Boscawen John: Crown Retail Deposit Guarantee Scheme Bill — First Reading Second Reading In Committee 
Boscawen John: Crown Retail Deposit Guarantee Scheme Bill — First Reading Second Reading In Committee 
[Volume:657;Page:6074] 
JOHN BOSCAWEN (ACT) 
: 
 It is a privilege to speak on the second reading of the Crown Retail Deposit Guarantee Scheme Bill. What I say tonight I say in the public interest. The basis of a financial system is confidence and trust. The reason that this measure was initially introduced last year was a total fall in confidence in the world banking system not just in New Zealand but throughout the world. We saw that manifest itself in the failure of many finance companies. Reference was made this afternoon to I think some 16 finance companies. Well over 30 finance companies went into receivership or a moratorium. I have spoken at length on this subject over the last 6 months. 
Tonight I would like to talk about one specific finance company and about the issue of confidence and trust—trust in the financial system. Mr Cunliffe in his first reading speech talked about the banking inquiry that the Opposition organised. He referred to the front page of the  
New Zealand Herald  
business section of 15 July calling on the Government to support that inquiry. It is interesting that on that same page of the business section tucked down in the bottom left-hand corner there was an article about a company called Strategic Finance. 
Hon Darren Hughes 
: What’s the headline? 
JOHN BOSCAWEN 
: The headline is “Strategic warns of $98m loss”. The article is about a finance company that presented a proposal for a moratorium to its investors last December and it set out a case for those investors to support that moratorium. Its base forecast—its base case—was that its investors would be repaid in full and would get a full repayment of interest. So they were to get 100c in the dollar of principal plus interest. 
Some 7 months after that moratorium was put in place Strategic Finance told the market that it was now anticipating that it would lose $98 million but it still believed it could meet its commitments. But it did say that its accounts were subject to final audit and that the loss could well change when the audit certificates were completed. Just over a week ago Strategic Finance announced that in fact its loss was some $175 million. To put that into context I understand that the deposit holders—the holders of debentures; the creditors—of Strategic Finance are owed some $400 million. So since last December Strategic Finance has been telling its investors its creditors that its financial position has declined by some $175 million—by roughly 40 percent of its loan book. I wonder how New Zealand investors can have confidence in investing in such companies which is important. The Minister of Finance said this afternoon that it is important that New Zealand has a strong non-bank sector. 
Let me tell members what concerns me even more about the Strategic Finance situation. There was an article in the  
Sunday Star-Times 
 as recently as Sunday of this week referring to Strategic Finance and the Nelson investor John Lacey. One of the issues that Mr Lacey raises is the salaries being paid to the directors of Strategic Finance. I believe that the chief executive is quoted as receiving something like $500000 and a number of other staff as receiving salaries of in excess of $200000. 
I wish that was the worst of it but I have been told in recent times that the situation is actually a lot worse than that. Strategic Finance lends on first mortgages and on second mortgages but I am told that in its lending it has preferred creditors. If one likes the second mortgage is broken into two parts—Part A and Part B—and those people who fund the top part of the second mortgage are in essence preferred creditors. These people might be called friends of Strategic Finance who have advanced money in the knowledge that they have a prior charge over other bondholders. I am reliably told that these so-called preferred creditors have been receiving an interest rate of 17 percent up until very recently. At a time when the general creditors have been receiving nothing and are losing their capital a group of creditors is achieving a 17 percent return. That money is being paid at the expense of mum and dad investors. Essentially those investors know that the company they lent money to invests in first and second mortgages but I believe it is not clear to them that in the case of a second mortgage they actually rank behind a preferred creditor. In effect mum and dad investors are lending on a third mortgage. I wonder how many of the people who invested in Strategic Finance were aware that on some of their loans they were essentially lending as third mortgage creditors. I wonder whether they would have voted for the moratorium if they had realised that they had that level of prior charge. 
I am told that there may well be shareholders and certainly directors or people associated with directors who hold a privileged position as preferred creditors. I have looked through the Strategic Finance prospectus. It talks about prior charges to the Bank of Scotland International. There may well be evidence in the accounts that points to those prior charges; I have not been able to find it yet. I would have thought that had that been the case perhaps someone in the media might have disclosed it. I may be wrong but I cannot find it. It concerns me also that when the bondholders go along to an extraordinary meeting to vote on a moratorium they do not realise that there is a group of people who vote equally with them but who have a preferred status. Why would the people who have that preferred status not vote for the moratorium if the moratorium is to cement their preferred status and to keep the company trading so that they may get a higher return than the average mum and dad investor? I believe that the mums and dads who voted at that Strategic Finance moratorium meeting did not have a chance because they were a lower class of creditor. 
It saddens me a great deal that many thousands of New Zealanders—mums and dads; a lot of elderly people—have lost money in finance companies. Some of those finance companies have been very well run but a lot of them have not. The Hon Lianne Dalziel talked about the protections that the current Government is putting in place and the protections that the previous Government put in place. I know that there will be an inquiry at the Commerce Committee level into the practices of finance companies. But we will not address the real problem until we address the issue of confidence and trust. If what I have been told is true and I have no reason to believe that it is not I wonder how those people who invested in Strategic Finance can have the confidence and the trust to deal with other companies in the future. Thank you Mr Deputy Speaker.