I remember the onset of the 2008 Global Financial Crisis all too clearly. In the space of about two years 31 separate New Zealand finance companies crashed and burned, taking about N.Z.$3 billion worth of savings with them. The crash of so many companies and the resulting fallout cost numerous jobs, led to criminal trials for fraudulent activity and caused a loss of trust in banks. Nine years later, not having learnt much from the previous crash New Zealand, like the world at large is at risk of another, possibly bigger, crash.
The causes of the 2008 Global Financial Crisis are well documented. In the United States lax banking regulations led to the failure of Fannie Mae’s, Freddie Mac’s, Lehman Brothers amongst others . Hundreds of billions of dollars was wiped from the value of the U.S. economy when Lehman Brothers collapsed. The bailout plan authorized by U.S. President George W. Bush cost about U.S.$700 billion to enact. Following these collapses President Barak Obama passed legislation called Dodd Frank Act which enabled large scale reform of the banking sector, in terms of transparency, tightening up reporting requirements and protecting whistle blowers.
In New Zealand the following are just some of the financial institutions that failed in 2006-2010 (N.Z.$)¹:
- Capital Merchant Finance ($190 million)
- South Canterbury Finance ($1.6 billion)
- Provincial Finance ($296 million with $273 million recovered)
- Bridgecorp ($467 million)
¹67 went into liquidation or receivership, or entered moratoria all up between 2006 and 2012
I believe that legislation needs to be passed in two respects to bring accountability to the banking sector, but also institute a better code of practice than the one that exists. Elsewhere I have mentioned the need for better whistle blower protection. This is to ensure that the fate of whistle blowers at the Ministry of Transport who exposed fraudster Joanne Harrison and lost their jobs for doing so, is not repeated.
But perhaps the biggest reforms that I think need to be made are to how individuals enter and exit the financial industry, and the range of tools that can be used in dealing with significant breaches. We have the Financial Markets Authority investigating significant breaches, which is well and fine. But, given the size of some of the aforementioned collapses and the fact that individuals who had leading roles in precipitating said collapses were handed what I think were very light sentences, I think the law needs an overhaul.
For small fraud (less than N.Z.$250,000), claims can be dealt with in the District Court and the High Court deals with larger claims. We saw out of the court trials arising from the collapses of companies like Bridgecorp that in many cases the sentences were too light. The sentences did not appear to take into account ill gotten assets such expensive cars. Nor did they appear to stop the defendants from working in the industry again. The sentences should be proportionate to the size of the losses incurred by the investors. Such a scale could look like this:
- Category E (dealt with in District Court) up to $250,000 = suspension of trading license + fine (up to $250,000) or jail sentence (up to 2 years)
- Category D – $250,000 to $10 million = loss of financial trading licence + confiscation of luxury assets or fine (up to $500,000) or jail sentence (up to 5 years)
- Category C – $10 million to $100 million = loss of financial trading licence + confiscation of luxury assets + fine (up to $1 million) or jail sentence (up to 15 years)
- Category B – $100 million to $250 million = loss of financial trading licence + plus fine (up to $2 million) + jail (up to 25 years)
- Category A – $250 million+ = loss of licence + fine (up to $4 million) + jail (up to 40 years) + confiscation of luxury assets + loss of passport
Not as harsh as thousands of investors having their retirement plans and anything that they might have been relying on their investments to fund now having nothing to show for their efforts. Not as harsh as hundreds of people working for these forms in good faith finding themselves without a job because of the collapse. Nor as harsh as any community finding that sponsorship of community events and projects have just gone up in smoke.