Opinion: Investors need faith as broker goes under

By Kate Perry of NZPA

Friday 10th September 2004

Thanks to the internet, investing in the sharemarket is now just a hop, click and a jump away for most computer literate investors.

Rising interest rates and the stellar performance of the sharemarket has seen "clicks and mortar" investments such as online share trading become an increasingly attractive option over more traditional "bricks and mortar" investment choices like property.

Investors have enjoyed a dream run on the sharemarket lately, with the benchmark top 50 index posting another record-breaking month in August, hitting an all-time high of 2803.14 points.

Figures released by New Zealand Exchange (NZX) on Wednesday showed trades on the stock exchange were worth $2196 million last month - up from $1674m in the same period last year.

But not everyone is basking in the good times. This week discount broker Access Brokerage was placed in liquidation. Around 700 investors were left in limbo as their funds were frozen and thousands of Access' other clients were left without a broker.

Initial investigations by NZX last weekend found the popular discount broker didn't have enough money in its client trust fund to cover its liabilities.

What went wrong is still far from clear, as liquidators sift through information and regulators conduct their own investigations.

What has emerged so far is that Access' client trust fund is short to the tune of around $5 million, despite NZX requirements that brokers sign off on its balance sheet and client trust accounts on a monthly basis - which Access did. NZX also conducts regular in-office audits - which Access was due for next week. As liquidators, regulators, and even the Serious Fraud Office try to figure out what went wrong, Access' clients have been left reeling.

While the prospect of losing money is something investors have to be aware of when putting money in the sharemarket, that risk is usually associated with their choice of shares - not their choice of broker. Not since the chaotic days following the crash of 1987 has a broker gone under in New Zealand.

But New Zealand Shareholders Association chairman Bruce Sheppard said shareholders need to think seriously about who they are dealing with when choosing a sharebroker. He has a personal preference for traditional full service brokers, rather than online brokers, saying although the fees were higher, the credit risk was lower.

"If you deal with a broker that requires you to pay for your shares before you buy then you have got a doubling up of your credit risk," Sheppard said. "The only way to actually get around putting the money up before you buy the shares, in a trust account that they (brokers) control, is to deal with a full service broker. Trouble is you pay a lot more to do that."

Some $47 million of clients' money was caught up in Access trust accounts, which were held by UDC Finance and the BNZ. UDC has unfrozen the $13 million it held, but the $34 million in BNZ accounts remains frozen, as it has a different legal structure.

A number of Access' clients quoted in the media this week were confused about the nature of the accounts they have been putting their money into - thinking they had set up personal call accounts, rather than depositing money into an Access controlled trust account.

One such client was a pensioner who told The Dominion Post on Wednesday his life savings of $112,000 were tied up in the frozen funds, after he deposited the proceeds of a property sale into the Access trust account, thinking it was a personal BNZ account.

Sheppard said it was in banks' best interest to ensure customers were fully aware of what they were getting into. "If your relationship is not with the BNZ, the statement and certificates that go out should make it very clear that the Bank of New Zealand is the holding agency for money on deposit with Access or whoever it happens to be."

The BNZ said in a statement on its website it cannot unfreeze the accounts without instructions from the liquidators.

Looking ahead, Access' clients may end up stressed and disillusioned, but they are unlikely to remain out of pocket. The sale of Access' assets and client base is likely, and disciplinary and regulatory fines are also on the cards once investigations are completed. NZX chief executive Mark Weldon is also on the record saying the exchange would be strongly inclined to stump up to cover any shortfall.

When people hand their savings over to invest, they not only place an enormous amount of trust in the people who are facilitating their investments, they are also placing their faith in rules and regulations which have been set up for their protection. But Sheppard said Access' collapse was not due to a lack of rules.

"You don't need more, you just need to use the ones you've got and thoroughly police them rather than perhaps superficially police them. I'm not suggesting that NZX did superficially police them but it doesn't alter the fact that $5 million has gone missing and it won't have happened overnight."

But Sheppard added the way in which regulations are applied and policed has changed in the last six months, "so it's bloody hard to sit back and say are any changes needed". One change NZX has been pushing for in recent months is for a central clearing house to be set up for all trades.

"The way it works right now is that money goes from broker to broker when a trade occurs. What we would want to do is put the exchange in the middle of that, so as soon as the money leaves the broker the responsibility for that money when it trades between two traders is at the exchange," Weldon told Radio New Zealand on Tuesday.

Whether that will be enough tempt investors caught up in the Access drama back to the market remains to be seen.

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