Parliament's Commerce Committee to hold inquiry into finance company failures (Update 1)

Parliament's Commerce Committee will launch an inquiry into the failures of finance companies in New Zealand, NZPA has reported on Stuff. (Update 1 includes more on inquiry.) The Deepfreeze list on interest.co.nz shows the level of failure in the finance company sector since 2006 following a downturn in the property market and the attendant credit crunch. At least 20 finance companies have been replaced in receivership since National Finance 2000 failed in early 2006, while at least 11 finance companies have been placed in moratorium. "These events have raised a number of significant issues with regard to practices in the finance company sector and the legal frameworks that govern the sector," committee chairwoman Lianne Dalziel said. Dalziel was Commerce Minister at the time of the collapses. A Companies Office report to the committee in March savaged auditors, trustees, directors and CEOs over finance companies 'operating like ponzi schemes'.

"A number of the issues involved have been identified by the current and previous governments - in some cases legislative changes have been made and new regimes are being implemented, in other cases major policy processes are under way that are likely to result in further legislative change," she said. NZPA wrote that Dalziel said the committee would not duplicate work that was already underway. "Rather it wishes to focus on issues that do not appear to have been identified within current work programmes, and on particular issues which may benefit from the scrutiny a select committee can bring to bear." Dalziel said there were four broad issues the committee had identified:

• 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 or redress exist when failures occur.
• Should the law make it easier to penetrate trusts that may protect the assets of culpable directors?

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?

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?

The committee has made a call for written submissions on the terms of reference, with a closing date of 15 October 2009.