Files reveal Reserve Bank's SC Finance concerns

Photo / Dean Purcell

The Reserve Bank was worried that South Canterbury Finance (SCF) related party transactions potentially breached the Crown retail deposit guarantee scheme as long ago as April 1, 2009.

This is revealed among a series of documents released by the central bank covering its engagement with SCF.

The Serious Fraud Office (SFO) last month launched an investigation into SCF related party transactions.

SFO CEO Adam Feeley says if fraud that enabled SCF to enter into the guarantee scheme is proven, the consequences would be "immense in financial terms" given the $1.6 billion taxpayer funded payout to SCF investors after the company's receivership and subsequent Crown guarantee scheme payout.

In an email dated April 1 last year, the Reserve Bank's senior risk analyst for domestic deposit taking oversight, Peter Williams, sent a file to colleague Douglas Widdowson.

In it Williams commented on related party transactions from December 2008 and January 2009 noting they may breach the terms of the Crown Deed of Guarantee for non-bank deposit takers.

He noted in SCF's January 2009 deposit guarantee scheme return, there were material changes including related party lending of $70 million, an increase in fixed assets of NZ$53 million and an increase in listed equity investments of $90 million.

Background information on this had been sought from SCF's trustee Trustees Executors.

No specific information was provided on the January related party lending of $70 million, although "general concerns" disclosed by the trustee, via the provision of a copy of a letter they sent to the company in November 2008, have been withheld from the information released by the Reserve Bank.

Nonetheless Williams says the possible Crown guarantee breach related to clause 6.2 covering arm's length transactions.

He notes that an un-named transaction, relating to the purchase of SCF loans by the parent - presumably Southbury Corporation - in December 2008 was a related party transaction and exceeded a 1 per cent total assets limit, being $89.6 million against the limit of NZ$21.36 million.

Furthermore, the deal didn't have prior Crown consent, and didn't have a written certificate provided by an approved expert that the transaction was arms length.

Williams noted the latter two points had been confirmed by the Treasury.

Another transaction, relating to the purchase of listed equity investments in January 2009 from related parties, was also a related party transaction, based on Trustees Executors' opinion.

This also exceeded the 1 per cent of total assets limit, at NZ$90 million against the $21.36 million limit, didn't have prior Crown consent nor the written certificate by approved expert.

The array of information released by the Reserve Bank also includes a report suggesting SCF was not systemically important to the New Zealand economy or financial system.

There's also correspondence between Trustees Executors and the Securities Commission and an email from Widdowson to Reserve Bank head of prudential supervision Toby Fiennes, governor Alan Bollard and deputy governor Grant Spencer dated May 28 this year.

It said: "John Park from Treasury has just let me know that events in Timaru are moving at a glacial pace."

"Their investigator informs them that (SCF director) Ed Sullivan has resigned, and Alan's (presumably SCF owner Allan Hubbard) resignation letter is on his desk. He is playing an effective delaying game holding up his signature, but time is running out."

Hubbard was placed in government enforced statutory management on June 20.

There's also an email exchange from May 2009 covering what's described as a "somewhat surprising claim" by ex-National Party cabinet minister and former Attorney General Paul East - now of law firm Bell Gully - on behalf of SCF that the industry had not been adequately consulted on proposed capital and related party prudential regulations for non-bank deposit takers.

- INTEREST.CO.NZ