Financial Markets Authority CEO Sean Hughes down plays prospect of using new powers to try and recoup NZ$3.45 bln lost by finance company investors

By Gareth Vaughan

Financial Markets Authority (FMA) CEO Sean Hughes is urging investors in the 16 failed finance companies being probed by the regulator to be patient but says whatever the outcome of the FMA's investigations, they're not likely to get much of their NZ$3.45 billion back.

Answering questions put to him by interest.co.nz after providing an update on the investigations into failed finance companies the FMA inherited from its Securities Commission predecessor, Hughes said the FMA "can and will" pursue compensation, for investors, where it is available from the directors or promoters of the companies and where it's appropriate to do so.

"But the reality is, most of the money is gone," Hughes said. "Our job is to hold people to account for that where the law has been broken, and that’s what we’re getting on with."

He did acknowledge, however, that a new power the FMA has, which the Securities Commission lacked, means there is the potential for greater recovery than was the case previously, and that the FMA can pursue a broader range of market participants rather than just directors or promoters. This new power (its so-called Section 34 power) is similar to one the Australian Securities and Investments Commission (ASIC) has. Effectively it enables the FMA to exercise a person's civil right of action.

Stepping into an investor's shoes

So if, after an FMA investigation or inquiry, the regulator believes it's in the public interest to do so, it could exercise the right of action of a person (investor) by launching and controlling civil proceedings against "financial markets participants" or individuals including company directors, auditors or trustees.  The FMA could then seek money or "other relief" for fraud, negligence, default, breach of duty, or other misconduct.

ASIC's use of its equivalent power saw it win up to A$67.5 million for investors in property scheme Westpoint earlier this year from auditor KPMG and four former Westpoint directors. See full story on this here.

Hughes, a former ASIC executive, points out the FMA can only use this Section 34 power when doing so is in the public interest. The organisation's public interest test includes issues such as  the seriousness of the conduct or misconduct, the amount of money that has been lost, the number of investors affected, the age of the conduct, IE whether it's stale and whether the evidence is still available and can be pursued, plus the reliability of witnesses.

"These are all factors that we need to take into consideration in deciding whether it is in the public interest to use public funds to pursue these types of matters as well as take up the time of the court," said Hughes.

"Furthermore, it would not be in the public interest to expend resources pursuing compensation if there is little likelihood of any assets being available to satisfy a judgment, if FMA was successful. In many cases, moneys were lost many years ago, well before FMA came into existence," he added.

Familiar names in the 16

Hughes announced this week that the FMA would continue probing 16 finance companies whose collapses the Securities Commission began investigating and close six investigations due to lack of evidence of any wrong doing. Those still under investigation include high profile casualties such as Hanover Finance, Strategic Finance, St Laurence, South Canterbury Finance and Allied Nationwide Finance. Also still in the gun is Equitable Mortgages, the only finance company to be tipped into receivership with deposits covered by the extended Crown retail deposit guarantee scheme.

The FMA hopes to conclude as many as five of the 16 ongoing investigations by year's end, but Hughes says it's likely to take another two years to work through all 16 cases. The 16 involve an estimated NZ$3.45 billion of investor losses.See full story here.

The FMA was launched by the government in May as the key plank in its efforts to restore ma and pa retail investors' faith in the capital markets after the meltdown of the finance company sector. It replaced  the Securities Commission and took over some roles from the Ministry of Economic Development, such as the regulatory role of the Government Actuary and some of the roles of the Registrar of Companies. In a Double Shot interview in April Hughes told interest.co.nz that restoring investor confidence wasn't a single job for a single person. It involves a partnership, he said, and everybody needed to "get in and roll up their sleeves."

'Be patient'

Asked if he had a message for investors, many of whom are elderly, in finance companies that collapsed four years ago and who are still waiting to see whether any action is taken against those who ran and supervised the companies, Hughes said: "I would ask investors to be patient. Investigations take time, and it is very important that FMA gets it right. The last thing we want to do is go to Court and fail because we have not prepared our case adequately."

"We have been in business for only four months. We are a new body with a new Board, and we needed to form our own view of all these cases. Investors should also be aware that some of the investigations we are pursuing may not end in prosecutions. Some of these companies failed for commercial reasons, not because anybody was breaking the law," Hughes said.

He acknowledged, however, that it was never enough to simply prosecute cases after the event.

"These are matters that we inherited. They didn't occur on our watch and we're now in the position of having to resolve as many of these as we we can within the confines of our budget."

The FMA has a total budget for 2011/12 of NZ$24 million.

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