Sorry, victims, but you're on your own

Jane Diplock says the Commission is ready to take on more responsibility. Picture / Mark Mitchell

New Zealanders misunderstand the risks of investing in finance company debentures and the powers the Securities Commission has to regulate them, its chairwoman Jane Diplock says.

The commission has been in the firing line this year following the failures of Provincial Finance, National Finance 2000 and Western Bay Finance, which owe investors almost $400 million.

"People seem to misunderstand our role, they think we can get their money back," Diplock told the Business Herald.

"They've written to us and are mystified that there's not a lot we can do and I guess that's their frustration and in a sense ours too. There's nothing we can do to help them and that's the nature of the framework."

That framework consists of upfront disclosure by way of offer documents and prospectuses, which the commission oversees, ongoing monitoring of the company by its trustee and then, "unfortunately, if the company fails, receivership".

The receiverships have been costly for debenture investors but Diplock says for investors in finance companies, losses go with the territory.

"Some of these companies are in risky businesses and they will fail. That is the way business works. If people don't understand the risks, they should not invest in those companies.

"If you can get six per cent from a registered bank in this country, and you're getting nine per cent from a finance company, I don't think people understand that that's 50 per cent more return you're getting and at least 50 per cent more risk."

Much of the criticism of the current regulatory regime has focussed on the quality and timeliness of information provided by finance companies about risk when their circumstances change.

That has led to calls for a continuous disclosure regime for finance companies - akin to that which applies to listed public companies.

However, the commission's director of primary markets, Kathryn Rogers, has defended its overseeing of offer document. She argues it amounts to a form of continuous disclosure already - as companies are obliged to revise or amend their prospectus should there be a material change in their circumstances.

Diplock said revising the prospectus "is a fairly onerous exercise in some people's mind".

Furthermore, a continuous disclosure is something the Ministry of Economic Development "might consider"in its review (now underway), but such a move would increase the compliance burden for companies, she said.

One of the drivers of calls for a more rigorous disclosure regime has been the belief that some industry players knew there were problems at Provincial long before the company stopped taking investor funds.

At least one financial adviser told the Business Herald they stopped putting clients' money into the company late last year because they had concerns about the company.

The company did reissue its prospectus in January, and Diplock said the commission was looking at it to see "if they were actually truthful".

But she dismisses allegations of problems at Provincial long before they were publicly revealed.

"Harry Hindsight! Everyone has great hindsight when a company goes bust. We hear that people say 'well, I knew that,' well if they did know that, why didn't they come to us and tell us? We'd have been quite happy to receive that information."

Should the commission discover problems with a company's offer documents it can ban them, an act which is not publicised but which Diplock says the commission has done many times.

But the commission does not monitor finance companies on a day-to-day basis, that is the role of a prudential regulator, she says.

"We don't have that sort of oversight in this country. Whether we should or not is still an open question."

The Ministry of Economic Development (MED) was also looking at that issue in its review and would canvas public opinion in a discussion paper to be released in October.

The role of finance companies' trustees, "is a form of prudential supervision" albeit a light-handed one.

Her opinion is that the trustees, who are currently self-regulating through their professional body, should be forced to strengthen their supervision of finance companies.

"One of the policy suggestions being tossed around by the MED is that there might be some role for the Securities Commission to oversee the way in which trustees undertake their role and that might be part of a beefed-up regulatory framework in this area.

"We will certainly be considering that option if it's put forward by the MED as part of their review."

But the trustees still rely on financial information provided by the company through its auditors, who are overseen by the Institute of Chartered Accountants. This is an area where Diplock sees scope for improvement.

"There's been some thought about a co-regulatory role for us in relation to auditors and I have called for an independent oversight body for auditors for some time."

But with the commission already co-regulating the stock exchange and likely to co-regulate financial intermediaries at some point in the future, its workload is likely to increase substantially.

Diplock says she has informed the Government the commission is "comfortable" with that, "as long as we're appropriately resourced".