By Gareth Vaughan
Financial Markets Authority (FMA) CEO Sean Hughes says he accepts the ultimate responsibility for the Ross Asset Management (RAM) debacle and the FMA is likely to seek law changes in the wake of it. He's also urging investors not to be shy about asking hard questions of their financial adviser or money manager, and to report any major concerns to the regulator.
In a Double Shot interview with interest.co.nz Hughes said the buck ultimately stopped with him and the FMA.
"I accept accountability for what has happened here. It happened on my watch. We authorised Mr Ross (as an Authorised Financial Adviser, or AFA) and we've had to sit back and take a long hard look at what happened here," Hughes said.
After complaints from RAM investors about delayed or non-payments, the FMA launched an investigation and exercised a search warrant on founder and director David Ross' offices on The Terrace in central Wellington and at his home between October 31 and November 2. It then had RAM assets held within New Zealand frozen and brought in PwC as receiver. PwC has thus far found just NZ$11 million of a purported almost NZ$450 million held on behalf of about 900 investors.
PwC has suggested RAM has the characteristics of a Ponzi scheme. David Ross is now cooperating with PwC, the FMA and Serious Fraud Office after a spell in hospital getting compulsory treatment under the Mental Health Act. See the FMA's timeline on its RAM inquiry here and see all our stories on RAM here.
INFINZ provided testimonial on Ross
Hughes says he's "absolutely confident" the FMA made the right decision to authorise Ross as an AFA based on the information he was required to provide. This included testimonials from the Institute of Financial Professionals (INFINZ) and from clients who Hughes says indicated they were "very happy" with the services Ross, a chartered accountant, had been offering them over 10 years. He was authorised in July 2011.
"I utterly accept that what we now understand about Mr Ross is an absolute tragedy, it's gut wrenching," Hughes says.
A key question now was what could be learnt from the sorry tale.
"In terms of the monitoring work, clearly we're going to have to think about how we allocate our resources and how we identify the sorts of threats and risks to investors that could arise from this sort of situation again. I can't give any cast iron guarantees that it won't happen again (but) we want to minimise the opportunity for that," says Hughes.
"But for that to happen, investors have got to start asking the right questions and the hard questions of their advisers. And if they are concerned they need to come to us because when they do come to us, we'll take action."
"We're going to look at this and say 'are those provisions in the Financial Markets Conduct Bill adequate' and we will give advice to the government if there are improvements that can be made to address this sort of situation. But at the end of the day all the best regulation in the world, all the right resources for the regulator, that's only part of the equation. Everyone else has got to play their part as well."
Hughes, a former Australian Securities and Investment Commission executive, took the reins at the FMA from its launch on May 1 last year. The FMA was established by the government to replace the Securities Commission, but given stronger powers, in an attempt to restore investors' - especially retail "ma and pa" investors' - confidence in the capital markets after the meltdown of the finance company sector. See a Double Shot interview with Hughes here dating from just before the FMA's launch.
'No information suggesting the NZ$450 million figure is accurate'
In terms of what FMA staff found when they conducted their searches, Hughes says the RAM records they turned up weren't perfect.
"Clearly it has taken the receivers and us, and now the SFO, some time to piece it all together and those inquiries are still underway. We did not find the sort of comprehensive, professionally maintained discrete records for each client across their investment portfolios separated out across different asset allocations that you would hope to find," Hughes says.
"I think one thing that comes through very strongly from the first of the receiver's reports is that although it's purported that he had nearly NZ$450 million under management, in fact it's only NZ$11 million so far that has been found. And we hold no optimism that any significant additional amounts of money will be recovered. So record keeping from our point of view was inadequate."
Hughes says he has no information to suggest the NZ$450 million figure is correct.
"I'd love to be wrong and I'd love to be able to find all the money that's promised to be out there but gut instinct tells us it's just highly unlikely," Hughes adds. "In my view it's highly unlikely that we will ever find justification to support that figure."
Based on RAM records seen Hughes estimates about 90% of investors were wholesale ones, whereby an affinity scenario developed with colleagues speaking to other colleagues and bringing them on board that way.
"So there's a lot of word of mouth. There was certainly no advertising and certainly that's another issue for us in terms of our ability to detect this sort of thing because from a desk based point of view, it's very difficult to find somebody who doesn't advertise."
Accountants and financial advisers who recommended Ross to their clients are also coming under scrutiny.
"We're starting to talk to those people and say 'well, let's talk about the quality of the due diligence you did before you put your clients with Mr Ross.' And it may well be that we'll be taking action against some of those people as well. That's an ongoing issue at the moment," adds Hughes.
It sounded too good to be true and it was
Hughes says it appears that only a very small minority of investors came in after 2011, with a small percentage of money invested since then. The RAM business model had been running "well and truly" before the new financial adviser regime came into force. Money found thus far had mostly been invested in mining stocks, what Hughes calls "junior mining stocks" in the likes of Canada and Australia.
"These tend to be very volatile in terms of their performance. They can promise extraordinarily high returns, and maybe that's what it was that Mr Ross was promising to his clients. But on the other hand they can also crash very quickly as well. So it is high risk."
"Gareth, you and I both know that if somebody comes to us and says '25% to 30% (return) guaranteed,' you're going to raise an eyebrow and you're certainly going to ask around and you're going to say to people 'this sounds too good to be true.' Our response sadly has to be it was too good to be true. Some people did get sucked in and what we would say going forward is you'd really have to have your wits about you when people are offering those sorts of quite extraordinary returns," says Hughes.
"I'm not sure we'll ever find the full story or that we'll ever get the last dollar back but it still has a few months to go."
New focus on AFAs offering DIMS
In an interim AFA monitoring report the FMA says it had visited 34 of the 2,000 odd AFAs by June, with David Ross not among them. Of 146 files examined, only 35 fully met FMA expectations. Of the AFAs about 1,200 are authorised to provide discretionary investment management services (DIMS) like RAM was.
"Clearly in light of what has happened in this situation we are now giving additional priority to those advisers who are operating a DIMS service," says Hughes. "About 1,200 of them, which is over half of all the authorised financial advisers, have that authorisation. Clearly not all of them are operating them and we're going to have to go through and work out which ones are those of greatest risk."
Even with all the resources available to the FMA, Hughes says the regulator wouldn't be able to cover all of them at once.
"We've identified a handful (and) we're going to be visiting those in the course of the next week or so. But at the end of the day we still have got finite resources and that's reflected in our budget."
FMA staff were also working closely with staff at the Ministry of Business, Innovation and Employment on the Financial Markets Conduct Bill, which is before Parliament.
"The provisions in relation to DIMS will require some additional safeguards and licencing, although it is noteworthy that for financial advisers who are already authorised by us they will not require licencing to operate a DIMS. That's something that we want to go back to the Ministry on and talk to the officials who advised the Minister (Commerce Minister Craig Foss) and just say 'have we got the right safeguards in place?"
"One of the things that we want to focus on in particular is what happens to the holding of the assets? Should there be separate custodians, should there be an annual audit report? What are the additional custodian or warden roles that can be played to give investors some confidence that their money's being looked after?"
'New Zealanders need to ask the hard questions'
Meanwhile, Hughes says anyone who has invested all their savings with a single adviser ought to pick up the phone or go and see them and say "show me my money."
"Show me the records, show me where it's invested. I want to know that what you've told me it's invested in it is actually invested in," says Hughes.
"I think here in New Zealand we have a bit of a problem asking those hard questions of people because it's seen to be a bit disrespectful or distrustful. But I don't think it's very fair that people lost money in this situation and we genuinely say that New Zealanders need to get a bit harder about asking questions of their professionals and in this case of their financial advisers."
"If you're not in that position and you're thinking of investing, can I just say that it's probably not a good idea to put all your eggs in one basket. Go and talk to a couple of people, get some advice, have a think about a couple of options and once you feel comfortable, then perhaps distribute some of your investment funds across a couple of different opportunities. But don't go down one path only."
In terms of approving someone as an AFA, Hughes says the FMA is constrained by what the law says. It must look at four things. Firstly, is the person on the financial services providers register, and Ross was. Secondly, did he have any criminal convictions FMA staff could get information on, and he didn't. Thirdly, did he meet the minimum qualifications in terms of competencies, and he did. And was he of good character, and he was according to the INFINZ and client references.
'When people bring things to our attention we will act'
Hughes notes that the FMA's financial advisers regime is still a fledgling one being just over a year old.
"In terms of our monitoring work, the approach has been based on three factors, - the first thematic (where) we've identified some issues that we want to focus on and we've done that and that's reflected in the interim monitoring report."
"The second is geographical, so we've obviously wanted to have a national spread in terms of our activities, not just being focused in Auckland and Wellington but looking at advisers operating around the country. And the third, and this is critical in terms of the Ross case, is responding to complaints, or tip offs or whistle blowing notifications that we receive."
"When we got those within a matter of days we took action. We'd frozen assets and we were in court. So the message that people need to get from this example is that when they do bring things to our attention we will act. In terms of Mr Ross, he wasn't part of the surveillance visits that we conducted over the first year or so of our existence. Should he have been? Clearly in the light of experience what we now know, yes. But hindsight's a wonderful thing," Hughes says.
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