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AGENDA
Presented by RAWDON CHRISTIE
RAWDON Commerce Minister Lianne Dalziel has had the unenviable task of presiding over the finance company sector of our economy while more than 30 finance companies have collapsed potentially destroying more than five billion dollars worth of Kiwi savings. Ms Dalziel probably hasn’t helped things by describing many of those investors as naïve. She joins me now. We're talking about possibly 5.7 billion dollars frozen or lost, how serious is this in your opinion?
LIANNE DALZIEL – Minister of Commerce
It's relatively serious and it's terrible for those that have lost money and obviously I've got every sympathy for those that have, they’ve spent their lifetime working hard to save that money and then they see it gone in a finance company failure but one has to put this in perspective in terms of the whole economy, the amount of funds invested in the finance companies make up 2.5% of the total number of funds invested in our financial sector, so although it's devastating for individuals in terms of the economy of New Zealand there is not threat to the economy of New Zealand.
RAWDON But there's a higher percentage of people affected here I mean we're talking potentially, I saw one estimate which we quoted on Agenda a couple of weeks ago at 175,000 investors now you put their families into the mix as well and this is a much bigger impact than that it's more than relatively serious for those people isn't it?
LIANNE Sure it is serious for the individuals and the terrible thing is that people have made investment decisions which haven’t turned out and the thing that really has been brought home to me is how important it is that we don’t move away from focusing on how important it is to lift financial literacy in this country. People did make investment decisions that exposed their life savings to levels of risk that they had no idea that they were taking, and I guess you know you use the expression that I had used of people being naïve, I mean that in a gentle sense in that they’ve been too trusting, they have actually put their money into finance companies when they haven’t realised that they’ve been taking a higher level of risk than they have been.
RAWDON Why didn’t you interact or intervene earlier on and actually try and point this out that I'm worried, the government is worried about the naïveté being shown by too many people investing too much of their life savings in one area?
LIANNE Well that’s ironic, I mean somebody did say to me that they had a diverse portfolio because they'd invested in more than one finance company and unfortunately that doesn’t pick up the point that a balanced portfolio requires investments in a lot of different instruments, not just debentures being offered by finance companies, this has been a relatively recent phenomenon, the growth in the number of finance companies has occurred over the last decade and we are seeing people as I say investing in these areas that they haven’t really been investing in so much in the past, but I think it would be wrong to say that the government has to jump into the mix and say hullo I think that too many people are investing in finance companies. Can I just say that finance companies have been around for a long time, not all of the finance companies but there are many who are rock solid who've been around for decades, they have provided an important source of finance for property development, for business investment and their infrastructure, plant and equipment, those sorts of things where perhaps the banks haven’t been so forthcoming the finance companies have been there and there are some very good finance companies out there. The trouble is that if you’ve got people who are relatively naïve, you know unsophisticated, inexperienced investors going in, why do people think they're gonna be any more experienced making the decision to pull out and some good companies have fallen with the bad and the reason that they’ve fallen is lack of confidence. So the government's role is actually around the area of confidence and that’s why we've got legislation in front of the House at the moment to give people more confidence in the sector.
RAWDON I want to pick up first on the naïveté side of it you know, people who have spread a portfolio across eight finance companies therefore they haven’t spread it at all, these people are getting advice though from financial advisors and fund advisors as well, so whose fault is this?
LIANNE Not everyone has taken advice from finance advisors but some have and there are many financial advisors who are members of professional bodies, if they haven’t done a professional job then complaints ought to be lodged against them, and sometimes it's a worry that people look to the government first to step into the market and fix a problem when in fact they haven’t taken the steps that they should take to protect the interests that they have. Did every investor ask their financial advisor the level of commission that they were earning on the recommendations they made, did they ask their financial advisor whether they were taking a level of risk that was matching their appetite for risk, because I have an honest belief that there are many people that are asking the government to actually legislate away risk, let's have no risk that anybody could ever lose any money. Well to be honest if you want a government guarantee then you should put your money in Kiwi bonds because that’s the only thing that the government will guarantee.
RAWDON Alright, why didn’t we see more being done or more urgency being taken three years ago, early three and a half years ago when economists and senior financial analysts were saying we've got this major issue which may just go pop very soon.
LIANNE That’s exactly when we started the review of financial products and providers, we put out nine discussion documents in the marketplace two years ago in 2006 so the initial work was done in 2005, the discussion documents out in 2006, the legislation introduced into the House in 2007. So we have been working through this process in a considered way and we are working very carefully now on getting the legislation implemented. The particular piece of legislation, the Reserve Bank amendment which will give credit ratings for finance companies will bring the Reserve Bank into the supervisory role around finance companies, that is in the House, it's just had its second reading, it will be passed before the election.
RAWDON Has it been done quickly enough do you think?
LIANNE Well I mean I guess that’s what you'd say to Lazurus you know what took you so long.
RAWDON Because I mean the government has responsibility to decide what should take precedence.
LIANNE Yeah that’s right, and let's look at what the government took as precedence. We became the government in 1999 and I would have to say that we inherited a regulatory wasteland, we had to start with getting minority shareholders the rights that they had been anticipating when the previous government passed a takeovers panel legislation but didn’t pass a code for them to enforce, so the first thing that government did was to address the issue of minority shareholders, we then brought in regulation around the Stock Exchange, people talk about the share market, the share market's been much better regulated under this government than it has been under previous governments, and then we have to do market manipulation. Now you asked me about the priority that the government chose to take, I stand by that priority, insider trading, market manipulation, you look at the 27 million dollars that was paid out as a result of the insider trading case that the Securities Commission took against those involved in the Transrail purchase a number of years ago, that money would not have been available to the shareholders of Transrail if the Securities Commission had not been given the powers it was given by this government.
RAWDON How high a priority now – how high a priority is the present finance company calamity taking?
LIANNE We have three pieces of legislation in the House at the moment, we have the provisions of the Reserve Bank coming in to supervise the finance companies, we've got the Financial Registration Bill so that the financial service providers have to be registered and have to have dispute resolution for consumers and we have the Financial Advisors Bill which brings the Securities Commission into direct supervision of that sector.
RAWDON Okay I'll bring in the panel, is this going to do enough to clear up this mess, Nevil.
NEVIL GIBSON – Editor, National Business Review
Well I think everything you said is exactly correct but what I'd like to do is go back to the basics of why so many people put their money into this particular sector, you were talking about the difficulties in the sharemarket and a lot of people were driven away from that and the profile of the people invested in these finance companies tends to support the view that the sharemarket was not for them for whatever reason. So why do you think they actually took this advice, they must have viewed finance companies as somehow being a little bit like banks?
LIANNE Yes I think they did and I think that there is an issue around the finance companies that I believe deliberately underpriced the level of risk that these people were taking, and I think they deliberately set their rates of return at levels very close to bank rates and so people had a false sense of security that they were going to be treated just like a bank but they were gonna get a little bit more for it.
NEVIL Which leads me to ask what sort of pressure was on you not to regulate in this sector or to change the order of priorities, obviously the sharemarket had its issues but this sector grew very quickly and it was funded almost entirely from newspaper advertising and that sort of thing.
LIANNE it was very interesting because there wasn’t a specific pressure on me to change the order of play, I think that if you actually go back and look at when - there were public concerns being raised in the media, it was in 2005 which was when we first started to develop the review of financial products and providers, so that was a substantial review of the sector. In 2005 some of the banks started to make public statements about the risk associated with putting money into finance companies and I've read some of the blogs that were put out at the time saying how dare the banks challenge the finance companies because the banks have a vested interest they're losing people that are wanting to invest in these and so therefore they're challenging whether they're secure or not, but actually some people didn’t do their homework and some financial advisors are in that category as well.
BARRY SOPER – Newstalk ZB
Lianne I know you can't blame the government for everything but it seems to me that the government only acted when public concerns were raised. Now you know we've been through bubbling economic times every since you’ve been in government and these finance houses have sprung up all over the place, one would have thought that maybe the government should have looked then at what these people were providing ….
LIANNE 2005 was when the work on the review of financial products and providers came into play and I mean as I said before it was the last stage in a series of changes that the government brought into play to ensure that our capital markets had quality internationally benchmarked regulatory frameworks around them, so you know I know that this language doesn’t mean much for the person in the street because they’ve invested their life savings and I feel terrible for the situation that has occurred, but they made the decision to invest in an environment where perhaps the checks and balances weren't in place and there were people advising them that should have warned them that there was risk.
RAWDON Alright I'm going to have to stop it there, Lianne Dalziel thank you very much for coming in.
