Pressure for reform on unsecured investments

The Australian Consumers’ Association (ACA) has called for greater prudential control over unsecured investments following the winding up of two Westpoint mezzanine finance companies, and warned investors of the risks of high-interest debentures, notes and mortgage trusts.

“We think it’s high time ASIC [Australian Securities and Investments Commission] and APRA [Australian Prudential RegulationAuthority] were given more powers to control these schemes,” ACA senior policy officer Nick Coates said.

“We don’t just want to see ASIC policing the advertising of fixed-interest investments. If the schemes continue to be promoted as safe and secure, there needs to be prudential controls on how these companies are allowed to use the savings of their small investors.”

Coates said there were very few safeguards on how investors’ money was used by the issuers of debentures, unsecured notes and high-yield mortgage trusts.

“It’s arguable that for many of the high-yield investments on offer, an 8 per cent to 10 per cent return, at just 2 per cent to 4 per cent above top bank deposit rates, doesn’t adequately compensate investors for the extra risks they’re taking,” he said.

International Mezzanine Funds Management managing director Martin Ashe said construction lenders typically charged between 25 and 35 per cent on money lent for property developments during the development phase.

“If the investor is aware of that and is prepared to take the risk and is getting recompensed for that, all well and good, but if the investor is buying a debenture and thinking they’re getting a good deal with 10 per cent … then clearly that’s where there’s been a mismatch,” he said.

Ashe said some property developers set up funds management arms that offered high-yield investment products to raise funds for their own developments, as was the case with Westpoint.

“Regardless of whether its Westpoint or whoever, I would argue that there’s always an inherent conflict of interest in that because you’re raising funds but you’re doing it for your own project.”

Coates said money raised was sometimes used for property development without the specific risks being discussed with investors. Inappropriate property valuations and unreliable creditors were other risks that could arise when public money was lent to parties related to the fund raiser, he said.

The Financial Planning Association (FPA) has stressed the importance of financial advisers clearly explaining the risks associated with any recommendations given to investors.

“The financial plan and any associated product recommendations must take account of the client’s risk profile and be appropriate to the client’s specific situation,” FPA chief executive officer Kerrie Kelly said last month.