Finance company collapse a timely warning

Finance company collapses timely warning to trustees.

Hot on the heels of National Finance 2000, Provincial Finance and Western Bay Finance, the collapse of Bridgecorp and Nathans Finance provide further warnings to trustees of family trusts. 

It is not only the corporate trustees of the finance companies that may find themselves having to answer some difficult questions but also trustees of family trusts, according to Mark Maxwell, Chief Executive of Integrity Trust Limited and author of Trusts – A Kiwi Sham?

“A major issue with family trusts is that settlors, the people who set up the trust, continue to treat the assets as though they are their own”, Maxwell says.  This can have serious consequences for trustees when it comes to investing according to Maxwell, particularly when it comes to finance companies.

Many stories are surfacing about investors losing all of their savings in the Bridgecorp collapse.  This highlights a basic investment principle of not having all your eggs in one basket.  In Maxwell’s view, this extends to not having all your eggs in finance companies as the sole type of investment.  When individuals chase the high interest rates finance companies offer they face the risk of losing some or all of their money.  If trustees implement the same investment strategy they not only face the same risk of loss but also the prospect of having to compensate the trust beneficiaries if their decisions are deemed imprudent.

Maxwell believes that as the final analysis of the various finance company collapses becomes clear we will begin to see beneficiaries starting to ask some hard questions of their trustees.  In particular many so-called professional trustees are likely to face the wrath of beneficiaries, especially if they have not obtained independent investment advice regarding trust investments or have not been actively involved in investment decisions. 

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 recent years, one would suggest that any investment in finance companies is viewed with caution as part of an overall diversified portfolio” says Maxwell.
 

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