John Watson (Tasmania, Liberal Party) Share this | Link to this | Hansard source

Today’s editorial in the Sydney Morning Herald parallels many of my own thoughts on the collapse of the property and investment group Fincorp. It states:

Two hundred million dollars buys a lot of misery. That is the sum at risk … It is unclear how much will be recouped by the group’s 7,800 debenture holders, or when.

It continues:

If our ageing society is to become more self-reliant in managing its money for retirement, it needs more access, more reliable guides to investment.

I believe the role of the regulator is important, and this is where the regulator has fallen short. Yes, ASIC has intervened, on some occasions, in relation to prospectus shortcomings. But what about all the newspaper advertisements for the high interest rates that were on offer which old folks found so attractive? Those newspaper advertisements were certainly very attractive and, at the time, I took issue with them and asked ASIC what it was doing about them. It is almost a year to the day that I spoke in this chamber, waving those advertisements for all to see, about the problems at Westpoint. I then indicated that similar schemes were bound to occur in the future along the lines of Westpoint but in relation to other types of products. During that speech a year ago I sought an account from the regulator as to what it had been doing to protect retail investors from these sorts of advertisements. At a hearing of the Senate Economics Legislation Committee on 31st May 2006 I confronted the ASIC chairman and asked:

What action can be taken by ASIC or the parliament to intervene to stop any further losses of this nature reasonably quickly?

In his response, the ASIC Chairman, Mr Lucy, said:

In respect of the potential for others, we are surveilling the Australian financial market landscape very closely. We have dialogue with a small number of entities where we have varying levels of concern and we think that those issues are being managed satisfactorily.

Clearly, they were not.

At the same hearing, coincidentally, Fincorp was cited by Mr Cooper, ASIC’s Deputy Chair, as an example of where ASIC had taken action. I am not denying they did take some action. The committee sought an assurance from ASIC that it had, to use a colloquialism, a fence at the top of the cliff—in other words, a barrier before the people jumped in. Clearly, again it failed as a regulator.

In the 10 months following the appearance of ASIC before the committee, the recent events involving Fincorp show that retail investors are still at risk. It would appear, according to reports in the media this week, that the majority of investors were direct investors and did not have the benefit of investment advice. I note that the deputy chair, Jeremy Cooper, stated in the Financial Review on Tuesday, 13th September 2005:

... problems arose because the sale of debenture products traditionally by-passed intermediaries such as financial planners because there is no commission and they realise that it is a high risk product.

Recognising that, why didn’t the regulator take more action? He goes on to say:

... we see ads with retired couples and Labradors.

They were the advertisements that I was referring to almost a year ago today where I felt people were being misled. Why have these types of advertisements been allowed? And doesn’t the acknowledgement by ASIC of the absence of professional advice reinforce the need for much more diligence?

What is even more worrying, and a more significant indictment of ASIC, is that, unlike with Westpoint, which exploited a loophole in the law to avoid the prospectus requirements of the Corporations Act, retirees who invested in Fincorp debentures did so on the basis of a prospectus that was required by the law and which was lodged with ASIC. Further, even though ASIC claims it was on a high alert it took limited action—yes, it did take some action—to ensure that the investors were protected.

What Fincorp’s collapse shows us is that the retirement savings of many unsophisticated investors are at risk. In relation to Fincorp, I understand that, and I have to acknowledge it, ASIC placed a stop order on the Fincorp 2004 debenture prospectus in September 2004. ASIC then filed proceedings in the NSW Supreme Court against Fincorp alleging that the replacement prospectus failed to adequately or at all disclose all the risks associated with lending to related entities, did not disclose all the risks associated with lending to borrowers involved in real estate developments, did not disclose fees paid to director-related entities and made misleading statements in relation to security obtained for loans provided.

At the same time, the directors led a very high life. I think they had a yacht in the Sydney to Hobart yacht race. They certainly entertained lavishly on Sydney Harbour. Of course, there were large fees paid to interrelated entities. The Supreme Court, on 21 September 2005, ordered Fincorp to offer certain investors in the 2004 debenture issue prospectus a full refund. That was a good move. ASIC again took action on 12 September 2005 to stop advertising by Fincorp which included inducements like ‘Invest with certainty’ which was reported in the Australian Financial Review on 13 September 2005 in an article entitled ‘ASIC books Fincorp a second time’. I understand that concerns had been raised much earlier with ASIC, in June 2003, about Fincorp’s ability to deliver on its commitments and that ASIC failed to ensure that the orders of the Supreme Court were complied with. What is the point of getting an order if the regulator does not follow it up?

I conclude with the following thoughts. Debenture issuers are not subject to the same requirements as are the offerers of interests in what we call retail managed investment schemes where there is a fairly prescriptive regime that has to be followed. Where debenture offers are made to retail investors, ASIC should be looking not only at the disclosure of risk to investors but at the ability of the debenture issuer to meet its commitments, with particular regard to property valuations and the financial stability of the organisation’s intragroup funding and financial arrangements. So it is the fiddling that goes on within these sorts of organisations.

It is clear from ASIC’s actions against, for example, Bridgecorp Finance Ltd in August 2006 that it has the powers and is capable of taking this type of action. Why isn’t there a consistency across the retail investment spectrum? Given Fincorp’s poor record of compliance, why hasn’t ASIC sought orders, for example, under sections 283HA and 283HB of the Corporations Act, similar to those obtained in the Bridgecorp matter? I believe this is another example of the regulator falling asleep at the wheel or simply being satisfied to watch the passing parade at the great expense of people who cannot afford to incur these sorts of losses. I thank the Senate.