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Property trusts
Risk becomes clear after property collapses
1 June 2007
Robin Bowerman
Complexity is the arch-enemy of clarity. It follows that the more complex an investment structure the harder it is to be confident investors understand the risks involved.
This week another property development financier Australian Capital Reserve was put into administration. It had raised $327 million in “deposit notes” using a similar corporate structure to Fincorp which collapsed in March after raising about $201 million from retail investors.
The new chairman of the Australian Securities and Investments Commission, Tony D’Aloisio, addressed the collapse of Westpoint, Fincorp and ACR this week in his first address to the Senate estimates committee.
While he has committed ASIC to a review of its role and how it deals with these type of products his statements (available on ASIC’s website) make interesting and possibly surprising reading for the 20,000 odd investors affected by the three company collapses.
According to ASIC these debenture and note investments were in possibly the highest risk category the debt securities market has to offer – that is they were unlisted and unrated.
With the benefit of hindsight investors now understand that the way these structures worked was to raise money from the public and then onlend the funds to an associated property development company who typically raised additional funds from banks. The bank loans were secured so the investor funds ranked well down the creditor list when the development merry-go-round music finally stopped.
This is where our regulatory regime faces a major challenge in order to better protect unsuspecting investors. The key plank of our system is based on disclosure – the principle being that provided a person has all the relevant information available to them they are free to make their own decision – good or bad.
The public calls for greater investor protection are being acted on by ASIC and its new chairman so it will be interesting to see what recommendations are put forward to avoid a rerun of Fincorp and ACR.
Certainly the role of advice is critical. There are many things in our lives we do not fully understand and have to seek help and advice on – be it going to a doctor or getting an architect to design a new house. So there is a powerful case for getting informed, impartial advice before investing in certain complex investment. However, the reputation of the financial planning industry is mixed – people who use an adviser tend to score them high on a customer satisfaction scale while people who do not have an adviser are often deeply sceptical and struggle to know how to find one.
But it is worth noting that in the case of Fincorp and ACR the mainstream financial planning industry appear to have comprehensively shunned the products. With Westpoint some advisers did sell the products although it appears relatively limited with ASIC’s report says it is pursuing seven licensees and 23 authorised representatives.
Perhaps there is an opportunity for the financial planning industry – in conjunction with the regulator – to redesign the offer of advice around these type of products. It would be a challenge because of the legal liability that would certainly attach to any product advice and that is before you even consider the commercial reality.
But surely it is not too ambitious to imagine that an investor intrigued by an investment offer could take a product disclosure document along to an adviser or perhaps visit an online ratings website where they could key in the product’s code, pay a reasonable fee and get an independent risk assessment or rating. Education and advice working together must surely help steer investors away from inappropriate products.
One thing is clear from Fincorp and ACR’s demise and the losses investors have suffered. We have to learn from those mistakes otherwise we are doomed to repeat them.
Whatever your views, you can discuss this article - or any of Robin's articles - on our message board Your 2 Cents.
Robin Bowerman is Head of Retail at index fund manager Vanguard Investments Australia and the former managing editor of Shares and Personal Investor magazines. To receive this column by email each week go to http://www.vanguard.com.au/ and register with smart investing.
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