Trustees warned over finance company failures.

6 December 2006

Trustees warned over finance company failures.

As if 2006 wasn’t bad enough, with the high profile collapses of National Finance 2000, Provincial Finance and Western Bay Finance, were these just the tip of the iceberg with more bad news due in 2007? Commentary around the release of the KPMG annual Financial Institutions Performance Survey suggests tough times are set to continue for finance companies.

“This is the question trustees should be asking themselves if they are managing investment portfolios that include finance company debentures” says Mark Maxwell, Chief Executive for Trust Management Specialists - Integrity Trust Limited.

While the interest rates offered by finance companies may seem attractive to trustees they need to be aware of their fiduciary obligations when making investment decisions. Trustees have an obligation to invest prudently on behalf of the beneficiaries of the trust. Failure to do so may find trustees having to compensate the trust for investment losses personally.

Prudent investment very often will not involve simply chasing the highest interest rates even if this is how they invest personally. Trustees must remember it may not be acceptable for a trust’s investment portfolio to simply mirror what they might choose personally.

It is also not acceptable for trustees to abdicate the decision making process for investments to a professional advisor. While trustees have a duty to seek professional advice it remains their decision at the end of the day. “I just invested in what my advisor told me to” is unlikely to be much of a defence if faced with court action from beneficiaries

It is important trustees take an active interest in investment decisions and Maxwell recommends involving your trust specialist and/or investment advisor in preparation of a written investment strategy for your trust. This will ensure a robust process is in place for investment decisions and will support trustees to defend their actions should challenges to investment decisions arise.

The Trustee Amendment Act 1988, Part II, section 13E provides trustees with a list of matters they should consider when making investment decisions. Maxwell recommends all trustees and their investment advisors make themselves aware of this list of considerations, referring to it for each investment decision.

When considering investments with finance companies, trustees should take particular note of (d) from the list mentioned above - The risk of capital loss or depreciation. “Given the events of 2006 and the KPMG Survey, one would suggest that any investment in finance companies is viewed with caution as part of an overall diversified portfolio” says Maxwell.

Mark Maxwell is Chief Executive and co-founder of Integrity Trust Limited (www.integritytrust.co.nz), a company specialising in trust management. Mark has extensive experience in the trust industry after a 17 year career with Public Trust where he held a number of senior roles, including General Manager of Charitable Services and National Manager, Trustee Services Development.

ENDS

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