‘We don’t have a duty to the investor,’ RBNZ says

Reserve Bank deputy governor Geoff Bascand says “To make public announcements early puts real grave risk of damaging the company.”

RBNZ deputy governor fronts on CBL.

0
0:00 0:10

The Reserve Bank’s head of financial stability and deputy governor, Geoff Bascand, has sprung to its defence after stunning investors with regulatory action against NZX-listed insurer CBL.

The company’s shares were suspended on February 8 after it finally revealed an RBNZ investigation into its solvency and a need to raise capital but on February 23 the central bank suddenly sought interim liquidation of CBL Insurance in NZ, triggering a domino effect through the group.

Documents subsequently disclosed to the court revealed the RBNZ had been seriously concerned about CBL since at least last June but its actions were kept secret by confidentiality orders issued under its governing legislation.

Mr Bascand says although it had ordered an investigation of CBL last July, saying it had “reasonable grounds to conclude CBL may not be carrying on its business in a prudent manner,” disclosure at that stage would have been premature.

“You need to have candid, free and frank discussions with entities,” he says.

“You want them to be able to trust that, if they share something that’s provisional and uncertain, that they can do that with a regulator.”

The law had a presumption toward confidentiality, he says.

“To make public announcements early puts real grave risk of damaging the company, its reputation and its value.”

The RBNZ’s engagement with CBL would have continued in the background had the company not forced the issue by paying out $55 million in breach of explicit RBNZ orders, Mr Bascand says.

“It was the breach of directions that tipped this thing over.

“The investigation could still have been handled and dealt with through more standard discussions without necessarily a liquidation proceeding if it had not moved to pay out overseas parties.”

Of that $55m, $42m was paid to Danish insurer Alpha Insurance, in which CBL is understood to have a small shareholding as well as sharing insurance on policies written by CBL subsidiaries in France.

The other $13m was paid out in a series of transactions to a single related entity, Mr Bascand says.

Documents disclosed to the court show the RBNZ ordered CBL on February 12 not to pay more than $1m to Alpha or any related company, after being alerted to proposed transactions at 8.56pm the previous day, a Sunday.

Disclosure request
Although CBL began to acknowledge its need for more capital, it did not ask the RBNZ for permission to release confidentiality orders until early February, Mr Bascand says.

“The first time CBL asked us to relax the confidentiality restriction was when it was contemplating a capital raise and we lifted the confidentiality order immediately. It didn’t ask at any stage prior to that.

“We said ‘yes of course we wouldn’t expect you to engage with investors without disclosing we have an investigation’, so we were quite supportive of that.”

Mr Bascand acknowledges under the law the RBNZ could have allowed CBL to disclose its orders as early as last July.

“It is possible,” he says. “But those statements you can read as consistent with the presumption that normal business is done confidentially.”

It was up to CBL to meet its disclosure requirements, he says.

“We don’t have a duty to the investor. We have duties to conduct our business with regulated institutions.

“[CBL] didn’t tell us it was feeling impeded by that in any way. I guess this will be all part of the [Financial Markets Authority] review – they will review whether disclosure was appropriate.”

Asked if the RBNZ was concerned about the sharemarket’s ignorance of mounting concerns over CBL’s solvency, Mr Bascand says the regulator was hamstrung by the time taken to produce the investigation report – the draft did not arrive until February 17 and the final report had only just been completed.

“We were sitting waiting for the investigation report. It was frustrating the report was taking longer than we would have wished.

“We were trying to avoid circumstances getting worse, hence some of those directions that placed limits on the business’s ability to pay away money.

“Meanwhile, all the way through this, the company was disagreeing with our view and didn’t accept our perspective reserving needed to be increased until the start of February.”

Value loss
The crisis has almost certainly decimated the value of CBL – from a market capitalisation of $747m before a trading halt was imposed on February 2 its value could be as little as zero.

Does the RBNZ think the months of secrecy have contributed to the damage? Not at all, Mr Bascand says.

“The value of the company relates to the value of the underlying business and the way it’s managed. I think our actions have been all directed at trying to support the best management of this business. Right at the end, unfortunately, we felt that it was not been managed appropriately and had to take severe action to limit the damage to the business.

“If there were underlying valuation issues they would have been there at any stage. They’re not caused by us and the investigation. They’re there in relation to its premiums and claims. So no, I wouldn’t accept we’ve damaged the business. I would say we’ve done everything we can to try and preserve it.”

All content copyright NBR. Do not reproduce in any form without permission, even if you have a paid subscription. 


17 · Got a question about this story? Leave it in Comments & Questions below.


This article is tagged with the following keywords. Find out more about MyNBR Tags

Post Comment

17 Comments & Questions

Commenter icon key: Subscriber Verified

Section 3 (1) of the Insurance (Prudential Supervision) Act 2010:
The purposes of this Act are to—
(a) promote the maintenance of a sound and efficient insurance sector; and
(b) promote public confidence in the insurance sector.

So at least two reasons why information should have been public. There's a balancing act between soundness and efficiency for sure, but efficiency means letting the capital market judge the merits of the insurer's business based on material information.

Reply
Share
  • 4
  • 1

The primary culprits, in my humle opinion, ut based somewhat on what I know first hand, are the RBNZ first and the FMA second. Action by either or both of the 2 aforementioned would have stopped CBL going public and, therefore, avoided the whole mess.

Reply
Share
  • 0
  • 0

Mr Bascand is being somewhat precious in his response and defense
He doesn't have responsibility for the CBL investors ( the FMA does though as they were advised)
Bit the RBNZ has responsibility to.the CBL insurance policy holders who were technically uncovered during this period of non conformance by CBL
The policy holders will have redress if they suffer loss

Overall the RBNZ was deficient in the way it handled this but the FMA more so

Reply
Share
  • 0
  • 2

The culprit here is CBL; not the RBNZ. CBL failed to keep the stock market informed under its obligations to the NZX as a listed company. Frankly, your know it all comments are becoming tiresome.

Reply
Share
  • 6
  • 0

The RBNZ is there to protect the financial integrity of the insurers - and therefore their policy holders. They failed to protect the policy holders
The FMA failed the shareholders
Obviously CBL failed everyone
FACT

Reply
Share
  • 0
  • 0

Rubbish the RBNZ is responsible for the system / sector not individual organisations or policy holders.

Has the insurance market collapsed - no. Will some policyholders maybe lose out yes but that is a commercial risk. The RBNZ stepped in when they thought the company was being reckless or not prudent. To have acted earlier would on the face of it be premature.

Reply
Share
  • 0
  • 0

I read the issue was that CBL MAY HAVE BEEN in breach of their solvency requirement. It appears that the payment of the $55m finally had CBL admitting they were in breach. Had the $55m not been paid who knows what the position in NZ would have been.

RBNZ's obligation I suspect is to protect the NZ business not international operations.

If CBL had announced they were under investigation my guess is their business would have collapsed even if not in breach so some secrecy was required.....the issue will be how credible was the CBL's position that it was compliant.

Reply
Share
  • 1
  • 0

So only when the company needed more capital did CBL ask for the confidentiality restrictions to be lifted, a full 7 months after the investigation began. Very strange that the company only felt the need to disclose at this point rather than keeping existing shareholders informed as per continuous disclosure.

Bring guns and gold - I can hear the lawyers lining up...

Reply
Share
  • 2
  • 0

I have been a big fan of RBNZ's actions in seeking the High Court order. As they say in banking, its always too late to appoint the Receiver.

I think the FMCA, and perhaps the NZX listing rules, now have to put in a specific rule that when a board is being directed by anyone as to how to run its business, and its chequebook, that is ALWAYS material price sensitive information that requires disclosure.

As I learned when auditing banks in London in the '80s - there are only two states in banking ( and insurance) going concern or doors shut.

Hence the RBNZ Open Bank Resolution mechanism, ie depositors get a haircut, was put in place virtually without discussion or debate post GFC refer
https://www.rbnz.govt.nz/regulation-and-supervision/banks/open-bank-reso...

So this is a good opportunity to debate it. What can be done better NOW in terms of RBNZ regulation of banks so that the Aussie owners of our banks get their equity nuts properly squeezed [or at least perhaps a brazilian clip first]. eg Why cant the haircut depositors immediately get all the voting equity in the failed NZ bank in return for their sliced deposit. That paper would trade immediately, all that would be needed is for the RBNZ to be the fully immune issuer and the issue to be exempt from FMC. No disclosure would be required, paper holders could elect their own replacement board instead of rolling up to an administrators meeting. Simple.

If Armstrong economics , who correctly picked the 1987 crash are right, there is a huge bull market rolling on for the next decade or so, refer
https://www.armstrongeconomics.com/future-forecasts/ecm/the-economic-con...

then the biggest crash of all time is coming, then we will all be owned by the East and Winston wont be here to save us.

CBL will look like proverbial chicken caca compared to that.

Reply
Share
  • 0
  • 0

I agree that depositors should be offered some sort of recompense since they are not direct investors. The problem though, as with the GFC, was that the US government ended up paying out bank bets almost dollar for dollar in order to avoid a liquidity crisis and the entire system seizing up, when in fact it was a solvency issue (who in their right mind wanted to buy toxic CDS's and synthetic CDOs for highly inflated values at that point?). The problem with bailing the banks out every time is that it creates moral hazard, and everyone, including depositors, expect their cut of capital back. I hate to say it, and I'll probably get pilloried for mentioning it here, but the only way this cycle will change is if a) we let the cycle sort itself out next time through bankruptcies and recession/depression, or b) the Ozzie banks NZ arm(s) become nationalised, taxpayers get their money back through government stewardship of the banks and CEOs and upper management start spending some time in jail (if they are proven to have knowingly sabotaged the economic structure of the country.)

Reply
Share
  • 1
  • 0

I think what the Armstrong link / forecast graph shows is that it is entirely predictable that humans will try one way of dealing with a situation, that will be inequitable and produce bad results for some people, then much later another. But for now the music will keep playing. [ and when it doesn't work, and the crisis deferred snowballs to bigger even than today's USD 20.6 trillion US govt problem, humans try something different next time].

In the current case, when Obama (No you didn't) bailed out Wall Street post GFC, and immediately post his election by those little people whose little wealth he then destroyed [ and who unsurprisingly voted Trump only because he was the opposite of Obama] and QE was Obama's tool to fund the bail out/inject liquidity into people who should have been felled. Fixed interest depositors and pension fund beneficiaries world wide were the losers, as the returns on their squirrel like behaviour for decades were diluted massively. The winners were/are fixed annual commission fund managers, equity holders in their funds, and property owners, but the gains on still owning your same own Auckland home are illusory, unless you cash them up and move to Gore. The only property winners long term have been the 4% real estate agents.

So we have just on 14 years to get this right. Its 31 years since the 1987 crash taught a few of us quite a painful lesson. 14 years is not long, especially at the back end of this game, and we baby boomers will be late 70's by then, and not working very well like we still are today.

Perhaps that's the message in the Armstrong graph. Because the truly scary part is that 2032 is exactly when the NZ Superfund expects to start paying out its 96% offshore invested portfolio.

I hope someone is brave enough to starting cashing that up in the years leading up to that point, and withstand 3 or 4 years of criticism for selling too soon, and bring a lot of it back to fortress NZ where we can use it in 2035 to 2037 to buy back cheaply all the things we have lost control of in the meantime, and probably use some of it to help pay for the groceries until 2038 too.

My kids have no memory of 1989 to 1994, one of the dips on the Armstrong graph, because 3 of them were born in that period. Well, its dark and lonely and the American Express guy comes to your door at 6pm kid's dinner time, [who's he daddy?] , and the wide boy across the road, who is still not facing reality, goes with you to meetings in Vincent St with BNZ bankers called Kim, who used to be in IT, and have no idea about anything, except they notice the wide boy opposite shouldn't really still be wearing that gold Rolex.

Reply
Share
  • 0
  • 0

A pathetic response from RBNZ as they dive for cover. If the drongoes at CBL could request relief from secrecy why bother in the first place ?

Reply
Share
  • 1
  • 0

The obligation on disclosure is with CBL not with anyone else. Why blame the RBNZ?

Reply
Share
  • 0
  • 1

Then the RBNZ should be dismantled as they won’t upset the holders of their fractional reserve bankers licenses and who will be clearly pleased with the process of insurance ponzi type schemes where a company underwrites commercial risk for premiums but has no cover financial or derivative for that risk. What was the company that took premiums but failed to cover responsibility for earthquake damage in Christchurch?

Reply
Share
  • 0
  • 0

A bit beltated this I guess. CBL does have a duty of disclosure, but surely, they also have a duty to tell the trth, the who;e truth and nothing but the truth and not tell ablatant lies, which they did by saying that they had acquired a US insurance company, whch they bever did.
In my humble opinion, and I have said this before, the real "proximate causes" of the whole CBL mes, scandal, call it what you like, are the RBNZ and the FMA. I know I am beginning to sound like a broken record, but if the RBNZ had acted on the information that was supplied back in 2013-2104 and pulled CBL's licence, they would never have gone public in the first place. A second chance to avoid the disaster was given to the FMA in September 2015 when irrefutable information about the lie about the American insurance company acquisition was provided to them. The information was ignored..

Reply
Share
  • 0
  • 0

It makes sense that there’s some respite from disclosure rules when a firm hits capital issues to allow them to get back on track without the disclosure being what breaks them. However you would expect it to be extremely closely overseen by the regulator and for a limited time.

Reply
Share
  • 0
  • 0

Agree and in this case the agency responsible is the FMA not the RBNZ.

Reply
Share
  • 1
  • 1

Post New comment or question

Plain text

  • No HTML tags allowed.
  • Web page addresses and e-mail addresses turn into links automatically.
  • Lines and paragraphs break automatically.
CAPTCHA
This question is for testing whether or not you are a human visitor and to prevent automated spam submissions.