Bernard Hickey: Fraud erodes vital investor trust

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Confidence and trust in a nation's financial architecture is a delicate and ephemeral thing. It's also crucial to the long-term sustainability of any modern economy and society.

If the public loses faith in the way their investments are handled, it can take decades to recover. In many ways, the anaemic nature of our stock market and the lack of investment in productive infrastructure through the 1990s and 2000s is a result of the failure of public confidence after the 1987 crash.

Many would argue the housing boom of the mid-2000s and the associated surge in investment in finance companies is also a result of that distrust. After years of failed inquiries, the perception was that those rich enough to afford good lawyers could get away with taking money from the public. Only a few of the 1980s high fliers saw the inside of a jail.

Rod Petricevic was involved in the spectacular failure of Euro-National and was widely distrusted within the more informed echelons of the financial industry, but the public invested $458 million with his finance company, Bridgecorp, and will be lucky to get any of it back.

A RaboDirect survey published this week shows public confidence in fund managers, financial advisers, stock brokers and finance companies is at rock bottom. The only institutions we really trust are banks and building societies.

As the wreckage of the global financial crisis is cleared, 200,000 mum-and-dad investors are left facing losses of up to $4 billion on funds worth $8.5 billion that have been frozen within finance companies, mortgage and investment trusts.

Much of this was money invested poorly but a good chunk of it will have been outright fraud. Estimates of the cost of white-collar fraud in New Zealand range from $2 billion to $5 billion a year. The costs are borne by everyone through higher prices and taxes, but it is especially damaging for investor sentiment.

Yet our policymakers seem to treat this white-collar crime as business as usual if the budget for the Serious Fraud Office is the measure.

The SFO will spend $7.47 million in the 2010/11 year, according to its annual report. This is flat on the 2009/10 year and up 35 per cent from the previous year, but it is vastly lower per capita than the resources spent in other Western economies. The SFO has just 32 staff who were handling 47 active cases and 13 prosecutions as at June 30. That works out at 0.68 staff per case, compared with 3.57 staff per case in the United Kingdom.

We have more people working in the Ministry of Youth Development or the Ministry of Women's Affairs. The Government spends $3.5 billion on law and order but just 0.2 per cent of it goes on investigating serious fraud.

Why do we spend so little on crimes that have the potential to cripple our future economic growth?


bernard.hickey@interest.co.nz