The Commission’s jurisdiction relates to issuers who offer securities to the public. The Commission monitors the securities markets and undertakes inquiries into matters where there may be illegal activity or poor practice. It also considers complaints from the public and referrals from the NZX, under its Memorandum of Understanding with the exchange. It undertakes inquiries when appropriate.

The Commission generally does not comment on its inquiry work, and usually will not state whether or not it is inquiring into a particular matter.

Public comment on work underway could:

• have serious effects on an issuer, or on the markets generally, which may be unwarranted;
• prejudice any inquiry that is underway; and
• have natural justice implications.

Announcing that the Commission is investigating can

give the impression that someone is guilty of some wrongdoing. This may not be the case.

The purpose of the inquiry is to establish whether there has been any wrongdoing. Early announcement by the Commission could lead to speculation about specific people which may not be justified at all.

Further, the Commission relies on information received from the markets to carry out its investigations. This is given in confidence and it is important that people providing information can rely on the Commission to maintain that confidence.

When an inquiry is complete the Commission may take no further action, or it may take appropriate enforcement action, or it may report publicly if it believes it is in the interests of the market to do so. The Commission's reports aim to provide guidance to market participants and to increase the integrity of the markets.

Finance companies - improved disclosure but risks remain

Review of financial products and providers

Commerce Minister Lianne Dalziel has released nine discussion papers as part of the review of financial products and providers. The papers propose a framework of regulation for the non-bank financial sector.

The papers are:

• Overview of the Review & Registration of Financial Institutions;
• Insurance;
• Supervision of Issuers;
• Consumer Dispute Resolution and Redress;
• Non-Bank Deposit-Takers;
• Collective Investment Schemes;
• Mutuals' Governance;
• Securities Offerings; and
• Platforms and Portfolio Management Services.

They are available on the Ministry of Economic Development's website www.med.govt.nz. Submissions close on Friday
1 December 2006.

Finance companies have improved their disclosure since the Commission's April 2005 report on Disclosure by Finance Companies.

The Commission subsequently reviewed offer documents, financial statements, and advertising of 20 companies. It focused on key areas identified in the earlier report such as disclosure of the risks, and the company's investment activities.

Two finance companies still had poor disclosure, especially about risk. Ten others had improved their disclosure but had fallen short in certain areas. These 12 companies amended their offer documents and / or advertisements and one also amended its financial statements. Other companies agreed to make improvements when next updating their offer documents or preparing advertisements.

"It seems that most companies had taken the report seriously and applied the guidance in it," Chairman Jane Diplock said. "Disclosure by finance companies is getting better, but there is still room for improvement, especially

with regard to risk."

For example, if investing $5,000 in a registered bank for a year gives a return of about 6%, and investing the same money in a finance company for the same term will return about 3% above the bank rate, that difference might seem small in percentage terms, but it may not represent the higher risk an investor takes with a finance company.

"An extra 3% return is a 50% increase in interest and must represent at least a 50% increase in risk," Jane Diplock said. "The governance of a finance company is also very important, as are the skills and track record of its directors and managers, particularly in financial management and in pricing risk."

The Commission does not have a prudential regulatory role. It cannot step in to stop a finance company failing or take action against a finance company that fails. It cannot help investors recover their money. Where appropriate the Commission refers possible breaches of securities law to the Registrar of Companies to consider prosecution.