Watchdog defends disclosure regime for finance companies

Amid mounting calls for more rigorous disclosure requirements for finance companies, the Securities Commission is defending the existing regime as sufficient to provide the information required to make sound investment decisions.

However, the commission's primary markets director, Kathryn Rogers, acknowledges room for improvement and is cautiously supportive of mandatory credit ratings for the sector.

Calls for more frequent and detailed disclosure of information on companies' financial fitness have grown after the recent failures in the sector that have left thousands of ordinary debenture stock investors millions of dollars out of pocket.

Many commentators - including finance companies - say some kind of continuous disclosure regime, similar to that which applies to firms listed on the stock exchange, is the answer. Others have called for a mandatory credit ratings system.

Rogers said in a recent newsletter that finance company prospectuses were already required to provide investors with all information material to the securities being offered.

"There's also a requirement to effectively update that should there be a material adverse change," she told the Business Herald.

Rogers said the existing regime amounted to a form of continuous disclosure if it operated correctly.

"Provided issuers comply with it fully, then that should be enough."

If issuers did not comply, the commission has the power to ban their offer documents "which it has done". Beyond that, "there is provision for criminal enforcement".

Rogers acknowledged the quality of information provided by finance companies varied - "that's something that's been looked at".

However, "There's a difference between saying finance companies aren't complying as well as they should be and saying there's no provision for information to be given, which was the impression we were getting from some of the media items.

"I'm not sure there's a big gap between what we've got and what the ideal would be, but we're always in favour of more disclosure so long as it's high quality and is useful to investors."

Provincial Finance has been the largest of the failures with $324 million owed to investors. Many industry figures have said it was known by the end of last year that there were serious problems at Provincial. Some investors say they were not informed of that by their financial advisers or the company.

Rogers said she was aware of those allegations and there was the possibility that Provincial had not been complying with its requirements under the law in the months before it withdrew its prospectus in April.

"It may also mean things may have gone wrong very quickly and there wasn't time to update it."

But because the company was no longer in business, the commission was unable to take any action.

Investigation of breaches by a company that was no longer an issuer were the responsibility of the Companies Office, and then, the Ministry of Economic Development's National Enforcement Office.

A spokesman for the Companies Office said last week it was awaiting a detailed report on Provincial from the receiver PricewaterhouseCoopers. The offer documents of another failed company, National Finance 2000, had been referred to the National Enforcement Office for further investigation.

Rogers said there was "probably a place" for mandatory credit ratings for finance companies - an idea being canvassed in a discussion document published recently as part of the MED's review of financial products and providers.

"But ... it's not a magic bullet. To expect that to assist investors, any more than the current disclosure regime does, is probably a little unrealistic. But it can act as a ready reference to compare one finance company with another."