A former Securities Commission member says Commerce Minister Craig Foss is "looking in the wrong direction" in claiming Ross Asset Management has not demonstrated regulatory failure.
David Mayhew, the former Commissioner for Financial Advisers who is now a London-based barrister, said the regime authorising financial advisers - where attention on the Ross collapse has focused - was simply designed to ensure applicants were qualified. The problem was a lack of licensing and oversight.
Ross Asset Management, run almost exclusively by founder and sole director David Ross, was placed in receivership shortly after clients complained they could not withdraw money. There is now a shortfall between customer accounts and proven assets of $438 million.
The failure of Ross did not expose fresh regulatory failures, Foss said this week. "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."
Mayhew said the problem at Ross appeared to be the same one seen repeatedly in the finance company collapses during the global financial crisis, namely a lack of professional or non-executive oversight scrutinising decision-making.
"Here [with Ross] it's even worse. You've got a sole director with sole investment responsibility," Mayhew said.
"For the minister to say there's no regulatory failure is to not be looking in the right direction. The regulatory failure is you can not yet put in place a regime which says someone like this who solicits money from the public, and then holds it for investment purposes, isn't licensed.
"Anybody can do it," he said.
"The real focus is, you've got a $400 million fund. How is that being managed, where are the governance controls over that, how can we stop one man running amok," Mayhew said.
Sue Brown, head of primary regulation at the Financial Markets Authority, said this month that the Financial Markets Conduct Bill, expected to become law early next year, would "in some cases" treat entities like Ross as offering financial products - rather than just advice - and therefore be more tightly regulated.
However, she warned that because many of Ross' clients were investing more than $500,000 they would be considered "wholesale" investors, on the same footing as banks or professionals, and so could opt out of the tighter regulations.
Last month Courts Minister Chester Borrows told Parliament that licensing could create high barriers to entry; therefore the new regime was expected to be "relatively light".
"It is primarily focused on ensuring that the unscrupulous are excluded from the industry, rather than ensuring that every participant has a gold-plated compliance regime or that no one fails."
Meanwhile, Bruce Tichbon, spokesman for a group representing hundreds of Ross investors, said yesterday that some of the most respected institutions had advised clients to put money with him.
"The people who were referring clients to David Ross include the biggest name investment houses in this country. He had everyone fooled," Tichbon told Radio New Zealand.
"The sentiment of our members is that people expected some oversight and it wasn't there. There was no point of accountability."