Financial Markets Authority confident of forcing changes on entity outed by interest.co.nz for wrongly claiming NZ authorisation to raise money from public overseas

Financial Markets Authority confident of forcing changes on entity outed by interest.co.nz for wrongly claiming NZ authorisation to raise money from public overseas

By Gareth Vaughan

The Financial Markets Authority says it's forcing changes to the claims made by City Savings "Bank" on its website following interest.co.nz's revelations that the entity, operating out of a small Auckland office and seeking to raise money from British investors, was using the word "bank" in its name when it's not permitted to, and claiming to be authorised by the New Zealand government when it isn't.

Sue Brown, the FMA's head of primary regulatory operations, told interest.co.nz the regulator was "engaging with" City Savings, which dropped the word "bank" from its name after the Reserve Bank issued a notice saying it's not licensed or prudentially supervised by the Reserve Bank of New Zealand or any other New Zealand authority.

"We started off from the perspective of a New Zealand investor, of course, and we want it to be quite clear that the sorts of services being offered by City Savings Institution aren't available to the public in New Zealand," said Brown. "The deposits they're offering aren't in compliance with New Zealand law."

She said the FMA was also concerned if the website suggests to the rest of the world that the level of regulation it exercises over City Savings is greater than it is.

"So we're working to make sure that's accurately cast on the website as well," said Brown.

"We're continuing our discussion with them and they're continuing to cooperate and we think we're quite close to having a satisfactory resolution."

Claimed to be authorised to offer banking services

Last month interest.co.nz reported City Savings Bank's website said it was authorised to offer "banking services" such as deposit taking, savings accounts, debit and credit card services, commercial and private lending, and foreign currency transactions. Using the phrase "let us earn your trust and then earn you high returns," the website said its activities were regulated by a swathe of New Zealand acts including the Reserve Bank of New Zealand Act 1989.

 

The website also noted that New Zealand - "home of City Savings" is perceived as the least corrupt country on the planet, and linked to Transparency International's Corruption Perceptions 2011 Index which ranks New Zealand as least corrupt.

A company affiliated to City Savings, City Savings Institution Ltd, is registered as a company and as a financial service provider with the New Zealand Companies Register, run by the Ministry of Economic Development. The Companies Office lists the London-based City Corporation Ltd as City Savings Institution's sole shareholder. City Savings has its deposit rate offer details listed on British website money.co.uk. These include 4% for six months, 6% for nine months, and 8% for 12 months with a minimum deposit of £25,000 "or equivalent in currency."

In a notice posted on its website two days after interest.co.nz's initial story, the Reserve Bank said: "This company is not licenced or prudentially supervised by the Reserve Bank of New Zealand or any other New Zealand authority. It is not authorised to provide banking services or take deposits. Refer to the caution on this website page about 'New Zealand offshore finance companies'."

New Zealand law does not provide for any form of officially sanctioned offshore finance industry. And only banks registered with the Reserve Bank are allowed to use the word "bank" in their name.

Warning could be placed on website

Meanwhile, Brown said if the FMA can't reach a satisfactory outcome with City Savings "we'll take whatever action's available to us and is necessary. That might include, for example, requiring a warning that we prescribe the terms of to be included on the website."

She said the FMA was concerned if people providing financial adviser services make misleading statements in their advertising because doing so is a breach of the Financial Advisors Act. Brown said that Section 157 of the Financial Advisers Act states that only certain sections extend to financial adviser or broking services received by a client outside New Zealand. The relevant sections are Section 33 and Section 34 incorporating the duty of a financial adviser to act with care, diligence and skill, and not to engage in misleading or deceptive conduct.

The corresponding offence is Section 118 which is a fine of up to NZ$100,000 for an individual or up to NZ$300,000 for an entity that engages in misleading and deceptive conduct. Under sections 33 and 34 the FMA has a range of regulatory actions available, including public warnings or requiring an adviser/company to display a warning on its website.

Brown said dealing with City Savings had been made easier by its physical presence in New Zealand, via its Queen Street office staffed by general manager and City Savings Institution director Simon Virgo. In a recent a "slightly different but related type issue" the FMA issued a public warning over the activities of Makko Securities, which was cold calling into New Zealand offering to provide broking services for the Facebook initial public offering.

"They (Makko) weren't here, they didn't even seem to be where they purported to be in Singapore and London. So we issued quite a prominent warning to the public because we don't have the jurisdictional reach to go to Singapore or to London to take action against them. Also we work with the local regulatory authorities through our contacts at IOSCO (International Organisation of Securities Commissions) to make sure they're aware of our concerns as well."

Govt's 'programme of work' against charlatans & crooks

Dozens of New Zealand registered companies have exploited the easy company registration system, rated simplest in the world by the World Bank, and New Zealand's good reputation for their own dubious, and in some cases illegal, ends in recent years. Aside from City Savings, these include First Capital Savings & Loan Ltd, which with its director Jeffery Lowrance, has been charged by the US Securities and Exchange Commission with running a US$21 million Ponzi scheme, and SP Trading which was involved in the charter of a plane intercepted at Bangkok airport - having come from North Korea and believed to have been on route for Iran - with a cargo of weapons aboard. There was also an unnamed New Zealand registered company highlighted in a cabinet paper last year that, with its effective base in Panama, committed a "significant" tax fraud in Britain.

Asked whether she thought any laws needed beefing up, or new ones should be introduced to help the FMA crack down on dubious activities undertaken overseas by New Zealand registered companies, Brown said the FMA was working with the Government on its work programme encompassing such issues.

"Some changes may be appropriate, but it's for the programme to work its way through," said Brown.

The programme she refers to includes an all of government response to strengthen New Zealand's resistance to organised crime. It says moves to crack down on shonky New Zealand registered companies include; the development of a risk assessment framework to identify risks on the Companies Register, enhanced monitoring of company registrations, improvements to information sharing between the Companies Office and Inland Revenue Department to identify and risk assess inactive companies, plus the Companies and Limited Partnerships Amendment Bill. See more on what the Government is doing here.

Also see Gareth Vaughan's opinion piece: How Bob Groover of Woodstock and his mates, with MED's acquiescence, bring New Zealand's reputation into disrepute.

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