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Opinion: Qué? Why the RBNZ's boffins should read Alan Bollard's book and take over the supervision of non-bank deposit takers themselves from trustees

Opinion: Qué? Why the RBNZ's boffins should read Alan Bollard's book and take over the supervision of non-bank deposit takers themselves from trustees
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By Gareth Vaughan

Many of our readers will remember Fawlty Towers, the hugely popular British TV series from the 1970s. It featured a Spanish waiter named Manuel whose grasp of English was poor.

When the clueless Manuel was spoken to in rapid English by guests at the hotel where he worked, or by his erratic boss Basil Fawlty, he'd often respond with "qué", the Spanish word for what. (You can watch Manuel in action above, or here).

Every now and again I read or hear something that shocks me to the extent that I too want to let out a loud "qué?"

One such occasion was when perusing the latest Reserve Bank consultation paper entitled Review of the Prudential Regime for Non-bank Deposit Takers (NBDTs).

My Manuel moment came after I read this: "Trustees have a long and favourable track record. There have been few notable cases of institutional failure in the last 15 years attributable to alleged inadequacies with trustees’ performance."

Gobsmacked I went to the bottom of the page to check a reference backing up this statement. This showed it came from a Ministry of Economic Development (MED) paper dated September 2006. That's nearly seven years ago. It would be a massive understatement to say the public perception of trustees has changed since then. But flicking back to the previous page of the Reserve Bank's consultation paper it notes the offending statement, and a range of others describing "the perceived benefits of trustee supervision of issuers", come from a 2007 discussion document.

Interestingly the 2006 MED document states this; "We believe that the trustee model is fundamentally sound."

Long time readers of will be familiar with our Deep Freeze list. This lists 67 finance industry failures since 2006. As of September 2006 the list would've consisted of just three entities, - National Finance, Provincial Finance and Western Bay Finance, which all slumped into receivership between May and July 2006. What has happened since then is old news, in that dozens of additional companies, including the likes of Hanover Finance, Bridgecorp, Capital + Merchant and Strategic Finance have crumbled, taking billions of dollars of retail investors' money with them.

Something all these companies had in common was trustees, such as Covenant, Perpetual, Guardian Trust and Trustees Executors, who investors relied upon as frontline supervisors. Now, a variety of issues were behind the demise of these finance companies, including outright fraud in some cases. But there would be few, if any, finance company investors who would be prepared to completely excuse trustees from any blame whatsoever.

Bollard's 'tough talks' with 'a curious group'

The Reserve Bank's recently departed Governor Alan Bollard wrote in his book Crisis: One central bank governor & the global financial collapse about being unimpressed with trustee oversight of finance companies. I hope the Reserve Bank staff whose work inadvertently caused my qué moment have read their former boss' book. Here's what Bollard had to say about trustees.

"Who had been responsible for this state of affairs? Under-prepared over-optimistic, unprincipled financiers? A gullible, under educated investing public? Inadequately attentive regulators? An under-resourced and under-committed trustee industry?," Bollard wrote.

"Our corrective focus was on the latter, a curious group of old established trustee firms who contract with finance companies to supervise the trust deeds under which the companies take debentures from the public," Bollard wrote.

"The more we examined their performance, the less impressed we were. One or two trustee firms had been particularly prominent in supervising the riskier end of the finance industry. We had some tough talks with these trustees, telling them the future had to be different and wanting to know how they intended to prepare. Some of them were surprised, indeed angry, at our response."

The Reserve Bank boffins have highlighted the demise of the non-bank deposit taker sector earlier in their consultation paper where they point out the size of the sector has been declining since 2005, "primarily due to the collapse of some domestic finance companies." Today there are less than a dozen finance companies with prospectuses open seeking debenture funding from the public, and most are small scale, compared with more than 60 back in 2006. The Reserve Bank has also provided a useful table, which I've copied in below, showing the rise and fall of the finance company sector as a percentage of the financial system's assets.

The consultation paper also includes a useful overview table noting the volume and size of companies under the Reserve Bank's NBDT umbrella, which is below.

In terms of the consultation paper's chapter on supervisory arrangements for what's left of the NBDT sector and trustees, it makes some good points. These include;

- The current supervisory regime is unusual internationally, with its reliance upon trustees as frontline supervisors.

- Trustees may have an inherent conflict of interest by being paid by the entities that they are responsible for supervising.

It suggests, however, that considerations around the quality of supervision, and the conflict of interest associated with a trustee being paid by the entities it's responsible for supervising, should be mitigated by the licensing of trustees under the Securities Trustees and Statutory Supervisors Act. Maybe.

Take the wheel yourselves

The Reserve Bank goes on to propose three options for the supervision of NBDTs. These are 1) the status quo, 2) an enhanced trustee supervision model, and 3) direct supervision of NBDTs by the Reserve Bank.

The paper says the Reserve Bank doesn't have a firm view on the appropriate supervisory arrangements for NBDTs, but considers there's merit in considering whether the option of direct supervision of NBDTs by the Reserve Bank may be a more efficient mechanism for supervising the sector than the current model involving both trustees and the Reserve Bank.

"While the (Reserve) Bank is open to considering possible enhancements to the current model, we see the choice around the appropriate supervisory arrangements for NBDTs as being fundamentally between broadly the same kind of regime as at present and direct supervision of NBDTs by the (Reserve) Bank."

The boffins also suggest direct supervision by them would probably be cheaper for the regulated entities because the Reserve Bank doesn't have the commercial necessity trustees have to make a profit, direct supervision would bring NBDT oversight into line with arrangements for prudentially regulated entities both here and overseas, and result in greater role clarity given the buck would clearly stop with the Reserve Bank.

I for one encourage the Reserve Bank to man up, so to speak, and take on direct oversight themselves, perhaps with beefed up resources to help them do so. This seems the obvious thing to do if they want the sector to ever get the kiss of life again given public confidence in trustee oversight of finance companies has been shattered. And given the Government's stated aim of restoring retail investors' confidence in the financial markets, this also seems the best way forward.

The Reserve Bank wants submissions on its consultation paper by May 17.

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But Gareth...the Wheeler has turned full circle and what was learned must be learned again...did you really expect the lessons had sunk in....!


Few thoughts:


1   All the major trustee companies have been approved by the FMA to operate as trustees of debt securities - so the FMA has run a pretty close ruler over all of them over the past 18 months


2  No trustees have been bought before the Court thus far with respect to finance comapny failures - so was their any real failure of trustees??


3  its pretty clear that the strategy of the RB has been to eliminate NBDTs from the finance landscape in NZ and those that are left are either very small credit unions / building societies with none of the finance company problems or a small handful of large companies like UDC which is bank owned and thus regualted by the RB by default.


4  The 'trash' has been taken out and the NBDT sector is nothing like it was - likely be a very cold day in hell before we see the reemergence of property develop backed finance companies again...


5  None of these organisaitons present a systemic risk to the banking system



HTG - you would be surprised - the finance sector is split between property / consumer. can't speak for property, however I suspect majority has been gobbled up by banks insatiable appetite for growth over the  past few years. consumer is very much alive and thriving however is in private hands. funded by banks or wealthy individuals and therefore not subject to the sec. act or regs -  and therefore not directly subject to trustee oversite - and the massive cost it entailed. The result is that interest rates are now substantially lower and the sector far more profitable. 


About time someone brought this up. There are supposed to be multiple layers of oversight to prevent financial fraud in companies. A board of Directors further checked by Corporate Trustee accontancy houses dominated by the 'big four' KPMG, Deloites, PWC and Ernst & Young or local accoutants they sub contract work out to.
QC Anthony Molloy in his report of New Zealand finance company collapses basically said that the BoD's within New Zealand were full of people with a lack of financial qualifications that were simply taking the money and leaving the job upto^ the Corporate Trustee's.

That being the same Corporate Trusstees who are finally beginning to come under the pump about the part they played not only in New Zealand but in the global financial crisis;


"The auditors' behaviour before, during and after the crisis has not been subject to an official report, unlike, for example, the banking system, the Department of Finance, and the previous government.

This lack of scrutiny is disconcerting. Auditors have a crucial role in ensuring the sustainability of any business's finances. An auditor is usually an outside accountant (or in the case of Ireland's banks, one of the 'Big Four' accounting firms: KPMG, PWC, Ernst & Young, and Deloitte & Touche) engaged by the board of the bank to review the financial statements prepared by the bank's staff."


Good link from Mish's blog re Incentivized to cheat and the failure of auditors to pick up on fraud…




Newby, Not sure if you saw it but I did an interview with Tony Molloy on the finance company collapses back in 2011 -…

and a story on his report too -…