Watchdog tells finance industry to cut the spin

By Deborah Hill Cone

Friday 24th September 2004

Finance companies will be forced to cut the spin and tell it as it is if a confidential draft document from the Securities Commission is implemented.

The document sternly criticises the lack of disclosure of risk based on investment statements from 30 finance companies - and it is not just dodgy loan sharks that are being singled out.

The commission's review reveals "a large number" of finance companies have shortcomings in their disclosure and has identified as problem areas the spelling out of risk as well as details of related party transactions.

"The commission's view is that finance companies generally need to raise standards of disclosure," the draft report states.

Enforcement action, where appropriate, will follow the review, it warns.

The report, obtained by the National Business Review under the Official Information Act, finds few finance companies adequately outline the risks of the investments they offer in terms of returns.

It zeroes in on lender-of-last-resort and property financing, with investors entitled to know whether borrowers have had difficulty raising traditional bank funding and whether properties are under development.

At present this is not made clear to investors; borrowers are lumped into broad categories that do not include this kind of detail.

The commission is also concerned about the adequacy of disclosure by finance companies in related party transactions, including those that involve the "sale" of loans or loan portfolios.

It does not single out any companies by name but among the larger players the Eric Watson and Mark Hotchin-owned Hanover Group, which claims to have a loan book of $1 billion, is considered to have one of the most complex webs of inter-party transactions (NBR, March 26).

The commission is proposing that finance companies should make known extensive details of the parties, broken down into seven different categories, including the financial health of related parties and whether the transactions occurred on any special or unusual terms or conditions.

"Without this information investors may not be able to assess the risks of the investment and will not know what entities and activities their investment is ultimately funding," the commission's report reads.

The activities of the related party and the risks of its business may be a key factor that determines the return on investment and a principal risk of a subscriber not receiving the described returns.

Issues to be disclosed either in the investment statement or registered prospectus include:

* whether investor funds are used to fund the activities of related parties or their related parties;

* the proportion of any outstanding amounts on loans that are from loans made to related parties;

* whether related party lending obscures the true extent of a finance company's indebtedness; and

* whether the related party lending has been signed off by an independent director.

The report also sounds alarm bells over conduit issuers where one company is used to raise money from the public solely to pass it on for use by another company.

Finance company advertising, which has ballooned over the past year, also attracts criticism, with the commission rapping finance companies for failing to have proper systems to make sure their advertising complies with the law.

Complaints from the public have been received about the way finance companies present rating information, leading the commission to suggest this be disclosed in the prospectus.

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