Finance companies improve their disclosure, but risks remain

The Securities Commission has reviewed the offer documents of 20 companies prepared since its report.

This review focused on key areas identified in the Commission's earlier report such as disclosure of the risks of the investment, and the investment activities of the company. Each company's most recent investment statement, prospectus, financial statements, and advertising were reviewed for compliance with securities law.

Two finance companies had not followed the guidance set out in the report and still had poor disclosure, particularly about risk. Ten others had improved their disclosure on the basis of the report but had fallen short in other areas. The Commission required these 12 companies to rectify their disclosure deficiencies. All of them amended their offer documents and/or advertisements and one also amended its financial statements. Other companies have agreed to make improvements when they update their offer documents or prepare new advertisements.

The Commission noted that finance companies can be a high risk investment and that investors should read the investment statement and the prospectus so that they know who the finance company is lending money to, and how well the repayments are going.

Currently, investing $5,000 in a registered bank for a year gives a return of about 6%. Investing the same money in a finance company for the same term will return about 3% above the bank rate. That difference might seem small in percentage terms, but it may not be representative of the higher risk an investor takes with a finance company.

Investments with finance companies are generally for a fixed term. Usually this means that investors can't withdraw their money until the end of the term, even if the company's financial position deteriorates. If they are allowed to cash the investment in early, they will likely have to pay a penalty.

The Commission does not have a prudential regulatory role - it cannot step in to stop a finance company failing or to take action against a finance company that fails. It also cannot help investors recover their money.

Where appropriate, the Commission refers possible breaches of securities law to the Registrar of Companies to consider prosecution. The Commission is working with the Registrar on matters raised in the review and on finance company issues more generally.

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For more information on any of the cases, articles and features in Financial Services Quarterly, please email Rachel Gowing or call on 64 9 916 8825.