Monday, February 23, 2009

Regulation by trusty trustee

Probably the most annoying thing about regulation is its ability to raise false hope coupled with a ubiquitous inability to deliver on its promise. Nowhere is this more apparent than with that punctured condom the Trustee arrangements in NZ.

Long experienced banker turned sharebroker and financial advisor Chris Lee  pointed out on National Radio this morning that amongst all the failures of finance companies over the past two years one would look utterly and completely in vain to find one investor protected or “saved” by a trustee.

Such efforts as have been successful have come from:

- receivers,
- managers and owners, and,
- possibly auditors.

Further it has been receivers and regulatory agencies who have turned up related party transactions, misleading disclosures, and highlighted the dense legalese few investors have a chance of understanding  – all  approved at some point by trustee companies.

Incredibly, investors pay these institutions (involuntarily – the law is totally coercive on this) to “monitor” their investments and ensure their safety. Performance in this regard speaks for itself.

Incredibly there is no accountability for their performance in this regard – short of  the Courts - to date untested largely because of the expense and high chance of failure given the breadth of the trustee mandate.

The acid test is whether investors would pay for the pontificating (for there is not the vaguest sign of remorse)   without  the performance. But for the law it is doubtful in the extreme.

Too harsh? Well yes in that it has been trustees who have, too late, tipped failed and failing companies into the hands of receivers which has sometimes helped investors… and possibly served the useful purpose of demonstrating to investors that trustee arrangements are incapable of preventing losses – at least as currently organised.

The pious tell us that a critical first step to recovery is to face reality with complete honesty. In explaining what regulation of capital markets can and cannot do it is clear who should be leading the way.

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