Taxpayers could be tapped to pay clients

Taxpayers could be asked to meet the cost of investor losses in the event of a sharebroker collapse, sharemarket operator NZX says.

During the recent inquiry into NZX's oversight of sharebrokers in the run-up to the collapse of online sharetrader Access Broking, NZX chairman Simon Allen told the Securities Commission that future funding of the NZX fidelity fund might come from the Government.

The fund was established to pay out investors in the event of brokers going bust.

Payments from the fund are at the discretion of the NZX but its entire balance of $460,000 was paid out after Access went under in September last year owing nearly $5 million to clients.

The balance of outstanding client funds, about $4.3 million, was paid out by BNZ Bank.

Since the Access collapse, the fund's balance has remained at zero.

During the commission's inquiry, Allen said the fund could be recapitalised "before or after any event leading to a call upon the fund".

He said possibilities for replenishing the fund included a levy on each transaction by market participants or Government funding.

In effect, that would mean the taxpayer would pay the bill for brokerage failures.

Allen said he would regard the fidelity fund issue as urgent if another broker collapse was on the horizon, but he acknowledged NZX was unlikely to know when that was about to happen.

In its findings released this week, the commission said the maintenance of a fidelity guarantee fund for stock exchange transactions raised law reform issues "that are beyond the scope of this inquiry".

"These issues will, we understand, be considered by the Government in its current review of securities law."

A Ministry of Economic Development spokeswoman confirmed the ministry was looking at the fidelity fund as part of the Review of Financial Products and Providers. "All options are open at the moment," she said.

Securities law expert Stephen Franks said the commission's report had shown confusion at NZX about how the fund should be administered.

"That's a positive outcome of the report for them to say these guys are essentially offering the spurious comfort of a fidelity fund that's got no money and doesn't have any fixed obligations," he said.

"People will think there's some entitlement to compensation from the fidelity fund and, in fact, it looks like it's an optional comfort."

An NZX spokeswoman said since demutualisation in 2003 the fund was not required to hold any money although cash could be raised by a levy on transactions if and when needed.


Funding guarantee
* Set up to help clients of a failed broker.
* Liability is limited to $500,000 for any single failure and $20,000 for any one claimant. Greater amounts may be paid at the discretion of the NZX board.
* The fund rose to a peak of $2.85 million in September 1989 through members' contributions and high investment returns.
* The exchange stopped levying members in the early 1990s.