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What really needs to be done about KiwiSaver funds

Friday, March 12th 2010, 11:29AM 8 Comments

by Philip Macalister

Isn’t it odd how one rogue event can taint a whole lot of people and cause government’s into knee jerk reactions. Yes I am talking about KiwiSaver and the Commerce Minister’s statement this week about bringing forward a review of some of the regulatory functions. Some of the ideas such as having the same reporting requirements for default and non-default providers makes sense. But the idea of a “super-regulator” seems to be a huge over-reaction. Why not, instead of creating another government department, make sure the rules in place now are properly enforced? You have to look no further than the trustees on this one. It’s hard to argue against the proposition that trustees failed in their supervision of the finance company sector and their duty to protect investors. Unfortunately we are seeing re-run of this situation. The trustees’ role with KiwiSaver should be more than just making sure the scheme adheres to the trust deed. They should be looking at more than that and looking after investors. I have spoken to some KiwiSaver providers and they are quite amazed at how little trustees do with KiwiSaver funds. The point being you wonder why they are there at all, except to collect fees. There has also been talk about what happens when you have one firm that provides both fund administration services and trustee services to a manager. The argument they can’t tell each other what is going on because of Chinese walls is fine in theory, but looks like a conflict of interest. Maybe the fund administrator should alert the trustee to anything it sees that could be marginal (let alone outright dodgy). Surely that is not too hard to do? Power tells us he has fast tracked work being done by officials on KiwiSaver regulation. Sure they may report back in four weeks time. But when will anything be done? Let alone asking the question does anything need to be done?
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Comments from our readers

On 12 March 2010 at 3:58 pm Interested Observer said:
In fairness, most trustees were generally OK. But I don't understand how Perpetual and Covenant haven't had their licenses stripped, or been sued by investors in a class action. If these two operators maintain their licenses under the new regime it will make a mockery of the entire reform programme (respectfully, in my view, etc, etc!).
On 12 March 2010 at 8:16 pm Independent Observer said:
What would be the outcome if you were to replace the rules based environment with a Principals-based environment... whereby the directors of all financial entities are held personally liable for recourse.

That will help everyone to remain focused, whilst reducing the need for another bloated pseudo-regulator
On 12 March 2010 at 9:16 pm alan said:
But just how far can a trustee go in keeping tabs on a fund? Fund managers make the investment decisions and it would be ridiculous if a trustee had the power to over-ride them because the trustee thought the investment risk was too great, which is not to say they should'nt act if an investment fell ouside the fund's specific advertised investment parameters. If protection of the investor's interest is paramount, which it should be for both the manager and trustee,would this mean that the trustee should have audited the likes of Bridgecorp and not allowed it? And aren't most investment decisions ultimately subjective anyway?
On 13 March 2010 at 7:13 am Independent Observer said:
You're correct Alan - the reality of investment management means that it is difficult (nearly impossible) for an external party to effectively monitor process/philosophy etc... which is why it is easier to place the onous on the Directors of the investment management firms to report any breaches (technical or otherwise) to the Regulator. This methodology is much easier to administer when the Director's homes are "on the line"...
On 13 March 2010 at 10:11 am Independentobserver said:
I can't understand why Simon Power, the Securities Commission and others are wasting their time on KiwiSaver when there have been billions lost in the finance company sector and continuing to be lost and nothing has been done about it!
If they have limited time and budget, as they always say they have, then they have a duty us, the public, to focus on the hard issues not the easy ones!
On 15 March 2010 at 10:16 am Kimble said:
IO, perhaps what needed to be done in the finance company sector has already happened. Maybe people are going to be more careful tomorrow, given so many collapses yesterday.
On 16 March 2010 at 1:14 am Adviser said:
The Securities Commission is a modest quango with much to be modest about. They go about their business of market surveillance with the capacity of a blind toothless tiger. Blind to the obvious sneaks and self centered Directors in our countries board rooms. The Securities Commission along with Trustee companies have been infiltrated by leagues of lawyers who have ably demonstrated their complete lack of empathy for the investors in our country. The legally trained guardians of this countries investment wealth should be ashamed of what they have allowed to occur under their watch.

A recent example was the revelation of South Canterbury Finance lending $15 million of debenture investors funds to their Chief Executive L Macleod, (now former CEO) to buy 10% of Southbury which is ultimately South Canterbury Finance owner. The loan included no personal guarantees. It was also reported at least two other directors of South Canterbury Finance were given identical, but smaller loans. These transactions were not by any stretch of the imagination normal commercial activity for South Canterbury Finance. In my view another case of a finance company Trustee failing in their job to protect investors interests.

In my opinion the solution is for the Securities Commission and the Trustee companies to sack a few dozen Lawyers and employ some decent forensic Accountants. Let these forensic Rottweiler's loose with a free rein to snoop were they wish and in a short while they will get the attention of the sneaky NZ Company Directors.
On 17 March 2010 at 10:59 am Interested Observer said:
Bear in mind, the trustees are the quasi-regulators of finance companies and managed funds - not the Commission. It is quite correct for the Commission, at least historically, to have adopted a hands-off approach to monitoring of these industries as that is the designated function of the trustees - it's just that, at least in Perpetual and Covenant's cases, the trustees haven't been doing their jobs.
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