KEY POINTS:
Finance companies falling into receivership are momentous events for those who are concerned that they may not get all their money back but the failures are not in themselves a signal that the system has failed.
Investors should not panic. They should review their investments, ask questions, and
consult a responsible adviser. It is time to consider abandoning the traditional New Zealand DIY approach to investing.
Investors should not assume that all investments are bad. They should consider the alternatives and keep in place those savings they have with strong organisations and funds that are delivering the returns they expect.
They should retain their sense of perspective, difficult as this might be if they have lost money.
In terms of that perspective, corporate trustees are involved with fund management and debt market activities of $105 billion, of which finance company borrowings account for 10 per cent.
The finance companies who are in difficultly make up 1 per cent of that total responsibility.
In business and financial markets some failures are inevitable, with causes as diverse as competition, market movements, misreporting and incompetent management.
The flow-on effects can be a lack of liquidity in the market leading to pressure on rates, and unexpected financial breaches. Even the relatively prudent may be caught short.
Investment markets are about risks and rewards and they go through cycles in which one or the other or these factors dominates. Trustee corporations have an important role in maintaining investor confidence.
Organisations seeking funds from the public must have a trust deed which establishes the processes, parameters and legality of their operations and their responsibilities to those they are borrowing from. They must also have a trustee, whose role is to ensure those responsibilities are met. The powers the trustees have in regard to finance companies are largely confined to monitoring management reporting and compliance and, when appropriate, calling meetings of investors.
The trustee also has the important responsibility of alerting authorities - such as the Companies Office and Securities Commission - of any governance discrepancies and breaches of the trust deed as regulated under the Securities Act.
Discussions between the Trustee Corporations Association and the Securities Commission are likely to result in changes that will give trustees access to more regular reports on the operations of finance companies and the right to appoint experts such as investigating accountants to report on the true state of a company's affairs. We are advocating legislation requiring finance companies to have higher levels of capital and shareholders' funds and to ensure directors are fit to hold office.
Trustee companies have played an important role in New Zealand for the past 130 years - a role that has not changed in the light of recent company failures.
That role is now even more important given the billions of dollars New Zealanders have invested in securities as diverse as debentures, unit trusts, managed funds, credit unions and superannuation funds.
In the case of finance companies, trustees do not hold assets (the invested capital) on behalf of investors.
But trustees do hold the assets in a fund management situation, where they have greater control over how a manager operates, thus delivering greater security to investors.
Trustee corporations, through their individual statutory empowerment and the Securities Act, have the authority to act as guardians who will ensure finance companies and fund managers carry out their obligations to investors.
The Government is looking to trustees to monitor the health of finance companies and ensure they are making the appropriate disclosures in terms of their trust deeds.
Although investors' powers as individuals are limited, they can be confident that the continuing role of trustees is to represent them in a collective manner to ensure the governance standards are upheld - just as they have done for 130 years.
* Clynton Hardy is chairman of the Trustee Corporations Association.
