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REPORT ON DISCLOSURE BY FINANCE COMPANIES

APPENDIX - LAW REFORM ISSUES

96.

Respondents to the Discussion Paper raised a number of matters that the Commission considers would be more properly addressed as matters of law reform. The Commission does not at this time make any recommendations on these matters. However, the Commission considers that it is useful to note the main law reform issues in this report so that these views are more widely known. The Commission will put these matters forward for consideration by the Government in its forthcoming review of the Securities Act.

The role of the investment statement

97.

Several respondents were of the view that the current form of investment statement may not be ideal as a disclosure document. Some respondents proposed various alternative documents which they considered would be better understood by investors.

98.

The view was expressed that Schedule 3D is a "one size fits all" approach to disclosure and that this may not be appropriate. It was suggested that a new schedule to the Regulations be created for debt security disclosure. Others suggested that as well as disclosure specific to the finance company, the investment statement could benefit from a standardised section for easier comparison between issuers. One suggested a section in the investment statement about tax treatment of the investment.

99.

It was also suggested that the investment statement should include a section where it is compulsory for the investor and their adviser to sign an acknowledgement that they have read the investment statement. A signed copy should then be provided to the finance company.

100.

The main shortcoming with the investment statement was identified by respondents as the lack of detailed financial information. Several respondents considered that the most recent financial statements should be attached to the investment statement and thought that this would address several of the concerns expressed by the Commission in its Discussion Paper. Some noted that they include their audited five year summary financial statements in the investment statement to indicate the financial history of the company. Some considered that the investment statement and prospectus should be combined.

101.

One respondent noted that debt issuers tend to see a limited role for investment statements and concentrate on selling their products through financial advisers, assisted with extensive advertising about the interest rate. While some saw investment statements as useful marketing tools, others considered there to be a limited use of investment statements as additional marketing material and considered that they had become little more than just a compliance document.

Advertising

102.

Some respondents expressed concern that regulation 12 of the Regulations restricts the financial information that can be provided to investors as it has the effect of limiting disclosure in advertisements about assets and liabilities to that shown in the most recent audited consolidated statement of financial position of the group. It was suggested that the Regulations relating to advertising should be modified so that disclosure of more up-to-date financial information on an unaudited basis could be included, so long as the financial statements from which it is drawn are filed at the Companies Office.

103.

The Commission notes that proposed amendments to regulation 12 may alleviate this issue. The proposed amendments will mean that it is permissible for advertisements to state the amount of net assets, or total assets and total liabilities, if the amounts shown appear in -

(a)

the most recent audited statement of financial position; or

(b)

an interim statement of financial position contained in the registered prospectus or accompanying a certificate registered in relation to the prospectus under section 37A(1A) of the Act.

The advertisement will have to state the date of the statement of financial position and whether the amounts have been taken from audited or unaudited statements.

The roles of the Companies Office and the Commission

104.

It was noted by one respondent that more clarity may be required around the enforcement roles of the Commission and the Companies Office in terms of reviewing and accepting offer documents, and consistency of interpretation between the two regulators.

105.

Some respondents also noted that, while a prospectus is reviewed by the Companies Office prior to registration, an investment statement is not, and, as a result, investment statements were often prepared "in house".

Intermediaries

106.

It was noted that the role played by the investment advisory industry and the quality of advice given to investors by advisers is a matter that requires serious consideration. Some thought that investors' understanding of the risk/return relationship was likely to be enhanced by the use of financial advisers. Others expressed concerns with the disclosures made by financial advisers and the information that they provided.

Industry action

107.

It was proposed by some respondents that the finance company sector should be responsible for improving the quality of its disclosure rather than more regulations and that the industry should set some standards to quantify the risks inherent in the industry.

108.

The view was expressed that strong growth in the sector in a relatively short time had led to a need for the sector to evolve professionally and be properly structured and governed.

Trustee Companies

109.

It was noted that there are a significant range of covenants used by trustee companies and that some trust deeds have not been updated for a number of years. It was considered that more work needed to be done by trustee companies to identify more closely the key covenants applying to particular industry groups and to amend trust deeds accordingly.

110.

Some submitters questioned whether the trustee oversight protections are delivering benefits for the costs involved with the oversight, and whether investors understand what those benefits are. Some thought that more prominence should be given in the investment statement to the role of the trustee.

Prudential supervision of finance companies

111.

While disclosure and financial reporting provide protections for investors, some respondents considered that more protection might be necessary. Some questioned whether there was a need for prudential supervision of finance companies.

Regulation of rating agencies

112.

Several respondents expressed concern that ratings agencies are unregulated and that there is no standardised rating system for finance companies. Several noted that for a rating to be meaningful the ratings agency had to be reputable and competent. It was also considered that there would be less confusion about the meaning of ratings if there was regulated disclosure of credit ratings.

113.

Respondents were also concerned that investors should be able to differentiate between a rating that results from an independent, in-depth assessment of the company and a rating that involves no detailed internal review of an entity and is based only on publicly available information.

114.

The expense associated with obtaining a rating was also of concern and several respondents noted that this cost meant most finance companies could not afford to be rated by internationally accepted credit rating agencies.

115.

It was noted that investors may place too much reliance on a rating alone and may not seek to confirm its quality and meaning. It was also noted that there are currently some issues with disclosure of rating information because some ratings agencies consider some of the rating information to be their own proprietary information.