Get tough calls after string of failures

Finance industry figures are again calling for more rigorous regulation after the third finance company failure in three months.

Several days before Western Bay Finance was placed in receivership last week owing debenture stock investors $48 million, Securities Commission primary markets director Kathryn Rogers defended the existing regime as sufficient to provide the public with the information they needed to make sound investment decisions.

But the chairman of KPMG's banking group, Andrew Dinsdale, one of the earliest advocates of tougher regulation, has disagreed.

"The regime at the moment, which is basically an investment statement or a prospectus, is probably not enough in this environment. We've got so many finance companies, we're just not getting a distinction between the good, the bad and the ugly. It might have been all right in the eighties or nineties but I don't think it's fit for purpose in 2006 and beyond."

Dinsdale has advocated mandatory ratings, while others such as the chief executive of listed finance company Dorchester Pacific, Andrew Walker, have also called for a continuous disclosure regime, similar to that with which listed companies have to comply.

However, Rogers also said the present system amounted to a form of continuous disclosure "provided issuers comply with it fully".

Last week, Walker told the Business Herald the regime was not functioning well in that regard.

"If there was genuine continuous disclosure, and it was working adequately, then how did we get to the situation we got to with Provincial and Western Bay? The system clearly didn't work in practice."

Meanwhile, Dinsdale said there was already "pretty good compliance".

"It's just that all it is is disclosure - so what? You've got to get people to read the things [offer documents and prospectuses]."

Similarly, Pyne Gould managing director Brian Jolliffe said that "in a perfect world" the present regime might be adequate "but this is far short of that.

"Some investment advisers have even confessed that they haven't read prospectuses. So if the so-called professionals are not reading the disclosure documents under the regime, then when the regulations effectively say they should be transparent enough for the non-professional investor to be able to make a sound decision, we are well short of where we need to be."

Jolliffe believed a more appropriate regime was for a mandatory independent credit rating "from a credible internationally recognised agency".

But Walker believed there needed to be a three-pronged approach consisting of compulsory ratings, continuous disclosure and open and transparent access to companies' financial information.

"If you try to solve the problem just fixing one aspect, you're just not going to succeed." Dinsdale favoured a voluntary regime similar to the Australian model of "approved deposit takers". Under the oversight of the Reserve Bank, companies would be required to maintain adequate credit ratings, minimum capital ratios and enhanced disclosure.