Securities Commission Chair Jane Diplock wrote a column in the NZ Herald on Saturday calling for the government to fast-track the review of the Securities Act and create a 'super-regulator' to restore investor trust in the capital markets.

Diplock blamed the delays in fixing the act and the lack of a coordinator for some of the finance company debacle. She appeared to hitch her wagon firmly to the new 'super-regulator' the government is planning and may even want the top job.

Here's why I think the government should say 'thanks, but no thanks' when she submits her CV.

Jane Diplock has been the chairman of the Securities Commission since 2001. The buck stops with her on its performance.

It's surprising she is now blaming her tools for the failure of the regulatory regime to restrain finance companies and financial advisors from what we now know was a frenzy of kick-back commissions, inaccurate and misleading reporting of asset values and results, widespread capitalising of interest, endemic related party lending and Ponzi-like deposit taking.

How outspoken was she during 2004, 2005 and 2006 in pushing the government to reform the rules or on warning investors about finance companies? How many times did she act to block finance companies from raising money?

I had a look through her speeches on the Securities Commission website for 2004, 2005, 2006 and 2007 for evidence she was pushing the government to toughen the rules dramatically and give her the powers she says now that she needed.

This speech here in March 2007 on "Developments in New Zealand Securities Regulation" suggests she was quite happy with the increased powers she had at that stage.

"New Zealand has come a long way on securities regulation over recent years. Major reforms - the latest will come into effect around the middle of this year - have clarified and strengthened our regulatory framework and made enforcement more effective.

The Securities Commission has been given increased responsibilities and powers, and is committed to using its powers cost effectively. We seek the best means to achieve the best outcome for investors and the market."
she said then.

"Despite the substantial reforms, there has been little or no change in the fundamental principles on which New Zealand regulation is based. We continue to place the highest importance on timely, relevant and complete disclosure of information, and on competition among equally well-informed market participants.

The reforms have brought the New Zealand securities markets further "into the light" where efficiency, integrity and, ultimately, confidence can flourish,"
she said.

Earlier in the speech she said this to reinforce the strength of her powers:

"Earlier reforms brought in substantial penalties for breaches of securities law and these are extended in the latest law changes. The Commission will be able to seek pecuniary penalties for serious breaches, compensation for losses suffered by investors and management banning orders against individuals in some circumstances.

We will have powers to make prohibition, corrective or disclosure orders for market manipulation and disclosure failures. Under the insider trading law, we will be able to bring actions in the High Court."

"It is interesting to contrast the capabilities of the Commission today with those of a decade ago. Then, the regulator's role was largely confined to inquiry and report writing on market trends and instances of poor market behaviour. Court action could only be taken by market participants.

"The Commission has always had powers to cancel false or misleading prospectuses and advertisements for securities offered to the public. These are essential powers.

We also have power to grant exemptions from compliance with certain aspects of securities law where unwarranted constraints or costs would otherwise be incurred. I would note though that any exemption granted is subject to conditions particularly relating to providing information for investors. These powers reflect the fundamental importance of having a well-informed securities market and of ensuring regulation is cost-effective."

So it's clear that back in 2007, before the worst of the abuses, Diplock had the power to cancel prospectuses or ads for 'first ranking secured debentures'.

She could also ban individuals from issuing prospectuses. Yet the likes of Owen Tallentire, Mark Bryers and Rod Petricevic were allowed to go on their merry way. Prospectuses that talked about interest 'earned' actually misled many because much of that 'interest' was capitalised. Related party deals went unexplained and unchallenged by the Commission.

The accounts reported by finance companies were often nearly a year out of date by the time they were available to investors.

These accounts were often rubber stamped by friendly auditors and appear to have been ignored by both Trustees and the Companies Office. How else would they let them through without being challenged?

Why didn't Diplock cancel the prospectuses? Did she commission investigations that spotted these problems? And how much of a warning bell did she ring?

Here's the August 26 press release Diplock is referring to when she said she warned investors. It was issued several weeks after the collapse of Bridgecorp.

"You should be especially clear about who the finance company is lending money to, and how well the repayments are going. This is why it is so important for investors and their advisers to read a prospectus.

The Securities Commission does not have a prudential regulatory role over finance companies - it cannot step in to stop a finance company failing, or take action against a finance company that fails, or help investors recover their money.

The Commission's job is to intervene only if a finance company does not provide the required information for investors to make a decision on whether or not to invest."

"If the investment statement, prospectus or advertising is not up to standard the Commission can require the finance company to correct the information.

If necessary the Commission can take the offer off the market until any breaches are remedied. Once the offer is stopped, the Commission's role ceases. With their higher rate of return than a registered bank, well-managed finance companies are still an investment option for mum and dad investors to consider.

But they must always understand the risks they take with their money. This includes assessing whether the promised return is high enough for the risk they are taking."

This doesn't look like a warning that would make a difference, and it didn't. It even included the comment that 'well managed finance companies are still an investment option for mum and dad investors to consider'.

Two days later in 2006 the Securities Commission issued another press release saying this:

"Finance companies' disclosure of information for investors has markedly improved since the Securities Commission published a report on Disclosure by Finance Companies in April 2005. This is the finding of a Commission's review of offer documents of 20 companies prepared since the Commission's report.

The Commission's job is to intervene when finance companies do not provide the information required to enable investors to make informed investment decisions. The report set out the Commission's expectations of disclosure of information by finance companies. This subsequent review focused on key areas identified in the earlier report such as disclosure of the risks of the investment, and the investment activities of the company.

Each company's most recent investment statement, prospectus, financial statements, and advertising were reviewed for compliance with securities law.

"Two finance companies had not followed the guidance in the report and still had poor disclosure, especially about risk. Ten others had improved their disclosure on the basis of the report but had fallen short in certain areas.

The Commission required these 12 companies to rectify their disclosure deficiencies. All of them amended their offer documents and / or advertisements and one also amended its financial statements. Other companies have agreed to make improvements when next updating their offer documents or preparing advertisements.

"It seems that most companies had taken the report seriously and have been able to apply the guidance in it. On the whole we are pleased with the co-operation we received from the companies reviewed,"
Jane Diplock said.

"The standard of disclosure in the finance company sector has improved significantly as a result of the Commission's work. However, there is still room for further improvement, especially with regard to risk."

Why won't these companies named? Why weren't there prospectuses cancelled? The comments in the speech delivered six months later (referred to above) emphasise her concerns about cost effectiveness for issuers, rather than protections for investors.

Jane Diplock's Securities Commission has not covered itself in glory, yet with this latest column she appears to be campaigning for a role in running the new Super regulator. We need a clean break with an awful past. Let's find a fresh face.

For further views on this check out Brian Gaynor and Gareth Morgan.