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Commerce Commission targets 95% return to 15,000 ING-ANZ frozen funds investors

Commerce Commission targets 95% return to 15,000 ING-ANZ frozen funds investors

About 80% of the 15,000 investors in two ANZ-ING frozen funds should receive some money from ANZ's NZ$45 million settlement with the Commerce Commission, the regulator says.

(Update adds detail, background).

The Commission says investors who don't receive a payment are likely to recover, or might already have got back, more than 95% of their initial investment. This includes through accepting ANZ and ING's NZ$400 million settlement offer last year, receiving compensation from ANZ or through the Banking Ombudsman, and by claiming adjustments on tax losses in relation to their investments.

The Commission says all investors should ultimately get back about 95% of their investments.

The payment method was based on information supplied by ING and nominee providers, and was modelled by experts working with the Commission and ANZ. The Commission looked into, but ultimately rejected, making a pro rata or ‘cents per unit’ payment.

“The payment approach fulfils the Commission’s stated intention to return as much of investor’s initial capital as possible, in the most equitable way. The Commission believes this is the best available outcome for the majority of investors,” said Commerce Commission enforcement branch manager Graham Gill.

Payments are expected to be made by late November.

The ING Diversified Yield (DYF) and ING Regular Income (RIF) funds were frozen in March 2008. Last month the Commission announced it had reached a settlement with ANZ, which promoted the funds and now owns 100% of ING, and ING in relation to a Fair Trading Act investigation into the promotion and marketing of the funds.

As part of the settlement, ANZ and ING accepted some of their conduct may have breached the Fair Trading Act, and agreed to pay the NZ$45 million.

The DYF fund was promoted as having a moderate risk profile even though it invested principally in Collateralised Debt Obligations (CDOs) and used derivatives to hedge currency risk. The RIF was promoted as having a low to moderate risk profile. When they were suspended the funds were valued at NZ$533.51 million with investors including about 2,800 ANZ customers.

ING and ANZ offered to buy suspended investor units at 60 cent for the DYF and 62 cent for the RIF in July 2009. The offer was conditional on investors not taking or benefitting from any legal action in relation to the funds.

The RIF and DYF funds have been an operational and reputational nightmare for both ING and ANZ, triggering protests outside banks by angry ANZ customers who were advised into the fund by ANZ advisors.

Read the Commerce Commission's statement below:

The Commerce Commission has determined the payment method for distribution of the $45 million settlement fund agreed with ANZ National Bank Limited (ANZ) and ING (NZ) Limited (ING) in respect of the ING Diversified Yield Fund (DYF) and ING Regular Income Fund (RIF).

The Commission has determined that the payment method should target returning about 95 per cent of the capital originally invested by eligible investors, taking into account payments already received or likely to be received.

On 22 June 2010 the Commission announced that it had reached a settlement with ANZ and ING in relation to its Fair Trading Act investigation into the promotion and marketing of the DYF and RIF. As part of the settlement, ANZ and ING accepted that some of their conduct may have breached the Fair Trading Act, and agreed to pay a further $45 million to investors.

Approximately 80 per cent of investors should receive a payment from the $45 million fund. The remaining investors who do not receive a payment are likely to recover, or may have already recovered, more than 95 per cent of their initial capital through other remedial steps including accepting the ING offer, receiving compensation from the ANZ or through the Banking Ombudsman’s Office, and through claiming adjustments on tax losses in relation to their investments in the funds.

The payment method has been determined based on information supplied by ING and nominee providers, and was modelled by experts working closely with the Commission and ANZ.

“The payment approach fulfils the Commission’s stated intention to return as much of investor’s initial capital as possible, in the most equitable way. The Commission believes this is the best available outcome for the majority of investors,” said Commerce Commission Enforcement Branch Manager Graham Gill.

“With 15,000 individual investors it has been necessary for the Commission to make certain assumptions, rather than exactly calculating of each investor’s position. Taking this approach we can ensure that the payments approximate each investor’s likely circumstances, are equitable and are quickly executed,” said Mr Gill.

An alternative approach considered by the Commission was to make a pro rata or ‘cents per unit’ payment. This would have seen affected investors receive approximately 7 cents for each unit they held in the Funds.

Ultimately, the Commission concluded that this method did not provide for the fairest distribution of the settlement proceeds, as it could have provided a further payment to those who have already received their capital back, at the expense of other investors who may have ended up receiving only 70 to 80 per cent of their capital back.

The Commission, having determined the method of payment, now requires ING and ANZN to finalise the payment calculations, to contact investors and process the payments.

Investors should receive a letter within the next three weeks advising them as to whether they will be receiving a further payment. Payments are expected to be made by mid-late November.

A question and answer sheet is available on the Commission’s website at www.comcom.govt.nz/anz-ing-questions-and-answers

Background History of ANZ/ING case.

Around 15,000 investors had their money frozen in the two ING funds (DYF and RIF) on 13 March 2008.

ING and ANZN facilitated an offer to buy suspended investor units at 60 cent for the DYF and 62 cent for the RIF in July 2009. The offer was conditional on investors not taking or benefitting from any legal action in relation to the funds.

Timeline. In July 2003, ING (NZ) Administration Pty Limited (ING (NZ) Admin) established the DYF as an Australian unit trust. At the same time, ING (NZ) Admin directed ING (NZ) Limited (ING) to promote the New Zealand dollar denominated participatory units in the DYF to New Zealand resident investors.

The DYF invested principally in CDOs (collateralised debt obligations) and used derivatives to hedge currency risk. The DYF’s performance target was to outperform the New Zealand 90-day bank bill rate by 2 per cent per annum after taxes and the deduction of fees.

The DYF was promoted to investors and prospective investors as having a moderate risk profile. Beginning in late 2004, there were changes to the tax laws in Australia and New Zealand that affected investors’ obligations to pay tax on their investments in the DYF. In response, the DYF’s objective was changed from “after taxes and fees” to “after fees”.

In September 2005, ING (NZ) Admin established the RIF as another Australian unit trust. ING (NZ) Admin directed ING (NZ) to promote the RIF to New Zealand resident investors. The RIF had a similar investment strategy to the DYF. The RIF’s performance target was to outperform the New Zealand 90-day bank bill rate by 1 per cent per annum after fees. The RIF was promoted to investors and prospective investors as having a low to moderate risk profile. In March 2008, the DYF and the RIF (collectively referred to as the Funds) were suspended by ING (NZ) Admin.

The Funds had a total of 8,280 unit holders as at the date of suspension made up of 5741 in the DYF and 2809 in the RIF. The value of the Funds as at the date of suspension was $369.81m for the DYF and $163.7 million for the RIF, a total of $533.51 million. Around 2,800 ANZ customers invested in the Funds as at the date of suspension. The remainder were introduced by a variety of financial planners either directly or via a wrap platform.

Altogether approximately 15,000 individual investors were affected. On 22 June 2010, in its largest monetary settlement to date, the Commerce Commission announced it had secured $45 million in compensation for those who had invested in the two funds. As part of the settlement ING and ANZN accepted that some of the representations made in marketing material and by ANZ advisors may have breached the Fair Trading Act.

The Commission announced it would not be issuing legal proceedings against ING and ANZN over the alleged breaches of the Fair Trading Act. Penalties under the Fair Trading Act. It is up to the Courts to determine penalties. The maximum fine for a business convicted of breaching the Fair Trading Act is $200,000, and the maximum for an individual is $60,000.

The largest individual fine imposed under the Fair Trading Act was $900,000 against Carter Holt Harvey in 2006 for selling timber that did not meet the grade claimed on the packaging.

In 2007 the Commission concluded the last of nine prosecutions against banks and credit card providers for inadequate disclosure of currency conversion fees. In those cases, compensation, fines and costs paid by the banks as part of the prosecutions and settlements totalled just under $30 million.

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