Fictional guarantee prompts BNZ's bounty

By Shoeshine

Friday 24th September 2004

Despite some recent attempts to hitch a ride on the corporate social responsibility bandwagon, banks aren't known for philanthropic acts.

So BNZ's bailout of Access Brokerage clients was bound to meet a cynical response in some quarters.

Shoeshine confesses some of the catcalls have been his but he isn't unduly embarrassed.

That was just the way the paper trail pointed.

Having followed the trail for a little further, however, he is now convinced BNZ has been given a bit a raw deal.

To recap: BNZ operated the Access Client Funds Trust Account (CFTA), which receiver Ferrier Hodgson has said contains $3.7 million less than is needed to meet obligations to Access clients.

The CFTA was an Access account only Access staff could authorise payments to be made from it. And it was a "pooled account," containing money owed to and by hundreds of clients at any one time.

Whether with malicious intent or not, Access led clients to believe money owed to them pending settlement was held in an individual BNZ trust account in their own name.

They got a deposit card with their name on it and a prominent BNZ logo, and Access' literature referred to "your Access Brokerage BNZ Call Deposit Account."

So, they thought, they could sleep easy BNZ would surely not allow Access to use funds in such an account for any purpose other than settling with the client.

In fact, no such accounts existed. They were "sub-ledgers" set up by Access, although the bank knew what the balances were.

And that, the bank says, is why it has stepped up to the plate and underwritten the shortfall in the CFTA.

In managing director Peter Thodey's words, "in underwriting the shortfall in the trust account, BNZ is acknowledging that some Access clients believed they had trust funds in their own name with BNZ."

So why the cynicism?

The suspicion has been that BNZ just wasn't doing its job properly and that, if it had been, the clients' money wouldn't have gone missing or at least that the discrepancies would have been detected earlier.

So, the theory goes, the bank, far from discharging a moral obligation as it claims, is averting legal action by one or another of Access' creditors or by one of the slew of investigating agencies.

The smoking gun, this school of thought fancies, is the letter BNZ provided annually to Access.

This was posted on Access' website in its printed disclosure statement and, Shoeshine hears, was framed on the wall of the reception area of Access' Wellington office. It reads:

"By letter dated 1 April (annually), Bank of New Zealand acknowledged that the Client Funds Trust Account is used by Access to hold money on behalf of its clients and that the money held in that account may not be applied to meet any liabilities of Access."

Aha, the theory goes, what can that possibly mean if not that BNZ had a duty to monitor the account and make sure Access didn't get its fingers on the clients' money?

Not so, says BNZ spokesman Owen Gill.

Sharebrokers are required by section 17 of the New Zealand Exchange rules to obtain such a written acknowledgment once a year and to supply it to the exchange's inspector.

Gill says the purpose of the exercise is not to impose on banks some sort of duty of regulatory oversight but to ensure they don't enter into what the industry calls "offset arrangements."

These can occur when a bank's business client has two or more accounts. The bank may choose to allow one account to go into overdraught, provided the debt is offset by a credit balance in another.

The letter of acknowledgement is an undertaking by the bank not to allow brokers to use the balance of CFTAs as an offset for indebtedness elsewhere.

Shoeshine's legal mates reckon BNZ could still have faced some tricky stuff if it hadn't "settled."

Sure, the argument goes, it may not have had a fiduciary duty to the beneficiaries of the Access CFTA. But it knew the account was a trust account.

It had the power to monitor deposits and withdrawals. If it had done so, it might have picked up cheques going to Access' creditors Mercury Energy, Telecom, etc.

That it didn't do so could be construed as a breach of its duty of care.

Shoeshine is bereft of any legal training but he doesn't reckon that argument has any legs.

That interpretation of the law would require New Zealand banks to be, in effect, the frontline regulators of any client who held anybody else's money on trust a position that would involve the banks in many millions of dollars of expense.

And it would effectively require banks to underwrite every cent held in such accounts, an absurd encumbrance.

A cynic might suspect that the real reason BNZ shelled out was the position of its Australian parent, National Australia Bank.

NAB lost more than $2 billion three years ago on its Homeside foray into the US.

This year another $A360 million disappeared in a foreign exchange options trading scandal.

It faces a contingent liability of $A307 million from a claim by the Australian Tax Office and a further $57 million from our Inland Revenue Department.

A deficit in its European defined benefits pensions fund could amount to $A800 million.

The list goes on. Analysts reckon, all up, NAB could have to announce one-off losses of $A3 billion.

A scandal in New Zealand is one thing the bank just doesn't need.

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