Exchange practice flawed, says regulator

Peter Marshall

Sharemarket operator NZX's broker compliance regime suffered from inexperience, inadequate training and poor understanding of relevant rules during the period leading up to the collapse of Access Brokerage late last year, the Securities Commission has found.

However, the commission, which regulates the sharemarket with NZX, says the problems have been largely addressed.

It launched an inquiry into NZX's regulation of brokers after the Access collapse. Liquidator Ferrier Hodgson found the company had been run on client funds for some time in breach of NZX rules. Former Access managing director Peter Marshall has been charged by the Serious Fraud Office in relation to the misuse of the funds and NZX's enforcement body is also taking proceedings against him.

The commission's report was never intended to establish the cause of Access' collapse but was a review of parts of NZX's regulatory functions leading up to it.

At that time, NZX's broker compliance programme was in the early stages of development.

"The report concludes that there were some shortcomings in the development and early operation of the NZX broker compliance programme," the commission said.

But the report looked at "a snapshot in time which is no longer an accurate picture of the way the New Zealand markets are regulated".

The commission said: "Implementation of broker inspection procedures was largely left to NZX staff who were relatively inexperienced in broker compliance programmes." This was partly due to difficulties in finding experienced staff.

Furthermore, at the time the broker compliance programme was being developed, there was a poor understanding of client fund account rules. Another shortcoming was inadequate training for the inspection team. However, commission chairwoman Jane Diplock said NZX had already made improvements to address most of the issues identified in the report.

"We make recommendations on certain parts of NZX's regulatory operations and have referred these to NZX for their consideration," she said.

NZX chief executive Mark Weldon said NZX had updated the programme "absolutely independently of any inquiry into Access brokerage".

"It is now robust and systematic, and there's a group of experienced people running that programme."

Weldon said NZX and the commission continued to have differing views on some of the points made in the report.

"Where the commission has made recommendations on possible further actions by NZX, we will be examining these and providing feedback on a timely basis." 

Troubling time

* In early September last year, Access Brokerage majority owner Bill Garlick tells NZX his firm is in trouble. A couple of days later, the firm goes into liquidation with a $5 million shortfall in client funds.

* The next week, the Securities Commission launches an inquiry into the collapse. Later the same month, liquidator Ferrier Hodgson's initial report shows the firm ran on client funds for some time, leading to the shortfall. BNZ offers to cover that.

* In April this year, a second Ferrier Hodgson report finds Access' problems may date back as far as 1998. NZX charges Access Brokerage and former managing director Peter Marshall with breaching rules.

* In May, the Serious Fraud Office charges Marshall on 13 counts of false accounting and two of making false statements.

* In late August, Marshall is remanded until a depositions hearing beginning February 27.

* In September, BNZ - with Ferrier Hodgson - says it will take New Zealand Exchange and Deloitte Touche Tohmatsu to court over the collapse in a bid to recover about $5 million.