Boscawen John: Securities Trustees and Statutory Supervisors Bill — First Reading 
Boscawen John: Securities Trustees and Statutory Supervisors Bill — First Reading 
[Volume:661;Page:9722] 
JOHN BOSCAWEN (ACT) 
: 
 It is a pleasure to rise and speak in support of the Securities Trustees and Statutory Supervisors Bill 
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ACT will be supporting this bill. Like many in this House ACT is very concerned about the massive losses that have been caused through the collapse of about 40 finance companies. About $4 million to $5 million is currently either lost or tied up in moratoriums. Those losses have had a huge impact on the lives of many New Zealanders. 
I want to make some brief comments on the Hon Lianne Dalziel’s contribution this evening. But before I do I would like to congratulate her on the launch of her member’s bill last Friday which Kevin Hague just referred to. I had the pleasure of attending with Lianne a meeting of the Hawke’s Bay Frozen Funds Group where her bill was launched—I understand with the full support of the Maori Party and Green Party. I was able to tell the assembled group that I would certainly be supporting the bill at its first reading. If two of my remaining four colleagues also did that the bill would at least reach the Commerce Committee. 
Lianne Dalziel expressed her opposition to the proposed report-back date of 30 June. Like Lianne Dalziel I was surprised and in fact shocked to find out that on a bill as important and complex as this one the select committee would be required to hear submissions debate the bill and report back to the House in just over 3 months. I am pleased to say that I understand that the Government is now prepared to allow the committee a full 6-month period on this bill. 
I was also interested in Lianne Dalziel’s comments about the beefing up of the Securities Commission and the greater role played in Australia by the Australian Securities and Investments Commission the Australian regulator. I thought it particularly ironic that Lianne Dalziel referred to the fact that legislation was introduced into the House only 3 days before Bridgecorp collapsed. The irony of that is that the Australian Securities and Investments Commission prohibited Bridgecorp from raising money in Australia. If our own Securities Commission which at that time was under Lianne Dalziel’s stewardship—it was her responsibility as Minister of Commerce—had shown as much interest and as much teeth as the Australian Securities and Investments Commission did it is quite likely that the large sums of money lost in Bridgecorp would not have been lost or certainly the losses would not have been as significant as they were. 
This bill establishes a licensing regime for trustees and statutory managers. The role of a trustee is to monitor the issuers of securities. Of course issuers of securities are finance companies. Finance companies raise money from the public issue bonds and take security over the properties or assets of the people to whom they lend money. So the role of the trustee is to monitor the activities of a finance company and to ensure that that finance company reports accurately to its bondholders to the people who have leant money to that finance company so that that company can in turn lend money to the people who would like to borrow from it. 
Most New Zealanders would understand the concept of a first mortgage a second mortgage or a third mortgage. Typically when we look to buy our first home or any home we go to a bank for a first mortgage—to lend us some money to help us purchase the home. When we come to sell that home the first mortgagee—the bank—is the first party that has to be paid off. Sometimes a first mortgage is not sufficient to enable the purchase of a house and some people need a second mortgage. In that instance if the house is sold the first party to get the proceeds from the sale is the first mortgagee followed by the second mortgagee. In some rare cases a person may even go as far as borrowing a third mortgage and therefore will owe three people money. 
I would like to bring to the House’s attention one particular finance company that raised money on second mortgages. At least some of those second mortgages were structured so that they were in two parts. If you like they had a top part and a bottom part. Although it was called a second mortgage the terms of that second mortgage were such that when the asset was sold and the funds were paid back the people who lent on the top part of that second mortgage were paid in full before the people who lent money on the bottom half of the second mortgage. The effect of that transaction was that the people who were secured through the bottom half of the second mortgage were effectively lending money on a third mortgage. 
Let me give members an example. Imagine someone borrowing $100 million. That person borrows $30 million on the first mortgage and borrows $70 million on the second mortgage. Ordinarily if it was a standard second mortgage when it came time to sell that asset the first mortgagee would be paid off in full and would get the full $30 million and the second mortgagee would get the next $70 million. However if there was a shortfall if the company could raise only $35 million the $35 million would be spread equally at 50c in the dollar to all the people who had lent part of that second mortgage. Imagine if instead of it being a standard second mortgage it was arranged in such a way that it was in two parts: the top part had priority for $30 million and the bottom part had priority for $40 million. So when it came to sell that asset—let us say it sold for $65 million—the first mortgagee would get $30 million the people who had the top half of the second mortgage would get paid in full—the next $30 million—and the people who remained at the bottom would get the last $5 million. Even though they were owed $40 million they would get $5 million. That may seem a rather academic example but the tragedy is that that is substantially what happened in the case of a loan from Strategic Finance to the Hilton Denarau project. 
I tabled a letter in the House last week in which I acknowledged to the Minister of Justice that I knew Mr Neville Mahon—I had known him for many years—who had borrowed money under those terms. But the tragedy of this situation the thing that concerns me is that when Strategic Finance—a company that went into receivership just 10 days ago—prepared its 2008 accounts rather than showing mortgages that were in substance first second and third mortgages it showed only first mortgages and second mortgages. A year later when Strategic Finance did its accounts to 30 June they now showed for the first time what the company called a second mortgage with a subordinate position. It defined that as a second mortgage where the company participates with other lenders and investors but the company’s position is subordinated. So Strategic Finance lent money on a second mortgage it got part of that money from people who were outside the normal bondholders of Strategic Finance and those people took precedence. 
In my view the accounts that were presented by Strategic Finance for 30 June 2008 were misleading at the time. I believe that the people who voted on the moratorium may well have been misled. That situation was not corrected until the 30 June 2009 accounts were prepared and Strategic Finance went back and told people the true facts retrospectively—15 months after the end of that financial year and after the vote on the moratorium. I wrote to the Minister of Justice Mr Simon Power on 14 December—although the letter was dated 14 December in error—and asked Mr Power to appoint a statutory manager. I asked the Government to take control of this company. I asked the company to make its transactions transparent. I was concerned about conflicts of interest. I received a letter from Mr Power on 21 January. He said that he had referred the case to the Securities Commission. I have confirmed with Mr Power this evening that we are yet to hear from the Securities Commission. 
It is all very well to extend powers to the Securities Commission but not if those powers are not enforced. What is the role of the Securities Commission if it is not to tell the investors of Strategic Finance that their $68 million in mortgages which the company has characterised as second mortgages are in substance third-ranking securities? They may well be second mortgages in style but the truth is that in the case of Mr Mahon he and his fellow bondholders will not get their money until the first mortgagee is paid $30 million and the top half of the second mortgage is paid approximately $30 million. They get the rest. I think that is a disgrace and I think it is time for the Securities Commission to act. Thank you.