Briefing on finance company failures

Transcription

1 Briefing on finance company failures Report of the Commerce Committee Contents Recommendation 2 Purpose of the briefing 2 Background 2 Conclusion 4 Appendix A 5 Appendix B 6

2 Briefing on finance company failures Recommendation The Commerce Committee has conducted a briefing on finance company failures and recommends that the House take note of its report. Purpose of the briefing The purpose of this briefing was to explore the need for a select committee inquiry into the issues associated with finance company failures. We felt caution was required as we believe that any inquiry should not duplicate the considerable amount of work that is already being done in this area. Thus, the committee, with assistance from the Minister of Commerce and the Ministry of Economic Development, sought to establish what work the previous and current Governments had completed, or had under way. From there the committee sought to determine whether there were any issues not addressed by the Government s current work programmes that might warrant the scrutiny of a select committee. Background Between the beginning of 2006 and January 2009 more than 30 finance companies have gone into receivership or liquidation, entered into moratoria, or frozen repayments to investors. The total amount of investors money lost as a result of finance company failures has yet to be finally established, but is likely to be considerable. These events raised a number of significant issues regarding practices in the finance company sector and the legal frameworks that govern the sector. The Government at the time moved to address these issues, and the current Government has continued and added to this work programme. A summary of this work follows: Oversight of finance companies: an amendment to the Reserve Bank Act 1989 was made in 2008 to subject non-bank deposit takers (including finance companies) to direct prudential regulation in a similar fashion to banks. This regulation focuses on matters such as credit ratings, capital adequacy, and related-party exposures. The regulation of public offers of securities: the Government is undertaking a review of the Securities Act Key issues include the adequacy of disclosure to investors by issuers, and the powers of regulatory agencies such as the Securities Commission. The Minister of Commerce is also examining the adequacy of the regulation of moratoria proposals. The role of finance advisers: the Financial Advisers Act was passed in The Act establishes minimum standards of conduct and disclosure on all financial advisers and requires those providing more complex financial advice to be authorised by the Securities Commission. In addition, the Financial Service Providers (Registration and Dispute Resolution) Act

3 will require financial service providers to be on a public register, and to join an approved consumer dispute resolution scheme if they offer services to the public. The role of trustees: as part of the Securities Act review the Minister of Commerce has decided to fast-track work on the supervision of corporate trustees. We note that the Minister has announced that this will involve a licensing regime for trustees who supervise issuers. The role of auditors: the Minister of Commerce is currently considering whether auditors should be subject to supervision. Issues not addressed by current work We believe that there are four broad areas that are not addressed by the Government s work programme and would benefit from select committee scrutiny. They are as follows: Ensuring investors are well informed about investment proposals: it is crucial that investors have high-quality information before them when considering an investment decision, and that they can understand financial matters. Questions that we could usefully address include the following: whether the marketing and advertising of investment proposals play a disproportionate role in investors decisions whether further rules are needed regarding the quality of advertisements for securities whether the disclosure of advisers commissions is adequate whether advisers commissions should be banned what can be done to improve investors understanding of financial products and services. Ensuring that investors understand the implications of a moratorium proposal before voting: we wish to examine the quality of advice provided to investors in moratorium situations, including independent analysis of moratorium versus receivership, and the independence of the management of the moratorium. We note that the Minister has announced that the Government intends to pass regulations by the end of the year addressing most of these issues. Ensuring that advance actions can be taken to reduce the chances of failure: we wish to examine ways of minimising the chances of situations arising where the risk of failure is not adequately reflected in the risks identified to investors or the returns investors expect to receive for that level of risk. Questions that we could usefully address include the following: Should regulators have the power to call in particular products that may raise investor protection issues, in order to scrutinise whether these products should be allowed to go to the market? Should the law provide for extended whistle-blowing protections? 3

4 Does the law deal adequately with directors and managers who have been implicated in inappropriate activity in respect of finance companies and who go on to start up new firms? If not, what steps could be taken to improve the way the law addresses this issue? Ensuring adequate measures of redress exist when failure occurs: it is also important that robust measures are available to provide redress to investors where failure occurs and wrongdoing is established. Such measures should also act as a significant disincentive for wrongdoing to occur. The type of questions that need to be addressed are as follows: Do directors and managers of finance companies hold the appropriate professional indemnity insurance? What is the state of the market for professional indemnity insurance for directors? To what extent could the law make it easier to trace funds following the recent finance company collapses? How can this be facilitated to make it easier for investors to get financial redress for their losses? Should the law make it easier to penetrate trusts that may protect the assets of culpable directors? Conclusion This inquiry is intended to add value to the work currently being undertaken by the Government and other agencies, and not to duplicate their work programmes. On this basis, we believe that a select committee inquiry into the issues associated with finance company failures is warranted. We have therefore initiated such an inquiry, and have drafted the attached terms of reference. We have called for written submissions on the terms of reference, with a closing date of 15 October

5 Appendix A Committee procedure The committee met between 9 April and 20 August 2009 to receive briefings from the Ministry of Economic Development and consider whether to undertake an inquiry. Committee members Hon Lianne Dalziel (Chairperson) John Boscawen Charles Chauvel Clare Curran Te Ururoa Flavell Jo Goodhew (to 25 June 2009) Melissa Lee Peseta Sam Lotu-Iiga Katrina Shanks Jonathan Young (from 25 June 2009) 5

6 Appendix B Terms of reference Inquiry into finance company failures On 20 August 2009 the Commerce Committee initiated an inquiry into finance company failures. The committee identified four areas which do not appear to be addressed by the previous and current Governments work programmes, and that could benefit from select committee scrutiny. These four areas are: Ensuring investors are well informed about investment proposals Ensuring investors understand the implications of a moratorium proposal before voting Ensuring advance actions can be taken to reduce the chances of failure Ensuring adequate measures of redress exist when failures occur. Based on these areas, the committee has set the following terms of reference for the inquiry: 1 To examine the quality of information provided to investors when considering an investment decision, and investors ability to understand financial matters. Whether the marketing and advertising of investment proposals play a disproportionate role in investors decisions. Whether further rules are needed around the quality of advertisements for securities. Is the disclosure of advisers commissions adequate? Should advisers commissions be banned? What steps can be taken to improve the existing level of investor understanding of financial products and services? 2 To examine the quality of advice provided to investors in moratorium situations, including independent analysis of moratorium versus receivership, and the independence of the management of the moratorium. 3 To examine ways of minimising the chances of situations arising where the risk of failure is not adequately reflected in the risks identified to investors or the returns investors expect to receive for that level of risk. Should regulators have the power to call in particular products that may raise investor protection issues in order to scrutinise whether these products should be allowed to go to the market? Should the law provide for extended whistle blowing protections? Does the law deal adequately with directors and managers who have been implicated in inappropriate activity in respect of finance companies and who go on to start up new firms? If not, what steps could be taken to improve how the law addresses this issue? 6

7 4 To examine the measures in place that provide redress to investors where failure occurs and wrongdoing is established, particularly whether these measures act as a significant disincentive for wrongdoing to occur. Do directors and managers of finance companies hold the appropriate professional indemnity insurance? What is the state of the market for professional indemnity insurance for directors? To what extent could the law make it easier to trace funds following the recent finance company collapses? How can this be facilitated to make it easier for investors to get financial redress for their losses? Should the law make it easier to penetrate trusts that may protect the assets of culpable directors? 7