Fran O'Sullivan: Urgent need for watchdog with some bite

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Creation of super-regulator should be Simon Power's next step

Photo / Bay of Plenty Times
Photo / Bay of Plenty Times

The Hanover Finance and Huljich KiwiSaver affairs point up the pressing need for a "super-regulator" with the authority, budget and, importantly, guts to not only enforce existing regulations but publicly hang the miscreants out to dry.

That should be the next priority on Commerce Minister Simon Power's plate after his decision to fast-track KiwiSaver regulation.

He's put a rocket under officials and asked them to report back within four weeks on the needed measures, instead of piggy-backing them to the lengthy review of the Securities Act, which is not due to be finalised until October next year.

Surely it is important to properly regulate a sector which is managing retirement savings for the 1.3 million New Zealanders who have $4.88 billion in various KiwiSaver funds.

But that's only one part of the investing market.

Power should now be asking why arguable commercial hazards - many of whom continue to grace New Zealand's puffed-up social columns - seem able to pop up again with impunity within months of their latest failure to entice another wave of unsuspecting punters to "invest" their cash with them.

The Securities Commission has stayed silent over the latest reincarnation by Hanover Finance's so-called financial wizards Eric Watson and Mark Hotchin.

The mere fact that it was Herald columnist Brian Gaynor who blew the whistle last Saturday on Watson and Hotchin's activities in still raising money from the public through FAI Money, formerly FAI Finance, speaks for itself.

It took Gaynor to reveal to the investing public that FAI Money's accounting policies and disclosures are just as poor as Hanover's.

FAI has since sent a letter to investors advising that they will be repaid early and from March 22 it will no longer accept deposits.

As Gaynor wrote, FAI traditionally offered secured and unsecured personal loans but its latest prospectus reveals that the board and shareholders have decided the company may now engage in the provision of property development and property investment finance to the property development/investment sector.

"The prospectus also reveals that FAI's accounting policies on interest are exactly the same as Hanover's. In other words, interest capitalised on property developments is accrued over the course of the loan instead of being recognised when it is received."

The salient issue is there was no prospectus disclosure of the Hanover debacle and the role Hotchin and Watson played in this.

Nor was there any public warning from the Securities Commission that investors ought to be aware of the pair's track record.

If the commission was worthy of its claim to being a "watchdog" it would ask Power to bump up its budget so it could properly investigate Hotchin and Watson's finance companies.

Right now Allied Farmers claims it may have been sold a pup in respect of some of the Hanover Finance loans it acquired last year.

Allied chief executive Rob Alloway has talked darkly of secret deals.

But frankly, the investing public is entitled to know more of what lies behind this latest catastrophe involving Hanover's former "assets" than self-interested comments from a CEO who may have simply paid too much.

It should be a straightforward enough matter to expand the commission's existing investigation in relation to the NZX's disclosure practices regarding Allied Farmers.

Power's real problem in respect of the Government's plans to form a single regulator is that commission chairman Jane Diplock's second five-year term is not up on September 3, 2011 - 18 months away.

The commission is currently seeking a chief executive.

But it's also obvious that Diplock will not head the new super-regulator when it finally comes into play.

It would make sense for Power to ask the commission to put its plans on hold while he fast-tracks both the formation of the super-regulator and its first chairman and a gutsy chief executive.

Power finally sprang into action on the KiwiSaver front after revelations that a fund chaired by former National Party leader Don Brash had misled investors as to its true financial performance.

The political imperative was obvious, given that employers are compelled to make contributions to their employees' KiwiSaver accounts that are equivalent to 2 per cent of their salaries or wages and the huge amount of taxpayer contributions that have also gone into beefing up individual New Zealanders' retirement accounts.

The Huljich Kiwisaver affair still has the potential to be a vast source of deep embarrassment for National.

Brash chaired the Huljich Fund at the time former managing director, Peter Huljich, made the controversial "top-ups" from his own resources to "compensate" KiwiSaver investors for bum investment decisions.

Brash described these as "regrettable" in an interview with this columnist from Los Angeles airport two weeks ago. But he went on to defend Huljich's actions, saying no investor had lost out.

Former National Cabinet minister John Banks was also initially dismissive of the Huljich top-ups, appearing not to realise - or particularly care - about the responsibilities that went alongside the "executive director" title he had stamped on his business cards.

Banks' cavalier approach does not bode well for a politician who is aspiring to lead the new Auckland Council.

Not a good sign for a politician who is now making great hay out of his vocal opposition to the Government's plan to appoint top-class business people as directors of the various council controlled organisations - such as the Waterfront Agency - that will drive major elements of the new Super City.

Brash was introduced to the Huljich "opportunity" by another high-profile National Party politician.

It's a moot point that Huljich has since been forced to step down after the Securities Commission began investigating the integrity of the fund's statements. "In recent days, there have been a number of allegations about the way Huljich KiwiSaver Funds have been managed," Brash says.

"Some of these allegations are unfair and some are untrue."

But Brash has not explained what lies behind his claims that some of the allegations were unfair - and which were untrue.

- NZ Herald

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Fran O'Sullivan

A columnist for the NZ Herald

Fran O'Sullivan has written a weekly column for the Business Herald since its inception in April 1997. In her early journalistic career she was a political journalist in Wellington and subsequently an investigative journalist who broke many major business stories including the first articles that led to the Winebox Inquiry in both NBR and the Sydney Morning Herald. She has specific expertise in relation to China where she has been a frequent visitor since the late 1990s. She is a former Editor of the National Business Review; has twice been awarded Qantas Journalist of the Year and is a multiple winner of the Westpac Financial Journalism Supreme Award.

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