Regulators are prone to capture by those they are meant to be regulating. It is a common problem, especially when those being regulated can select their regulators - auditors are the most obvious example. Tough auditors can find work hard to come by.
Trustees who oversee finance companies for the benefit of investors are prone to the same problem; the more effective the trustee, the less likely it is they will be appointed.
Covenant and Perpetual are two of the larger trustee firms. Reviewing the wreckage of the finance industry, the Registrar of Companies wrote that the pair appear to have been "slow to detect adverse financial issues ... responded too timidly ... did not appear to have sufficiently experienced staff or adequate understanding of the risk profile of finance company lending".
It was damning. Parliament passed the Securities Trustees and Statutory Supervisors Act and put the FMA in charge of licensing trustees in the wake of all the industry's problems.
Covenant was the trustee of National Finance, Bridgecorp, Five Star Finance, and Clegg and Co, each where principals have been criminally convicted. Bernard Hickey's Deep Freeze list has 16 failed firms under Covenant's watchful eye, with almost a billion dollars of investors' money at risk.
Yet, last month, the Financial Markets Authority gave Covenant approval to continue overseeing finance companies until 2017. Despite 16 finance company failures. I would find it difficult to trust them to run a lemonade stand.
I am sure the FMA had good reason to grant Covenant a licence. I'd like to hear it.
The shambles at Perpetual is worse in my view. Twenty-three of their charges went down the toilet, taking almost $3 billion with them, including Nathans Finance, Capital + Merchant and Lombard; all where criminal convictions have been secured.
Perpetual was in the news recently when the FMA took it and Pyne Gould Corporation, a shareholder, to task for a related party loan.
Justice Heath wrote that "the lack of judgment and understanding of the role of a trustee of funds of this nature ... is striking".
That, you would think, would be the end of Perpetual as a trustee, but you would be wrong.
Pyne Gould sold its trustee business to a former manager. The newly emerged trustee business, Corporate Trust Limited, registered as a company the week before it was granted a licence.
At least it has a new shareholder and a new website.
In what I think is disgraceful conduct, both Covenant and Perpetual have continued to charge fees to failed finance firms, reducing the pool of funds to distressed investors.
How can they justify that to the people who have lost out?
The FMA is doing good work.
But if it wants integrity to return to the financial markets it needs to let people know why these retreads are still allowed to be active.