Available via license: CC BY-NC 4.0
Content may be subject to copyright.
Journal of Governance and Regulation / Volume 1, Issue 1, 2012
55
CAUSES OF NEW ZEALAND FINANCE COMPANY
COLLAPSES: A BRIEF REVIEW
Noel Yahanpath*, John Cavanagh**
Abstract
During the period 2006 - 2010, 49 finance companies, in New Zealand, collapsed or entered
moratoriums, owing investors in excess of $8 billion, and the fingers of blame continue to point in
circles. The blame for this tremendous financial crisis is extensive and a consolidation of arguments is
essential for the wider understanding of the topic and to put responsibilities into perspective. A part of
this paper is to recognize who can and is being held legally responsible for investors’ sake, and also
identify parties who have failed their responsibilities. We have highlighted the major issues created by
corporate governance being the most direct cause of finance company failure in NZ. We believe in
some way these findings will help avoid a similar crisis in the future and resolve a still commonly
blurred line in public opinion.
Key Words: Corporate governance, Finance company failure, Regulation
* Eastern Institute of Technology, Private Bag, Napier, Hawke’s Bay, New Zealand
Tel: 06-9748000
Fax: 06-8441907 E
E-mail: nyahanpath@eit.ac.nz
** Eastern Institute of Technology, Private Bag, Napier, Hawke’s Bay, New Zealand
Introduction
When asking the general public about the causes of
the finance company collapses in New Zealand, what
do we hear, who do they think is to blame, and what
caused it? There is a wide variety of answers, but the
most common is – greed! The answer is simple, but
not necessarily followed by any further explanation.
It’s as though the desire for wealth physically
manifested itself to devour these companies and
investors’ money. Are they right, or just a little
misinformed? Of course, it’s debatable. Other
answers given are: the economic crisis, company
directors, ignorant investors, financial advisers,
government agencies and legislation. That’s a lot of
people to blame, but then again there is a lot of blame
to go around. So, crucial to our understanding of the
collapses and the ongoing future potential of the
industry we need to know where the blame starts,
where it stops and, most importantly, where it
belongs.
The situation New Zealand investors have been
left with is what one might describe as a ‘witch-
hunt’. In the common understanding and use of the
word, as in the Collins English dictionary, it is “An
attempt to find and publicly punish a group of people
perceived as a threat, or to blame for an occurrence”
(as opposed to the more traditional definition). So, in
the modern-day interpretation it is possible that the
current media, public and investor search for people
to blame may be based solely on the belief of
responsibility and not a factual or legal one – hence
their responsibility being perceived and not actual.
On the surface, all aspects mentioned appear to
have some blame in this financial predicament, but
here are the important questions we will try to answer
with a comprehensive study of literature. What
caused finance companies in New Zealand to collapse
and who can be held accountable for the loss of
investors’ money?
During the period 2006 - 2010, 49 finance
companies collapsed or entered moratoriums, owing
investors in excess of $8 billion. The size of these
companies varied from $1.7million in Kiwi Finance
(by deposit size) to $1.6 billion in South Canterbury
Finance (Deep freeze n.d). In many cases these losses
destroyed the entire retirement savings of just
average, generally hard-working people described as
‘Mum and Dad’ investors.
The collapsing companies laid blame on the
economic conditions created by the Global Financial
crisis. But the extent of loss continued to grow and
the market sector failed to convince the public that it
was a situation that no one had control of or
responsibility for. As the finance companies began to
collapse, investors began chasing answers and
pointing the finger. These fingers of blame continue
to point in circles, and slowly the cracks are
beginning and some opportunities for blame are
opening.
Journal of Governance and Regulation / Volume 1, Issue 1, 2012
56
Method and Data
The method used in the process of this paper involves
a review of historical studies, publicly available
information, media and government reports. We look
to the appropriate literature to assist us in determining
a primary cause of finance-company collapses from
2006 to 2010. Furthermore, we seek to define and
allocate degrees of responsibility to many variables
involved in the collapses, including corporate
governance, the economy and investors, financial
advisers, trustee companies and the Securities
Commission. Much existing literature looks at the
failures of individual variables in the crisis; this paper
seeks to amalgamate these ideas to create greater
understanding of the phenomenon, while working to
conclude whether the search is simply a ‘witch-hunt’.
The data sample was collected from the multiple
sources mentioned and consists of 63 finance
companies that collapsed in the 4-year period. The
total funds invested in these companies is in excess of
$8.5 billion from 200,000 investors. There were 8
major companies in this sample that each held in
excess of $300 million in investments and accounted
for over half of all invested funds. Of the companies
that have estimates of funds returned to shareholders,
the average is 47% showing a substantial expected
loss in shareholder wealth of 4-5 billion dollars.
Corporate governance
The first group to be on the receiving end of a
directional finger-pointing is the directors of the
collapsing companies. The first point of call in
discussing the responsibilities of directors should be
their past behaviour. As we all know, the most
accurate predictor of one’s future behaviour is one’s
past behaviour. Harris (2008) highlighted in his
review three examples of directors’ past activities,
which included: Rod Petricevic, founder of
Bridgecorp, was involved in the $250 million failure
of Euro National in the 1980s; Michael Reeves of
Lombard Finance and Investment Ltd has been found
guilty in the past of a breach of the Securities Act
1978; and Kenneth Moses of Nathan Finance Ltd was
involved in a failed mortgage-broking firm.
Combined, their recent company failures involved
putting at risk a total of $772 million dollars.
Although this does not mean they are necessarily
responsible for these recent losses, it allows users to
see that these directors are not squeaky clean and that
it’s a justifiable option in the search for
accountability. However, as noted by Hammond
(2009), some finance companies were likely to have
been poorly run. Such a factor may have resulted in
their demise, but it is not applicable to all of the
collapsed finance companies. Hammond (2009)
believes that the collapse of most of the finance
companies was more likely a result of the diminished
confidence in the finance sector, due largely to the
earlier collapses and negative media attention they
attracted.
For those involved in investing in finance
companies it’s not enough for us to answer that some
collapses were caused by poor governance and others
may just be a spin-off of the confidence in the
economy. I can understand their desire to point the
finger at someone and have it stick, so who has failed
in governance and who is accountable?
Firstly, we must recognise that finance
companies are inherently more risky than mainstream
investments, such as registered banks and term
deposits, because they are a second-tier finance
provider. Finance companies generally give loans to
areas of the market that are more speculative, where
banks would not lend. Failure of these companies can
often be attributed to poor decision-making only with
the wonder of hindsight. For example, the second
company to collapse – Provincial Finance –
according to Wilson, Rose & Penfold (2010), moved
from its traditional base of providing finance for
mortgages to first-home buyers, into used-car finance
in South Auckland. They also decided to outsource
the lending decisions, which meant they could not
guarantee the quality of the loans. When confidence
in the quality of their loan book came into question
the number of new deposits dropped, creating
expected cash shortfalls in the coming year.
Ultimately, the Trustees put the company into
receivership to protect investors. The results of
decisions like this are due to the risky nature of the
business and, although it’s possible to blame the
directors as they are the ones ultimately responsible
for the company, all investors have taken part in the
risks of management by investing in the business.
Another more extreme example is Hanover
Finance. Directors of Hanover Finance grew the
company’s investment portfolio from an original
mixed base of loans, including consumer finance, into
excessive loans in speculative property. Hanover,
fronted by news reader, Richard Long, presented to
the public that its investments were “first-ranking,
secured debenture stock” (McCrystal, 2010).
However, the truth was that these investments almost
always ranked behind prior charges, and were only
ever second mortgagees over the assets. Further
issues in the Hanover mess were the high number of
related party transactions and hidden loan practices
(until receivership) that were in the interests of the
directors and not often for the benefit of the
company; as well as the excessive dividends being
distributed to Mark Hotchin and Eric Watson (the
shareholders) that came during the final 2 years of
Hanover’s life. Finally, when the housing market in
New Zealand bottomed out, Hanover suffered an
undoing of its own making and their practice of
investing long term and borrowing short term forced
the company into moratorium. But the directors were
not done ‘picking the meat from the bones’ of
Hanover. Under the moratorium, the shareholders had
Journal of Governance and Regulation / Volume 1, Issue 1, 2012
57
convinced investors to agree to waive any claims on
the dividends already paid to Hotchin and Watson,
and say goodbye to more than $200 million in
interest, for the chance of eventual recovery of the
sums invested and an immediate cash injection from
the shareholders. Of course, this cash never
eventuated and the moratorium payments ceased
while Hotchin and Watson performed a “magical feat
of escapism” (McCrystal, 2010, pg 50) and offloaded
the overvalued loan book in a debt-for-equity swap
with Allied Farmers.
As mentioned, this is an extreme example of
how corporate governance has clearly failed to
protect investors, and has contributed to the collapse
through excessive risk, and the removing of funds for
self gain; in this case, greed seems to be the correct
description of a cause. Because of the individual
nature of every company that failed, it is beyond the
scope of this report to carry out an analysis of all
collapsed companies to determine which have been
caused by governance. However, we can highlight
many of the issues that demonstrate the self-serving
nature of directors which clearly has contributed to
company collapses.
The loan books of many of the finance
companies are held under the group structure in
private companies, and therefore have no legal
reporting requirements. What this means is that
investors are rarely told where their actual
investments lie, making it difficult to assess risk
(Yahanpath n.d). Harris(2008) stated that often the
companies were simply a vehicle for the CEO to
carry out his own objectives and “too often, directors
were not adequately informed, were misled or failed
to take sufficient interest in the affairs of the
company”. What this leads us to is that not all
directors are necessarily responsible; in some cases,
one member of the governance team has been the
mastermind of the activities. Beatson (2009) says that
related party transactions were often excessive, and
that company funds were usually being used to
benefit the shareholders by purchasing assets from
the shareholders’ other companies or giving them
excessive loans with little likelihood of recovery.
However, in most cases, related party transactions
can be completely acceptable and to the benefit of
investors, as long as they are disclosed and
scrutinised by the board and the trustee.
McCrystal (2010) supports that many of these
companies had excessive concentration of loans, with
up to 80% of some finance companies’ loan books
held in one investment, thus creating huge risks tied
to the success of one company.
Finally, a major issue within these companies is
their treatment of non-performing loans. McManus
(2010) says that when loans were failing to be repaid
the company would simply roll the unpaid interest up
into a new loan. This practice allowed finance
companies to declare loan default rates to be very low
– sometimes 0%. It also meant that the true nature of
these assets was hidden to investors and allowed them
to continue to attract investment funds. Often these
rolled-up loans were nothing more than bad debts
which should have been written off as losses.
There are an exceptional number of ways in
which directors can do things wrong but, ultimately,
Peart (2008) says that “there is no doubt that
governance failed in some finance company
collapses” but, in the opinion of Godfrey Boyce
(deputy chairman of KPMG), if anything less than a
payout of 70% is returned, it’s safe to question the
actions of governance.
Table 1. Companies that returned more than 70% to investors
National Finance
IMP Diversified
Provincial Finance
Dorchester
Western Bay Finance
Compass Capital
Property Finance Securities
Mascot Finance
LDC Finance
Strata Finance
Beneficial Finance
Vision Securities
Geneva Finance
Rockforte Finance
Only 14 out of 49 collapsed companies returned
this level to investors and these companies account
for less than 10% of at-risk funds; ie, around $800
million of the $8.5 billion (deep freeze n.d).
The final chance of finding accountability is
when directors can be taken to court to test their legal
responsibility for wrongdoing and losses to the
investor and, if anyone is lucky, not only will they
have someone to blame and hold accountable, but
they might get some money back.
Since finance companies began collapsing in
2006, the Securities Commission has completed 26 of
50 investigations (Long list, 2011). From this, 35
directors from 14 companies have faced criminal
charges.
Marcus Macdonald and Nicholas Kirk of Five
Star Group were the first directors to be jailed; they
received over 2 years jail each for providing a
misleading prospectus (long list, 2011). The directors
of the Nathan Finance have been found guilty on 5
charges of breaching the Securities Act 1978 (NZ
Herald, 2011). More trials to come include the
directors of Bridgecorp for making untrue statements
in their prospectus; National Finance, on the same
Journal of Governance and Regulation / Volume 1, Issue 1, 2012
58
charge; Capital and Merchant; Lombard Finance and
Investments; and Hanover Finance. The directors are
likely to face charges, according to the Securities
Commission (NZ Herald, 2011).
It’s a given that the industry involves risk,
however misunderstood by the public, and that this
risk is taken by both shareholders and investors for
the rewards of interest and other returns. Where legal
disclosure has taken place, the directors may have
acted unethically but, except for those being charged,
there can be no legal fault found here. None are free
from blame but the degree to which they deserve that
blame varies. However, outside of the legalities there
is no one in corporate governance who can be held
accountable.
We can find that governance was morally
bankrupt, even guilty of breaches of law. This doesn’t
get money back (or very little) but might give
investors someone to blame. It also provides us with
information as to the degree of responsibility that
governance has had in contributing to the collapse of
their specific finance company. But they are only a
piece of the puzzle.
Economy and Investors
The excuses of many directors were the economy and
investors’ actions, so is there any truth in the claim
that they caused the collapse of 49 finance
companies?
The situation in the early 2000s was defined by
a booming economy with near-full employment.
Optimism was rife and money was available to
invest. During this time, property prices were
growing at phenomenal rates and doubled over during
the period 2001 to 2007 (New Zealand property,
2011). Investors were returning to the markets after
their gun-shy attitudes brought with them from the
80s and 90s. Many of the baby-boomer generation
were, and are, coming up to retirement age and had
been looking for places to grow their nest eggs.
Carefully targeted returns –higher than banks but not
so high as to cause suspicion to the average investor –
were on offer from a number of new and growing
finance companies.
The RBNZ stated that, since 1998 the non-bank
deposit-taking companies (NBDTs), which is the
sector dominated by finance companies, had grown at
a greater rate than registered banks (RBNZ, 2004).
Growth was at a rate in excess of 15 percent. The
expansion of this sector continued at an excessive rate
shown by Figure A from total asset value of $7.3
billion in 2004 to a peak of $10.3 billion in June
2007. From 2004 this figure has given the NBDTs
around a 7% share of all investments in New Zealand,
up until 2007 when the asset value of finance
companies began to decline significantly, to $6.3
billion in 2011. The growth of this sector at such a
rate was an undesirable situation in which companies
that were structurally more suited to a small business
entity were finding themselves with an abundance of
funds available for investing (Securities Commission,
n.d). The RBNZ was recognising the possible threat
that this overzealous growth could cause in the future
and stated that “experience shows that rapid growth
in lending can foreshadow declining credit standards
and hence increased risk”. In 2005, the RBNZ
reiterated their concern, saying that more than a third
of finance companies lend to property developers and
experience shows that rapid growth can create greater
risk in a slowing economy.
Figure 1. Total NBDT Assets
Source: RBNZ, 2011
Journal of Governance and Regulation / Volume 1, Issue 1, 2012
59
During the global financial crisis, the warnings
and predictions of the RBNZ came to fruition. Credit
began to tighten in the market and loan defaults
became more common. This brought down the first 3
finance companies – National, Provincial and
Western Bay – because of their lax credit- risk
management (RBNZ, 2006). The collapsing housing
market in New Zealand had the effect of reducing the
value of many of the investments that finance
companies were involved in, and the initial collapses
and media attention spooked the ‘Mum and Dad’
investors.
The economic climate and involvement of risk-
averse investors are both contributing factors to the
collapse of many finance companies. It is said by the
Securities Commission (n.d) that many investors
were involved in this type of business because of the
excessive optimism of the growth (bubble) period of
the economy and housing market, and were
completely unaware of the risks involved, or of the
natural business cycle. Worse, they were over-
exposed to the risk by a lack of diversification of
investment and were not in positions to be absorbing
losses in these industries. So began the panic of
investors to flee their investments that all of a sudden
(in their eyes) had become hugely risky. It’s a well-
known fact (and historically proven) that no financial
institutions can sustain a consistent run of
withdrawals without significant cash-flow issues
resulting in receivership. This is called a ‘run on
funds’ and, according to Hammond (2009), is a
significant contributor to the collapse of New Zealand
finance companies. In this situation, after the initial
collapses, some investors panic and remove their
funds from their investment company. If other
investors learn of this they can quickly buy into the
panic and then rumours of the company’s weakness
and possible collapse become a ‘self-fulfilling
prophecy’ (Hammond, 2009). The business model of
many of these companies involved borrowing short
term and investing long term, which exaggerated the
effect of the run on funds (Peart, 2008). This
ultimately robbed the companies of the time to realise
the profits from their long-term investments. Thus, if
a company’s governance was acceptable, and the
lending practices were strong enough to survive the
economy, they may still have been brought down by
fear and ignorance of investors who did not belong in
that risk profile. This is shown by the 14 companies
that returned significant investment of over 70% of
funds even with the fire-sale situation that goes with
receivership. Therefore, in some cases, when looking
for someone to blame it may be the case that there is
no one to look to but the investors themselves. When
looking at responsibility it needs to be accepted that
the business cycle is natural, both shareholders and
investors need to expect periods of peaks and troughs
in the economy, and that panic is only another
negative influence in the market.
Financial advisers
“Until recently, any person, regardless of their
experience or qualifications, was generally free to
provide investment advice or financial services to the
New Zealand public” (MinterEllisonRuddWatts
Lawyers, 2008). This sums up the level of control in
the financial advisory industry as severely lacking,
and a possible playground for the under-educated and
immoral.
Current laws covering financial services are
limited and only involve common law, generic
consumer-protection laws, and sector-specific
legislation like the Securities Markets Act 1978.
Some advisers belong to voluntary professional
groups which have their own additional codes of
conduct and disciplinary procedures (MED, 2007).
The Ministry of Economic Development also believes
that the current voluntary and sector-specific
regulation of financial advisers is failing to ensure
accountability in the sector and lacks protection for
their clients.
Let’s get things straight – financial advisers are
a profit-seeking business people. They don’t work for
their clients out of the goodness of their hearts; they
are out to make money, and the way they do this is
often by commission. Advisers take their cut from the
capital invested in companies on their
recommendation to clients. Another way they make
money is by charging fees for monitoring the
investments. So, really, some financial advisers may
be hard-working, intelligent and moral individuals,
but there is no requirement for those characteristics in
the overall industry and these factors definitely do not
restrict their earning potential.
Aranyi (n.d) believes that the financial advisers
involved with these companies were often no more
than commission salesmen who directed all investors
they could into the companies that paid the highest
commission. These commissions were sometimes two
to three times larger than the industry standard. In
certain companies, such as Bridgecorp Finance,
advisers were receiving 3% commission as opposed
to 1% as the standard. A special investigation by the
Sunday Star Times (2007) found that “Excessive
commissions, free holidays and biased deals are
plaguing financial services in New Zealand”. An
example of this was Bridgecorp’s points scheme for
advisers, whereby points were awarded for those who
brought the most funds into the company, and the
adviser with the most points would win tickets to the
Rugby World Cup.
How does this translate into unfulfilled
responsibilities and deserving blame in the industry
for finance company collapse? We look to the nature
of the industry, as mentioned; these supposed
‘professionals’ are profit-seeking, have few
restrictions placed on them by legislation or
regulation, and are faced with excessive cash
Journal of Governance and Regulation / Volume 1, Issue 1, 2012
60
commissions and prizes. In this case we can only
assume greed has overtaken many in this industry.
To draw links between financial advisers and
actual causes of company collapse there can only be
one tie, and that is that advisers assisted these
companies to grow beyond what would have been
possible in a prudent and professional investment
environment. Advisers cannot be held responsible for
the actions of directors. For example, if the supply of
funds was restricted by the market, and adequately
risk-averse, would directors have had such funds to
take such speculative approaches? Jane Diplock,
chairman of the Securities Commission, states that
many of these companies were unable to adequately
handle the rapid expansion of their businesses, and as
a result of a failure to recognise the symptoms of the
situation, the businesses faltered (Peart, 2008). It
appears that advisers could have had a contributory
role in some companies’ actual demise, but what
needs to be proven is that they recommended
investment in those companies against the best
interests of their clients. If the investments appeared
to be in the best interest of the client, then they have
little responsibility for company collapse (although
the funds have contributed). It is where advisers have
been self- serving, and recommended investment in
these companies against the best interest of the client
that they have become responsible to the client for
their losses, and responsible, to a degree, for the
actual collapse of the company (as adequately risk-
averse investment would not have contributed to their
excessive growth).
Under consumer law and the code of ethics of
most professional financial advisers, the best interest
of the client is firmly imbedded as a primary
consideration (IFA, n.d). Some examples of the
numerous breaches of these responsibilities are; an
elderly couple specified to their adviser that they
wanted their investment to be protected for the future
purchase of a house, but their nest egg was put in
significant-risk investments and lost over 30%
(Dominion post, 2008); 200 investors are taking
action against financial advisers with 3 firms in
Auckland and Christchurch, because the risks of their
recommended investments were not explained to
them accurately; a group lawsuit is being considered
against a Hamilton adviser for similar breaches but
comments were restricted for legal reasons. Fifteen
Disputes Tribunal cases have been taken by the IFA
for breaches of the code of ethics for a variety of
reasons, all related to acting in the best interests of
their clients, including; giving advice outside their
area of expertise, providing recommendations
inappropriate to the clients’ needs, not providing
proper written documentation, failing to make the
client aware of the volatility of the investment
recommended (IFA, n.d), all making gains for
themselves with commission payments.
There is a significant number of financial
advisers who clearly disregarded the needs of their
clients in the search for personal gains from finance
companies. Their actions contributed to the sector’s
bubble-like growth and collapse, and they should be
held accountable. Others who unwittingly added to
this situation by providing inadequate advice cannot
realistically be blamed without becoming scapegoats.
The likelihood of finding these people accountable,
and resulting in returned funds for investors, is slim
as many have themselves lost large sums of money.
As Gray (2011) says, “None of them have any
money”, and the current legal action may yet prove
difficult.
Trustees
With financial advisers luring people to invest, and
directors gambling with other people’s money, was
there anyone actually monitoring what was going on?
Should someone have noticed that things were getting
out of hand? A number of organizations had roles in
this area. Two on the government side are: The
Securities Commission, headed by Jane Diplock,
which had responsibilities to investors; and the
Registrar of Companies, responsible for the
registration of prospectuses. But more direct was the
responsibility of Trustee companies. These corporate
trustees were responsible for supervising the
performance of investors’ assets. According to the
Trustee Corporations Association (n.d), “Trustees are
appointed to monitor the performance of business
entities offering debt securities to the public.”
A trustee’s role includes:
• negotiating the rules (called the trust deed) that
the company must adhere to
• monitoring compliance with the trust deed
• monitoring reports from the company
• working as a communicator between investors
and directors
• exercising reasonable diligence.
Morrall (2011) claims that trustees have walked
away from finance company collapses unscathed and
“that certain trustee companies breached their trustee
deed obligations by failing to conduct appropriate due
diligence of the loan book assets of the finance
companies” as well as failing to identify related party
transactions. Davies (2007) continues by saying that
trustees have a “statutory whistle-blowing duty” and
if they think a company has breached its trust deed
they are obliged to inform the Registrar of
Companies. If they do not, Gray (2011) claims that
they’ve failed this duty and have breached the trust of
investors.
Of the five corporate trustee companies in New
Zealand, at least 25 of the failed companies used
either Perpetual Trust Ltd or Covenant Trustee
Company Ltd to oversee their investors’ interests.
Harris (2008) believes that this level of involvement
raises questions about due diligence being carried out
by these organizations. Furthermore, Harris (2008)
directly states that he believes that these two trustee
Journal of Governance and Regulation / Volume 1, Issue 1, 2012
61
companies were slow to detect and respond to the
arising issues that put investors’ money at such risk.
He also continues to explain that the Trust deeds
agreed to by these trustees were too weak to provide
any real protection to investors, leaving them
powerless to prevent any loss had they known of
adverse trading situations.
It appears that trust companies have taken a
back seat in their role as monitor for the interest of
investors and have let the companies have free reign
over investors’ funds. Davies (2007) explains that this
is not that case; it is simply that the powers of trustee
companies under the law are very limited when it
comes to intervening in the company’s actions. If the
trustees suspect a problem they can only request
examination by the auditors, which can be rejected.
Furthermore, a trustee must refer suspected breaches
to the Registrar of Companies, but cannot alert
anyone else, including investors, due to privacy
restrictions.
There are two sides to the coin in the
observation of trustee companies. They have taken on
roles that they apparently don’t have the powers to
successfully carry out. It is an incredibly difficult
situation for which to lay blame. It appears obvious
that the trustee companies had issues that needed to
be addressed long before this crisis, and Harris (2008)
believes that shortcomings of trustee companies are
very hard to identify to prove any accountability.
The only way trustee companies could be held
accountable in the collapse of some companies, is if it
could be proven that they failed to reprimand
directors when breaches of the trust deed occurred. If
this was had taken place they may have been able to
limit the riskiest exposures the company was
involved in, ultimately preventing receivership at a
later date. Consider this: if you lend you car to
someone who drives in a risky manner and crashes
into a guard rail that doesn’t do its job, resulting in a
mighty plummet, then who is accountable? The driver
caused it with their risky driving, so of course they’re
accountable, but so is the company that installed the
barrier. The car didn’t have to go off the cliff.
Trustees’ true accountability to investors will be
tested if they are taken to court in an unprecedented
class action against them (Morrall, 2011). This is the
only court action against any party involved that
could possibly retrieve a substantial amount of
investor money as these trustee companies are large
and profitable.
Securities Commission
There is much debate about the level of responsibility
held by the Securities Commission in the area of
collapsed finance companies, and what its regulatory
role actually is. Roger Partridge, chairman of Bell
Gully, states that the Securities Commission has a
wide range of powers to tackle inadequate disclosures
by finance companies. He believes that the Securities
Commission has failed to utilize its broad powers to
prevent finance companies from issuing misleading
information and advertisements to investors
(Business Desk, n.d). The Securities Commission
said that, under the Securities Act, their powers relate
to the offer documents (which are prospectuses and
investment statements) and their role is to ensure that
these documents accurately disclose “everything they
should” (Securities Commission n.d). They also state
that they have no power to enforce any duties that
failed companies may owe to investors.
A review of the performance of the Securities
Commission by Prada & Walter (2009) highlights
that the Securities Commission’s powers are only
available during the period in which a company’s
offer is open, and it has the power to require
amendments to documents and advertising if
disclosures are not adequate. They continue to say
that the Commission only exercises these abilities on
complaints from the public, which often come only
after they have suffered financial loss.
It’s important to note that the Commission has
no powers of investigation during the life of the
investment as it is the role of the trustee companies to
carry this out.
In general, from Prada & Walter’s (2009)
research, we see that the Commission had used its
powers at a very conservative level, as shown by its
lack of comment on market trends and legal issues
which could have been highlighted to investors, or
testing the boundaries of its powers in the courts,
which was rarely done.
Roger Partridge sees that the powers of the
Securities Commission were advanced enough that,
had it been more proactive in the market, they could
have limited the damage done by finance company
collapses, although this is strongly rebutted by
Diplock as a myth in a statement that the commission
had done the job it was able to do under the Securities
Act (Business Desk NZPA, 2010).
To consider whether the Securities Commission
has performed these duties well enough to avoid
blame, we look at Diplock’s comments in 2006 when
she said that “The standard of disclosure in the
finance company sector has improved significantly as
a result of the Commission’s work” (Hickey, 2010),
and in 2007 when she stated that reforms in the sector
would make enforcement of investment documents
more effective, and confidence and integrity would
flourish. From the legal cases against directors
discussed earlier we can see that disclosure in many
cases remained consistently poor, and Diplock’s
response is that the regulatory regime was not
sufficient and the Securities Commission did not have
the tools (Hickey, 2010).
If the Securities Commission had been more
proactive in the market and had utilised all of their
powers, it’s questionable whether the companies
involved would have been allowed to continue raising
funds from the public. And if the powers it had were
Journal of Governance and Regulation / Volume 1, Issue 1, 2012
62
insufficient then why was Diplock pleased with them
in 2007? Diplock may not have caused the companies
to collapse but the Commission certainly has some
accountability in the crisis and its depth, either
through complacency or ignorance.
Discussion and concluding comments
The collapse of New Zealand finance companies has
been a unique event in New Zealand history. Of
course, businesses, and even finance companies, have
collapsed before, but never so many so quickly, with
such vast amounts of money being lost. $6.5 billion is
still at risk, and it is expected that at least $4 billion
will have been permanently wiped from New
Zealanders’ pockets and nest eggs.
Finding those who can legally be held
responsible is a process that will continue for years to
come, with new cases developing and current cases
constantly being dragged out. However, the
consolidation of many market watchdog
responsibilities into the Financial Markets Authority
(FMA) will hopefully set a productive and aggressive
approach to the regulation of a wild and significantly
unaccountable sector in the future.
But for now, the public, the government and, of
course, investors are left with the questions that
someone needs to answer. Who caused these
companies to collapse and lose investors’ money?
You, the investor, did. You put too much money
behind dodgy directors using very poor business
models with no economic endurance, you put it in
risky and speculative companies, you trusted people
who were giving you free advice (how does that
makes sense?), and relied on people who actually had
no power, or at least no initiative, to use it. And then,
when it looked like it was all turning to custard, you
pulled everything you could out, like pulling the legs
out from under the companies themselves.
Well, that’s not really true is it? But when you
look at the financial losses involved, if we reflected
blame in the same proportion then this would be how
it looked. In reality, blame, accountability and
causation are all unique to each company that
collapsed.
In some situations company governance was
clearly poor, taking too much risk and having a belief
in a business model that was unfounded. We can
blame them and say they caused the company to
collapse, but we can’t hold them accountable; it’s
simply an unfortunate inherent risk in the sector.
Now, some directors misled, lied and cheated
investors, they created liquidity problems in the
companies to serve their self-interests, took excessive
dividends, broke Trust deeds, and the law. These
directors contributed significantly to the collapse of
their companies by means beyond just poor
management. We can only hope that their
accountability will be proven in court.
The events in the economy at the time led to
decreasing asset values and tighter credit situations,
which created the climate that would weed out good
business from bad. It did cause companies to
collapse. Just as heavy rain flowing under a poor
structure creates a situation, it is the design of the
building that determines whether it survives or not.
The actions of investors in creating a run on
funds, can’t be seen in these cases to be a true cause
of most company failures. The large majority of the
collapsed companies returned under 70% of the
capital invested. If these companies were put in
receivership at an appropriate time then there would
not have been a need for panicked withdrawals, but in
the New Zealand finance industry most of the fear
was warranted, and only a select few companies
could blame the run on funds.
The growth of the industry was beyond the skill
and control of the directors involved, money for
investments was abundant and Financial advisers
made use of this for their own gain of huge
commissions and financial treats. Advisers are a
direct cause of the finance company collapses
through over-funding business structures and risky
companies, allowing and encouraging their practices.
These advisers fuelled the fire that was risky business
– one can’t expect to throw petrol on a fire and claim
one didn’t burn the house down.
The supervisory roles of trustees and the
Securities Commission are simply failures of
responsibility. They didn’t take prudent steps to fulfill
their roles and responsibilities. They have contributed
to the collapse of these companies by failing to
restrict them to legally and morally acceptable
practices.
As a result of this amalgamation of literature we
can see that the most commonly involved cause of
company failure and unfulfilled responsibilities is
self-serving corporate governance. Yet still, finding
legal recourse will prove difficult. And still this does
not hold true for all involved. Every mentioned area
has differing responsibilities due to the different
variables involved – loan portfolios, directors,
investors, advisers, trustees. All have different
failures and different levels of failure in every
company. Pinpointing the cause of an individual
company’s collapse will cause substantial difficulty
and yet, in a general approach, to summarise a cause
of the New Zealand company collapses is quite
simply a witch-hunt.
References
1. Aranyi, T. (n.d). A discredited profession? – Financial
advisers. About time! Retrieved on 12 July, 2011.
From www.thepaepae.com
2. Beatson, D. (2009). Finance failures – our $6 billion
blame game. Retrieved 19th July, 2011. From
www.pundit.co.nz
3. Business Desk NZPA, (2010). Securities Commission
hits back at ‘nodding off’ claims. Retrieved on 7th
Journal of Governance and Regulation / Volume 1, Issue 1, 2012
63
July, 2011. From http://www.nzherald.co.nz/business/
news/article.cfm?c_id=3&objectid=10691547
4. Business desk, (n.d). Securities Commission ‘nodded
off’ on finance companies, says Bell Gully head.
Retrieved on 17 July, 2011. From
www.sharechat.co.nz
5. Davies, A. (2007). Securities act hamstrings finance
company trustees. Retrieved on 19th July, 2011. From
www.soundfinance.com/page/917482
6. Deep freeze list – Finance industry failures (n.d).
Retrieved on 15 June, 2011. From
www.interest.co.nz/saving/deep-freeze-list/
7. Dominion Post. (2008), Investors to sue of finance
firm losses. Retrieved on 20th July, 2011 from
www.stuff.co.nz/business/245076/investors -to-sue-
over-finance-firm-losses
8. Gray, J. (2011). Law firm seeks funding for class
action. Retrieved on 8th July, 2011. From
www.nzherald.co.nz
9. Hammond, S,. (2009). Inquiry into Finance Company
Failures. Retrieved May 20th, 2011. From
http://www.parliament.nz/NR/rdonlyres/ 7BB10E9A-
ABD5-44C9-BB58-F21247279927/
117669/49SCCO_EVI_00DBSCH_INQ_9325_1_A20
276_StaceHammond_.pdf
10. Harris, N,. (2008). Finance company failures –
observations of the registrar of companies. Retrieved
May 20th, 2011. From
http://www.parliament.nz/NR/rdonlyres/16F22058-
8DD8-4541-B9A9-064848076239/100892/
DBSCH_SCR_4272_6521.pdf
11. Hickey, B. (2010). Give Diplock the flick. Retrieved
on 12th July, 2011. From www.nzherald.co.nz
12. http://dictionary.reverso.net/english-cobuild/witch-
hunt
13. Institute of financial advisers, (IFA), (n.d).
Disciplinary disputes tribunal. Retrieved on 19 July,
2011. From http://www.ifa.org.nz/compdis-
reso/disciplinary.php
14. Institute of financial advisers, (IFA). (n.d). retrieved
on 19th July, 2011. From www.IFA.org.nz
15. Long list of finance firms lined up for investigation
and trial. (2011). Retrieved on 25th June, 2011. From
www.nzherald.co.nz
16. McCrystal, J. (2010, May). The Fall of the House of
Hanover: North & South Magazine. 290, 40-51
17. Ministry of Economic development (MED), (2007).
Financial advisers – A new Regulatory Framework.
Retrieved on 19th July, from www.med.govt.nz
18. MinterEllisonRuddWatts Lawyers (2008) Financial
Services Update. Retrieved on 12th July, 2011. From
http://www.minterellison.co.nz/
publications/Financial%20Services%20News%20Aler
t%20Dec%202009.pdf
19. Morrall, A. (2011). Slater and Gordon teams up with
Turner Hopkins to launch class action suit targeting
trustees. Retrieved on 8th July, 2011. from
www.interest.co.nz
20. New Zealand property market subdued. (2011).
retrieved 20th July, 2011. From http://www.
globalpropertyguide.com/Pacific/New-Zealand/ Price-
History.
21. NZHerald Staff, (2011). Nathans Finance directors
convicted. Retrieved 19th July, 2011. From
www.nzherald.co.nz/business/news/
22. Peart, M. (2008). Finance company collapses – a sign
of poor governance. Retrieved on 15th July, 2011.
from www.archivesearch.co.nz/
?webid=mgt&articlebid=29810
23. Prada, M. & Walter, N. (2009). Report on the
effectiveness of New Zealand’s securities commission.
Retrieved on 15th May, 2011. From www.sec-
com.govt.nz
24. RBNZ, (2004). Financial Stability Report, October
2004. Retrieved on 12th July, 2011. From
http://www.rbnz.govt.nz/finstab/fsreport/
25. RBNZ, (2005). Financial Stability Report, October
2005. Retrieved on 12th July, 2011. From
http://www.rbnz.govt.nz/finstab/fsreport/
26. RBNZ, (2006). Financial Stability Report, October
2006. Retrieved on 12th July, 2011. From
http://www.rbnz.govt.nz/finstab/fsreport/
27. RBNZ, (2011). Financial Stability Report, October
2011. Retrieved on 12th July, 2011. From
http://www.rbnz.govt.nz/finstab/fsreport/
28. Securities commission, (n.d) Report on Disclosure By
finance companies. Retrieved on 30th May, 2011.
From http://www.sec-
com.govt.nz/publications/documents/bim-08/03.shtml
29. Securities commission, (n.d). What powers do we
have. Retrieved on 15th May, 2011. From
http://www.sec-
com.govt.nz/publications/documents/finance-
company-investigations/#2
30. Sunday Star Times, (2007). The hidden Sales scandal.
Retrieved 21st July, 2011. From
www.stuff.co.nz/sunday-star-times/business
31. Trustee Corporations Association, (n.d). The role of
trustees. Retrieved on 12th July, 2011. From
http://www.tca.org.nz/services/the-role-of-trustees/
32. Wilson, W.R., Rose, L.C., & Pinfold, J.F., (2010).
Examination of NZ Finance Company Failures: The
Role of Corporate Goverance. Management online
Review. Retrieved on May 20th, 2011. From
http://www.morexpertise.com/download.php?id=149
33. Yahanpath, N. (n.d). Some accountability issues in the
Finance company failure in New Zealand: A Brief
Survey. Retrieved May 20th, 2011. From
http://w3.manukau.ac.nz/aaac/ARA_2010_papers/Yah
anpath.pdf
