Finance collapse pinned on directors

Securities Commission chair Jane Diplock

The Securities Commission and the professional body for finance company trustees have joined with the Companies Office in pointing the finger at finance company directors for the collapse of the industry.

The commission yesterday announced it intended to scrutinise the quality of corporate governance, including that by finance company boards.

Last week a stinging Companies Office report on the run of finance company failures between 2006 and 2008 was tabled at Parliament's finance and expenditure select committee.

"The quality of corporate governance is a key factor to be considered in our attempt to understand the reasons for the failure of the finance company industry," the report said.

Registrar of Companies Neville Harris said some boards "tended to lack the breadth of experience and skills required to oversee the scale, complexity and characteristics of financing operations".

"Too often directors were not adequately informed, misled or failed to take sufficient interests in the affairs of the company."

The report was also highly critical of the work of finance company trustees, particularly Perpetual Trust and Covenant Trustee, who between them were the front line regulators for the majority of the 30 or so companies that failed in the last three years.

"In our view, Covenant and Perpetual were slow to detect adverse financial issues developing and they responded too timidly to circumstances where investors' interests were being put in jeopardy."

Harris said the two firms appeared to lack sufficiently experienced staff and an adequate understanding of the risk profile of finance company lending.

Defending his members yesterday in an interview on National Radio, chairman of the Trustee Corporations Association Clynton Hardy said finance company directors had misled trustees and kept them in the dark.

"What we have seen in the last while is a lot of events where directors of issuing organisations like finance companies just haven't done their job properly and haven't reported to the trustee as they are obliged to do under the law and under the trust deed."

While Securities Commission chairwoman Jane Diplock indicated historical weaknesses in the trustee supervision regime, ultimately, "the buck has to stop with the directors".

Diplock conceded this amounted to a light-handed regulatory regime for the sector. "But in being light-handed it requires directors to take those responsibilities very seriously".

"They have failed in many cases and there's been poor governance.

"Given the current financial climate investors need greater assurance that issuers have robust corporate governance arrangements in place. Investors can only have confidence in the market if such arrangements are fully disclosed," Diplock said.