Guarantee relied on trustees' word

Finance companies, including failed Mascot Finance, were granted coverage under the Retail Deposit Guarantee largely on the word of their trustees, says the Reserve Bank.

However in many cases, the oversight by trustees had already been called into question before the scheme was introduced.

Reserve Bank Governor Alan Bollard yesterday told Parliament's finance and expenditure select committee that information provided by the bank to Treasury during the application process came from trustees.

"We ask the trustee if [the finance company] is in breach of its trust deed. If we get a clean bill of health from the trustee and there is nothing else that we are aware of that would stand in the way of it receiving the guarantee then we will give no-objection advice to Treasury."

When the scheme was introduced in October the Reserve Bank said finance companies would have to meet "strict eligibility criteria".

However Act MP and committee member John Boscawen yesterday suggested information obtained from trustees was "a very low test" and the Reserve Bank needed to look at companies' assets itself.

But Bollard said the law was that trustees had "primary responsibility for ensuring there is no, or not likely to be, contravention of the trust deed".

"That is the cornerstone regulation that Parliament decided was the way for the future. Now to make that work better we are leaning heavily on the trustees to ensure they understand their enhanced role and do that properly in the future."

Trustees have drawn considerable criticism over the past three years as firms have started toppling. Commentators have pointed out that problems at firms including Provincial Finance, Bridgecorp and Hanover were widely known well before trustees were seen to act to protect investors' funds.