Only expert investors should have put money in Credit SaILS - ComCom

Only experienced and expert shareholders should have invested in Credit SaILS, the Commerce Commission says. 

The commission's report into the 2008 collapse of the investment described the product in a manner which was "difficult for a layperson to understand".

Commission chairman Dr Mark Berry says Credit SaILS were marketed to the average investor but were highly complex and unsuitable for the average investor.

He says the companies who marketed and sold the product should have known the product was unsuitable for the average investor.

"Only an expert's careful and thorough analysis of the Offer Document and associated materials would have uncovered the true nature and risks of the investment.

"Extracting from the Offer Document the relevant risk information would have required the careful and repeated reading by an expert."

The commission has today released its investigation closure report summarising evidence during the investigation of five companies associated with the marketing and sale of the product to investors.

The report comes nearly three months after the commission's settlement with the five companies -

Forsyth Barr Limited, Forsyth Barr Group Limited, Credit Agricole Corporate and Investment Bank, Credit Sail Limited and Calyon Hong Kong Limited.

As part of the settlement, the companies agreed to create a settlement fund of $60 million to be distributed to investors who lost money when Credit SaILS failed.

Credit SaILS were sophisticated debt securities marketed and sold to the New Zealand public in 2006 with the prospect of 8.5% interest income and capital protection.

Dr Berry says he is confident the commission could have won any trial it took against Credit SaILS but the commission was aware many of the investors were retired and needed a quick settlement.

"All investors will get their settlement by September this year. Any litigation would take 2-3 years with no certain outcome."

He says the $60 million is sitting in a trust account accruing interest and within the next month, investors will be sent offer documents asking them to forgo their right to seek litigation if they accept settlement of 85% of their investment.

The interest earned from the trust account will then be used to cover administration costs and any remaining interest will go towards covering the commission's $700,000 costs.

Commission gives advice

As part of today's report, the commission has offered guidance for future investment promoters, including:

  • All information conveyed to investors must be accurate. This applies to information in a prospectus, offer documents, marketing materials and things said verbally by financial advisers.
  • It is possible to mislead by silence. What you leave out or obscure can mislead, as well as what you choose to say. Ensure that all relevant information is provoded.
  • Use plain english, not technical jargon. Investors will take different meanings from the language than financial institutions and brokers.
  • Financial advisers are a critical source of information for investors. Whatever the documents say, advisers can mislead investors by what they say. Where products are new or highly complex, promoters must ensure that all intermediaries who sell the product are given genuine grounding in the products and thorough information. Otherwise selling agents can be put in a position where they mislead investors.

Dr Berry denies the comapnies have got off lightly and says establishing a settlement fund is no small contribution.

He is also confident this will not happen again, given the commission's guidance.

"It's not in anybody's interest to put out a product that requires us to investigate."

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3 Comments & Questions

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How very clever after the fact is the commerce commission

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It's ridiculous that if Credit SaILS had made heaps of money, it's unlikely that the ComCom would today be issuing the same statement.

In other words, the castiagation is purely a result of the security having performed poorly - now, is there ever an implicit of explicit guarantee in an investement? No. Therefore, the ComCom and the buyers of Credit SaiILS are embarkingo on a 'heads I win, tails you lose' crusade.

Should the promoters of Credit SaILS have done an IQ test on investors who applied?! How ridiculous in the ComCom in saying that the prospectus was complete, not misleading in any way, but that its their fault that people who read it, understood investment risks and applied anyway were still too stupid?!

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I think the failure of this security has more to do with the GFC than its complexity. Does the Com Com require the same level of disclosure when I buy a car. I defy any driver to understand how precisely it operates but we nearly all own one. perhpas cars are for experts only, or is there a special level of disclosure requred for investments. ( my car is certainly not one of those!)

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