Regulating finance companies

The Commission’s role in regulating finance companies is limited to offer documents. It can intervene if a finance company does not provide the required information for investors to make a decision on whether or not to invest. New law relating to finance companies, announced by the Government in June, is expected to be introduced within the next year.

The proposed new law gives the Reserve Bank a prudential regulatory role over finance companies. Trustees will continue to be the frontline supervisors. Finance companies will need to be licensed and to meet enhanced minimum standards, including:

fit and proper requirements for directors and senior managers;
strengthened capital adequacy rules;
minimum corporate governance requirements;
mandatory credit ratings from an approved rating agency; and
strengthened disclosure requirements.

The Commission will authorise trustees for all debt issuers, including finance companies, and have enhanced powers to monitor trustees’ performance. It will continue to enforce disclosure by finance companies.

Locke Guarantee advertisements banned

The Commission banned the advertisements for the Locke Secured Capital Plan on 20 June 2007. The investment was offered by Locke Guaranty Trust (NZ) Limited (LGT).

LGT is incorporated in New Zealand and used New Zealand as a base to offer securities in other countries. It stated that New Zealanders are not eligible to invest in the Plan.

LGT’s website advertisement stated that the investment is safe and risk free. All investments have a degree of risk and the Commission believes these statements are deceptive and misleading.

The website also stated that LGT is regulated under the Reserve Bank of New Zealand Act and the Securities Act. This may give the false and misleading impression that LGT was licensed and/or approved by the Securities Commission or the Reserve Bank. LGT is not a registered bank in New Zealand and is not subject to banking regulations. If LGT’s claim that New Zealanders were not eligible to invest was true, then the offer would not be subject to the Securities Act.

The Commission can and will intervene in deceptive or misleading offers being made by people based in New Zealand even if the offer is not open to New Zealanders. Investors should be warned about the scheme because the Commission believes claims made about it are likely to deceive, mislead or confuse investors.

Contributory Mortgage Investments Limited (CMI) offer enforceable undertaking

CMI, its nominee company, Contributory Mortgage Nominees Limited (CMN), and their director John Martin and alternate director Ron Jamieson offered enforceable undertakings to the Commission.

These include:

to not offer or promote securities until after 31 March 2008;
to keep all money received for the mortgages in trust, except for distributions to registered investors in proportion to investors’ contributions to the mortgage and some other lawful payments;
to have an independent chartered accountant audit the mortgage records and report to the Commission each month on the distribution of money and whether funds are properly accounted for;
to provide information to assist the Commission in its legal proceedings.

The Commission accepted undertakings from CMI, CMN and John Martin in February 2006. These undertakings included an agreement to not offer new mortgages. Subsequent oral undertakings extended the period of restraint on CMI offering new mortgages. CMI has not offered new mortgages to the public since September 2005.

All the mortgages remaining under its management are in default. It is trying to sell the properties held as security for these mortgages and is taking other steps to recover contributors’ funds. Some mortgages have been settled by CMI at a loss to contributors. The Commission removed two mortgages from CMI’s management in December 2006. At the time of their removal investors were owed money.

The Commission has concerns about aspects of the parties’ compliance with the law and conduct in the offer and management of contributory mortgages including:

the legality of CMI paying its own costs from proceeds of property sales before repaying investors;
the adequacy of CMI’s disclosure about the risks of investment in some mortgages it offered;
the time taken by CMI to notify investors of borrowers’ defaults in some cases;
conflicts between CMI’s own interests and the interests of investors where funds are claimed by CMI or where CMI may have potential liability to investors for losses.

The Commission is seeking a Court opinion on certain legal issues, in particular, the legality of CMI’s deductions from sale proceeds before repaying investors. The Commission considers the interests of contributors will be best served by seeking this opinion before deciding whether or not to remove other mortgages from CMI’s management. This means the Commission, rather than investors in individual mortgages, will incur the costs of determining investors’ rights to these funds.

The enforceable undertakings and media releases relating to them and the ban on CMI from acting as a broker for two of its mortgages, are published at www.seccom.govt.nz.

THE BULLETIN JULY 2007