money and do bugger all. It even seems that some saw the finance company sector as an easy niche to concentrate on and earn a good income. Now these companies have a heap of work on their hands as their charges have fallen over, or crashed and burnt. I have heard stories, from trustees, that they took on companies with trust deeds which essentially meant the trustee couldn’t access relevant information. If this is the case they bring their whole sector into disrepute. Changes made last year give trustees more power to find out what is happening within the companies and this is arguably the biggest improvement which could have happened. What is needed is more transparency around what is really happening inside the companies. This is the equivalent to continuous disclosure on the NZX and is essential for investor confidence.

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