Finance industry examined

KENT BLECHYNDEN/The Dominion Post

GONE: Paraparaumu couple Marvyn Crone, left, and husband Rowland lost 38 per cent of their savings to failed finance companies.

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The finance industry suffered from an anything-goes culture lacking in ethics and morals, a parliamentary select committee inquiry into the finance company collapses has been told.

During the past three years about 30 finance companies have gone into receivership or liquidation, entered into moratoriums or have frozen investor funds, affecting more than $6 billion. The inquiry is in addition to several Government initiatives to bring change to the industry.

An organisational behaviour expert, Professor Emeritus Ray Adams, told the committee yesterday that the directors of some companies were ultimately responsible for their failures.

The finance community suffered from "a culture in which anything that was not illegal was right. Professional integrity and responsibility were abdicated. For them it became a game, if you could do it and get away with it, you were clever. The fact that actions taken by directors and executives were apparently not illegal, but were patently and obviously ethically and morally wrong, points I do believe to inadequacies in the law."

Professor Adams made a detailed case study of one finance company. That company was using assets bought with investor funds as security to borrow. "Which seems to me a flagrant misuse of other people's money" and openly called "legitimate insider trading".

The company also "created a climate of expectation" that was far in excess of its ability to deliver.

He recommended that finance company directors be licensed, that a code of ethics be introduced and a directors fidelity fund be established.

Trustee Corporations Association chairman Clynton Hardy said investors needed to be provided with simple-to-understand and concise information that spelled out the risk of an investment. There was also a need to better educate the investing public.

A recent damning survey by Consumer NZ on the quality of advice and independence of advisers "gave us all a massive shock", Mr Hardy said.

"The standard needs to be raised substantially." But banning commission payments could discourage investors from taking professional advice and be counter-productive.

"There is a real concern that investors will not pay $1000 or $2000 for advice."

Pressed by committee chairwoman Lianne Dalziel, Mr Hardy agreed that a "fee-based system is far more ethical".

'WE'RE JUST GRANNY AND GRANDDAD INVESTORS'

Paraparaumu couple Marvyn Crone and husband Rowland lost 38 per cent of their savings to failed finance companies.

Mr Crone was an accountant and manager until he retired in 1995 and the investment income supplemented their superannuation. "We are just granny and granddad investors," Mr Crone told the parliamentary inquiry yesterday.

He had spread his investments across a wide range of entities including 10 finance companies, six of which had defaulted.

They had invested in companies which a prominent Kapiti Coast adviser gave A and B ratings. "They were rated as top finance companies," Mr Crone said.

The couple have been repaid 39 per cent of their money through various moratoriums so far. Financial advisers and finance companies worked as teams "and I believe they work too close sometimes too", Mr Crone said.

The couple were twice advised to reinvest in Strategic Finance as few as 10 days before the company defaulted. "And I think that was pretty poor advice."

- © Fairfax NZ News