Inquiry into finance company failures

Chairperson, Hon Lianne Dalziel, advises that the Commerce Committee has agreed to conduct an inquiry into finance company failures.

Over the past three years, around 30 finance companies have gone into receivership or liquidation, entered into moratoria, or frozen repayments to investors. 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. 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 underway that are likely to result in further legislative change. These include the oversight of finance companies, the regulation of public offers of securities, and the role of finance advisers, trustees and auditors.

Hon Lianne Dalziel says, “the committee takes the view that it is not necessary to duplicate the work that is 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”.

The particular issues identified relate to four broad areas:

• 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.

Based on these areas, the committee has set the following terms of reference for the inquiry:

• 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?

• 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.
• 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?

• 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.