"The 'irresponsible' entity
MICHAEL WEST
July 8, 2009 .
"The administrators have done the analysis and found that, first of all, Timbercorp, the responsible entity, is hopelessly insolvent."
This was the finding of Timbercorp's administrator last month. Likewise, the verdict on Great Southern's responsible entity - "totally insolvent".
Unfortunately for investors in these entities, and a legion of others in the likes of managed investment schemes and mortgage funds, their REs have failed them.
Then again, they were never "their" REs, which brings us to the essential policy problem: independence.
It was the RE which was supposed to be looking after the interests of investors. Now that there are more lost savings, recriminations, lawsuits and inquiries than you could poke a stick at, the question can be posed: is the RE a failed experiment?
There used to be an independent third party whose role was to look after investors: the trustee. That all changed under the Managed Investments Act of 1998, a reform of the Peter Costello years. The RE was born.
Under the new system the product promoters - be they the spruikers behind a Timbercorp, City Pacific, Allco, or Great Southern - would now operate their own fiduciary (trustee). They would fund it, too.
These fiduciary reforms were espoused in the first place by the BTs, AMPs and Macquaries of the world who argued, with some reason, that third-party scrutiny by a trustee only added another layer of costs. Why not take it
in-house? they asked. Let's have a "single responsible entity". We will fund it, and be responsible.
This was all OK for a financial giant with ample resources. The only problems were that costs marched merrily higher anyway as investors were gouged by ever-imaginative fee formulas, regardless of the savings to have been made via an in-house fiduciary.
And meanwhile, at the racier end of the investment market we get Babcock, MFS, Allco and the MIS schemes such as "hopelessly insolvent" Timbercorp running their own scrutiny, veritably monitoring themselves. Kids in charge of the lolly shop.
It should be noted that the trustee system was, and is, far from perfect. The collapse of the debenture players such as ACR, Fincorp and Bridgecorp is testament to that.
At least the trustee was independent though, not to mention alive and still kicking in the aftermath. The notion of a promoter having to provide data to an independent fiduciary must carry some measure of deterrence.
The "single responsible entity" regime appeared to have served investors reasonably well, until the ructions of the global financial meltdown exposed its frailties. And how frail they were, dead-frail. As good as unregulated.
The excess of bull market spawned such a welter of dodgy financial products that the system was effectively out of control. With lost savings from investment schemes and products bloating into the billions the integrity of the financial services system in Australia is at stake.
If it is accepted wisdom that best practice in corporate governance entails a truly independent board of directors for public companies so that shareholders' interests are represented, then why not exact the same principle when it comes to investment schemes?
Who is independent, if not the fiduciary? Who can provide comfort that the interest of investors will be upheld?
In the recent disasters the RE scheme was often tangled in a conflict between perpetuating its own existence - and therefore fees for the holding company - and putting investors' interests first, which would in many cases involve winding the scheme down.
The complex structures of most of these schemes made it impossible for the investor to see a clear line of responsibility.
An independent fiduciary is in a far better position to appoint an administrator while there are still assets left to be sold. It can also bring scrutiny to related party transactions, a prolific factor in almost every collapse."
Source: The Sydney Morning Herald
http://business.theage.com.au/business/the-irresponsible-entity-20090707-dbu2.html
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