Financial Services minister Bill Shorten announced a proposal to increase the regulation of unlisted debenture funds last month, but the administrator of recently collapsed Wickham securities says more regulation is not the answer.
Shorten’s proposal came after the collapse of Banksia Securities, and sought to improve the financial strength of retail debenture issuing finance companies. ASIC will consult on the proposals to put in place mandatory minimum capital and liquidity requirements and to make finance companies give investors a prospectus detailing the company's financial performance. It will also look at clarifying the powers and duties of debenture trustees who monitor the financial performance of bond-issuers.
The proposal wanted to clearly differentiate debenture issuers from banks, building societies and credit unions that are regulated under APRA's prudential framework. Currently many finance companies use similar language to banks, which can be confusing to small investors. The government is proposing to ban this kind of language when it relates to bonds.
The Australian Financial Review said it would increase compliance costs of hundreds of companies, and be an advantage to banks over their ‘shadow bank’ competitors.
Administrator of recently collapsed Wickham securities Grant Sparks said the unlisted debenture sector may need a change in regulation, but not an increase in it.
“I don’t think more regulation is the answer. I think people need to accept that there’s a level of regulation designed to protect people and they have to be diligent with what they do and what they deal with.”
He said it was “a bit like buyer beware. There’s nothing wrong with chasing returns, but there has to be a level of risk.”
Sparks questioned whether debenture funds should be allowed to grow to the level that Banksia got to, and still be under the same regulation as a fund the size of Wickham. While Wickham owes $27m to investors, Banksia collapsed owing $650m. “Maybe something like that should be under APRA’s control, so regulation changes as size changes.”
He said the case of Wickham was unusual because all interest was being paid to note-holders on a regular basis, so there were no red flags. “I’m not aware of any note-holder that had money invested, asking any questions prior to the collapse,” he said.
They will issue their initial report on the company next week.
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