Finance company directors to blame for collapses, committee told

Photo / Mark Mitchell.

Directors of failed finance companies should be held accountable for their actions, a parliamentary inquiry into finance company collapses was told today.

During the past three years about 30 finance companies have gone into receivership or liquidation, entered into moratoria or had frozen repayments to investors.

The Government is implementing several changes and the committee is complementing its work.

Professor Emeritus Ray Adams, who has a background in organisational behaviour and administration, conducted a case study of finance company I-Cap Equity Partners Ltd.

"While some investors were no doubt greedy and some investment advisers incompetent the chief architects of company failures were the directors and managers," Adams told the MPs.

When systems and organisations failed it was because of people and while there had been a focus on financial advisers it was directors who were ultimately to blame, he said.

"The fact that actions taken by directors and executives were apparently not illegal but were patently and obviously ethically and morally wrong points, I do believe, to inadequacies in the law which should be rectified."

Adams said the company he studied created a "climate of expectation" far beyond the ability to deliver and rules around prospectuses needed to be better.

The finance community had a "culture in which anything which was not illegal was right.

Professional responsibility and integrity were given up, he said.

"It became a game in which if you could do it and get away with it you were clever."

Findings of his case study included assets being bought with investor funds which were then used as security for borrowing; loose definitions of conflict of interest that allowed insider trading; and contracts that did not include the failure to meet expectations as a possible breach.

There was also inadequate coordination between surveillance authorities.

Adams said directors should be licensed and sign up to a code of behaviour and ethics. Directors should be held accountable and face de-licensing and penalties.

He also suggested a director's fidelity fund be set up.

A Paraparaumu couple also fronted to the committee. Rowland Crone was an accountant and manager until he retired in 1995 and he and his wife used investments to supplement their super.

Six of 10 finance companies the couple invested in defaulted - representing 38 per cent of their portfolio. They had invested in companies with A and B ratings.

"They were rated as top finance companies."

The pair got 39 per cent of payments back.

Crone said financial advisers worked as teams with companies; "and I believe they work too close sometimes too".

They were twice advised to re-invest in a company that failed a couple of months later.

Trustee Corporations Association (TCA) chairman Clynton Hardy told the committee that one of the problems was that documents were too complex for the public to understand.

Hardy initially resisted committee chairwoman Lianne Dalziel's suggestion to remove commissions as a payment for advice, which followed a damming recent survey of financial advisers conducted by Consumer Magazine.

The TCA thought it very important to take financial advice and removing commission might stop that.

"We have a concern that by banning such commission payments... investors will not pay $1000 or $2000 for advice, it's a sad indictment on the way some of our consumers look at things."

Dalziel said it might be better if consumers relied on themselves rather than an advisor selling a product.

Hardy finally accepted her point: "I believe that a fee based system is far more ethical."

He was confident a new licensing regime being bought in would address a lot of problems in the industry.

NZPA