Guidance from Securities Commission for finance companies on improving disclosure to investors

Following a Discussion Paper released in September last year, the Securities Commission has now published a report with guidance for finance companies on raising the level of disclosure they make to investors.

The report describes the Securities Commission's expectations for disclosure under the Securities Act 1978 and Securities Regulations 1983 and indicates the approach that will be taken with regard to enforcement.

The Commission reviewed the financial statements of 16 finance companies. The review highlighted three main areas where financial disclosure and financial reporting practices needed to be improved. However, the report also noted that the disclosure requirements depend on the particular circumstances of each finance company.

1. Firstly, the Commission focussed on the disclosure of financial information relating to Financial Reporting Standard 33. FRS 33 sets out the minimum acceptable level of disclosure for financial institutions.

   The Securities Commission emphasised the need for finance companies to explain to investors the risks of any investment, including the risks that apply to finance companies generally and the specific risks for the particular company (including its credit risk management policy).

   The Commission's guidance also sets expectations about disclosure of finance companies' principal activities and experience in various industry sectors, and about explanations of companies' ratings.

   The essence of the Securities Commission's advice in relation to FRS 33 was the need for investors to be able to make informed investment decisions and assess risks.

2. Secondly, the Commission made several suggestions with regard to disclosure of related party transactions and activities. The report emphasised the fact that related party transactions and the risks of activities undertaken by related parties are material matters for investors.

   Consequently, finance companies should provide clear disclosure and explanations of related party lending.

3. Thirdly, the Securities Commission addressed the issue of disclosure where there is no specific guide in New Zealand financial reporting standards. The Commission advises finance companies as follows:
   
   
   • Finance companies should clearly identify the revenue from the different sources of a finance company's activities. Furthermore, the accounting policies adopted by finance companies to recognise each material revenue source should be clearly disclosed.
   
   
   
   • In relation to financial instruments, improved disclosure is needed about the basis for recognising financial instruments in financial reports.

At the end of the year, the Commission is expected to review a sample of disclosure documents from various finance companies. Enforcement action against finance companies could follow if the review reveals breaches of disclosure laws.

 

(Securities Commission, Report on Disclosure by Finance Companies, 22 April 2005)

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