I don't see regulatory failure - Foss

It "may come to pass" that rules governing financial adviser authorisation could be more onerous, Commerce Minister Craig Foss says, but "there's nothing in play right now".
It "may come to pass" that rules governing financial adviser authorisation could be more onerous, Commerce Minister Craig Foss says, but "there's nothing in play right now".

Commerce Minister Craig Foss denies the Ross Asset Management collapse has exposed regulatory failures, with no plans in motion to modify legislation he says is key to building confidence in financial markets.

In an interview Foss, a former investment banker with Credit Suisse, said accountants or other advisers working for Ross' clients had time to ask questions of how the company was being managed, if the regulator couldn't.

Based on The Terrace in central Wellington, Ross Asset Management was placed in receivership earlier this month, following a raid by the Financial Markets Authority (FMA).

The regulator moved into action after investors complained they could not get their money. There is now a $438 million gap between client account totals and proven assets, and receiver John Fisk of PricewaterhouseCoopers has said there is little prospect that much more will be uncovered.

Founder and sole director David Ross, who was held in hospital for three weeks under the Mental Health Act, has not been charged with any crime, although the regulator says his company "has the characteristics of a Ponzi scheme".

Given approval by the FMA to act as an Authorised Financial Adviser (AFA), Ross had to pass a "good character" test, but was never required to be audited, or to disclose how much he managed or his clients' numbers, because he purported to simply offer investment advice.

Foss said the Ross matter was before the courts, but it appeared to be a situation of investors being highly trusting of an unregulated adviser.

It "may come to pass" that rules governing financial adviser authorisation could be more onerous. It would only be if investigations by the FMA and the Serious Fraud Office concluded it was necessary.

"Perhaps it may come to pass that the test to be that person [an AFA] should be deeper, wider, or whatever, or maybe even more regulated, but . . . there's nothing in play right now, until we see how this plays out. It [the FMA investigation] may identify a weakness, it may not. I don't see regulatory failure, no. If there was, it's going back many years."

The Financial Markets Conduct Bill (FMC), which Foss has said is key to improving investor confidence, could become law by midway through 2013, the MP for Tukituki said.

In September, when the commerce select committee reported back on the bill, Foss said it would make it easier for companies to raise money while "ensuring the unscrupulous are held to account".

Foss conceded any recommendations out of FMA or SFO investigations may miss the passing of the FMC, which was continuing.

The Government could not regulate human behaviour, Foss said, but simply set the framework. Investors in a niche unregulated fund needed to question advisers and make demands if necessary.

"It points to almost a more sophisticated financial literacy, to [say] 'I have significant principal with entity A, I expect accounts, I expect independently audited accounts'. That's not totally caveat emptor [let the buyer beware], that's just at this level, that's where that fund is," Foss said, adding that client accountants "probably" had the opportunity to probe Ross on the lack of professional oversight.

"I would be surprised if many of the individuals didn't have their own accountants, financial advisers, you know, because they've got to produce their own accounts every year for the tax man, etcetera. The opportunity to ask those kinds of questions has probably been there for quite some time."

The commerce minister expressed "full confidence" in FMA chief executive Sean Hughes who has declined to be interviewed by The Dominion Post over whether the Ross situation exposed regulatory failure.

When the first receivers' report was released by PWC, Hughes was in Australia meeting executives in financial institutions operating in New Zealand, as well as representatives of Asic, the FMA's equivalent and Hughes' former employer.

Last week the FMA indicated Hughes would be available for interview, but later said this would not be possible because an investigation into Ross was under way.

This week he is in Singapore and Bangkok "presenting at regulatory conferences, briefing businesses with investments in New Zealand and co-ordinating regulatory activities with fellow members of the Asia Pacific Regional Committee of securities regulators".

Shortly after becoming the FMA's inaugural chief executive (it replaced the Securities Commission), Hughes indicated the organisation would cut the amount of international work it did.

His predecessor, Jane Diplock, had earlier been dubbed "plane Jane" for her extensive travel as executive chairwoman of the International Organisation of Securities Commissions.

Contact Hamish Rutherford
Business reporter
Email: hamish.rutherford@dompost.co.nz
Twitter: @oneforthedr

The Dominion Post