Taking Stock 24 April 2025

THE role of trust companies has rightly been disrespected for at least two decades, resulting from its failure to attract competent, trained executives and skilled, demanding directors. As a business model, the trust company sector deserves no future. 

Back in the 1970s, I valued the input of the trust company which oversaw the finance company I managed. The trustee oozed knowledge and wisdom. Regular meetings helped me adapt to the conservative but sensible standards of the trust manager in charge and helped our directors to ask the right questions.

By the turn of the century trust companies seemed to have deteriorated, employing only those low-value people who were scornfully fended off by the companies which were required to engage with them.

I recall one finance company CEO, a competent banker, telling me of how the only communication he ever had with his trust company was not to discuss investor protection, but to seek agreement of the trust company’s next year’s fee.

In that awful era, which must have started in the 1990s, the other functions of a trust company also were performed dreadfully, in most cases. Wills and estates were, as they still are, often grossly over-charged, and sometimes managed with no respect for the beneficiaries or the settlors.

I recall how NZ Guardian Trust persuaded a 90-year to redocument her intentions, creating a testamentary trust, which provided NZGT with decades of ongoing (ridiculous) fees.

Perpetual and NZGT were the worst that I saw in trust and estate work. I regard them as trustees of last resort. Ironically, along with Covenant, these three companies have now been cobbled together by George Kerr and Andrew Barnes and now form Perpetual Guardian.  Hmmm.

One other function of trust companies is in an area where extreme money is made. This is the function of overseeing fund manager portfolios where, especially in bond portfolios, the charges are far in excess of value. The charges are based on a percentage of the size of the fund.

Fund managers, even those at the bottom of the pile, do not benefit from such supervision, so a trust company charging 0.1% of a billion-dollar bond fund for its “oversight” is scoring a million-dollar fee for a task that a schoolboy could perform adequately. This is a box-ticking task. 

Fees for overseeing fund manager portfolios fill the coffers of trust companies and are the only explanation for their continued existence. 

But it is another source of fees, from the overseeing of unlisted syndicates, that raises questions about the “value” that trust companies add to the investors, who ultimately pay the fees.

In the case of unlisted property syndicates and forestry syndicates, the promoters often must appoint a trust company to oversee the deed that directs the management of the syndicate. Specifically, the trustee must ensure the management honours the commitments it made in its marketing documents, built around a trust deed which makes promises about the syndicate management.

Imagine a forestry syndicate where the promoters offered a thousand $5000 units to buy land and then plant trees, committing to create a special partnership so that every investor had a vote on any major decision. 

The plan might have been to grow a forest, manage and then harvest it, undertake a new round of planting, and then to sell the land and the immature trees of the new planting.

The commitment might have been to maintain the forest (prune it, develop roading etc.), harvest the timber, return the proceeds from the wood sales to investors and, after replanting, sell the fledgling second forest, either to a new younger batch of investors, or to another forestry manager.

It takes around 30 years for seedlings to become timber, so the original investors, average age, say 40, would reap the rewards at an age when starting again with seedlings might be a tad optimistic.

During the first iteration problems occur, and projections of the rewards vary as timber prices and currency values change. One of the promoters personally buys a run-down timber mill, presumably to process the timber.

Projections deteriorate.

The special partnership is changed to a general partnership which appoints a board to make all decisions. The board includes the original promoters. The “one unit, one vote” is lost in the change. 

The investors allow this to happen. The trustee offers no effective intervention. The new board decides to buy the run-down mill from the director that bought it, with plans to restore it.

The bank declines to lend on this proposal. But another bank agrees to lend several million, in exchange for a first lien over the timber, meaning the investors are relegated to a secondary status, and in effect have their future determined by the success of the mill, rather than the value of the timber.

The trustee remains ineffective, presumably failing to see the risk that has been added.

The mill processes timber from the forest but also processes timber from other sources. The other sources are paid.

But the original syndicate investors learn to whistle. The bank is paid before investors see any return.

Eventually the investors recover about their original unit price ($5000), meaning after 30 years their original capital is not lost.

At a 6% per annum return, well below the promoter’s original projection, $5000 in 30 years would have grown to $30,000. An investor who put up $20,000 for four units has seen $100,000 of original projections disappear.

Investors become quite good at whistling, but they have no audience.

All of this history begs the questions:

1. Why did the trustee not warn investors about the risk of allowing the promoters to make all the decisions?

2. Why did the trustee not warn about the risk of buying a run-down mill from a promoter and director of the syndicate?

3. Why did the trustee not warn about borrowing several million to restore the mill?

4. Why did the trustee not warn about the risk of granting a first lien to the bank in return for the loan to refurbish the mill?

If the trustee was not silent, but was simply ignored, what value would there be in his service?

The lasting question is whether the trustee ever had any value to add, any understanding of running a forestry syndicate, or any power to prevent the promoters/ decision-makers from making drastic changes that clearly changed the risk for investors.

Perhaps the bigger question was whether the trustee added any layer of effective support for the investors.

Should the trust company now be sued by investors?

Having met a fair few of the trust company people over the past 50 years, I have observed the trustee concept going from being of value to both investors and the supervised entity, to being of little if any value, except in rare cases. (The Public Trust once had an excellent corporate manager.)

 The idea of having a deed (a promise) filled with covenants (unalterable commitments) to protect investors from selfish or foolish promoters/decision-makers was a good idea. But it assumed the trust company would employ experienced, wise, and energetic people, with the right mix of corporate, legal and accounting knowledge to be effective.

The original concept did not assume that trust companies would slot comfortably into the Old Boys network, effectively employing box tickers with neither the knowledge, experience, or energy to add value.

Within financial markets trust companies have the same sort of respect from market participants that is awarded to those who act as consultants to government departments by teaching teamwork based on sessions of basket-weaving. (Do not think I am joking. Ask MBIE how many of its staff have been taught how to weave baskets, and how much the “teachers” were paid!)

Trust companies in my observation have a healthy appetite for revenue, but inadequate skills to add value.

Forestry partnerships, property syndicates, and supervisors of deeds need a new model that reverts to value-add practices.

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THOSE who borrowed money from ANZ and ASB prior to 2019 are unlikely to be regular readers of Taking Stock.

Our audience is more likely to be those who invest money or deposit it with banks, not those who take out consumer loans.

But every parent and grandparent should be at least intellectually interested in the current dilemma facing lawmakers, the judiciary, and 170,000 people who are involved in a claim against two Australian banks (ANZ, ASB) which regularly breached disclosure law prior to 2019.

The issue begins with typically sloppy law, approved first by Key’s government in 2014, and then amended even more brainlessly by Ardern’s government in 2019.

The relevant act was the Credit Contracts and Consumer Finance Act.

The act attempted to ensure every loan accurately and completely disclosed all relevant details, like the actual interest rate being charged, and any fees being charged.

There was nothing untoward about the intention of the law.

Disclosure is a duty and is essential to any fair contract.

The problem was that Key’s government passed carelessly framed law that treated minor administrative errors by banks as though they were of the same origin as the dreadful lies and concealment that were in back street lending textbooks. Bankers are NOT comparable with pay day lenders.

Accordingly, Key’s people prescribed extreme punishment for error.

Any failure of disclosure meant that the lender could retain no interest or fees at all until the error had been noticed and properly disclosed. Banks were treated like rip-off merchants.

The most minor error, perhaps of a decimal point, meant that banks would have to refund perhaps years of interest and fees for the period before the error was discovered and corrected.

The punishment was the equivalent of sending a retailer to jail for making an error when giving a customer a receipt.

By the time Ardern was in charge, she and her cabinet of people with precious little commercial orientation were persuaded by the banking lobby to change the law so that the punishment fitted the crime. That is, the client was compensated fairly and any punishment for the error was relative to the error.

Furthermore, Ardern backdated the new corrected law so that errors made from 2019, before the new law had been passed, were corrected reasonably.

The government and the bankers did not backdate the law to the time when Key had introduced it. So there is a gap of some years, not addressed by Ardern’s retrospective law.

The result has been catastrophic for banks whose software was unreliable.

The banks recognised that they had a liability for pre-2019 errors so after some research there was a confession made to the Commerce Commission and, without consultation or negotiation, the banks offered clients a small sum that put right any previous errors in the banks’ calculations and disclosures.

The banks asked the clients to sign off this offer as a full and final settlement. Perhaps the banks offered someone $50 if the error had a cost of $40.

We will never know. There was no consultation. The settlement formula was never revealed.

One does not need hindsight to observe that the banks made an error of strategy, typical of banks. The banks had acted unilaterally; you could say they had acted arrogantly. Probably nobody needs reminding of which politician by 2020 was on the ANZ board.

An alert lawyer noticed the lack of consultation and/or negotiation, ferreted around, and consulted a litigation funder with a proud record of fighting for disadvantaged consumers. The funder based his support on the relevant law at the time of the error.

The result was a case against the banks for pre-2019 errors demanding the full return of all interest paid.

The amount involved is not known to me but is likely to be hundreds of millions, perhaps a billion or two.

The bank lobby visited the Beehive again. So now the government proposes to introduce new retrospective law to prevent what the banking lobby quite naturally claim would be an excessive penalty for minor errors.

Retrospective law is a dangerous concept. One could argue that retrospective laws should be used sparingly and only when society rules an injustice might have occurred.

For example, the days when homosexuals were convicted and jailed (for what were illegal acts, like sodomy) ended, and homosexual law reform adjudged such behaviour was lawful. Those convicted in the distant past under previous law were pardoned. Retrospectivity was judged to be fair.

Retrospective commercial law is more troublesome.

The lawmakers had intended to punish all lenders, including banks which had been inattentive, or careless, or simply had made an error.

Did the lawmakers intend to punish a disclosure error that actually cost the borrower nothing, by requiring the bank to refund in full all interest received? If so, why?

A personal loan of $10,000 at 10% from 2015-2019 would have earned the banks a few thousand dollars of interest. If the bank had disclosed the interest rate wrongly, say describing the rate as 9.9% or 10.1%, should the client be refunded the whole amount of interest paid?

This issue is dividing the commercial sector.

Often, for idiotic reasons, many people hate Australian banks.

Perhaps these critics do not know of the occasions when Australian banks have quietly rescued NZ from the risks of disaster, for example when National Australia Bank in 2008 bailed out its subsidiary, the BNZ, when it was on the verge of contractual defaults. NAB coughed up a billion during the 2008 crisis.

Loathing Australian banks is irrational, perhaps xenophobic.

But retrospective law, irrespective of how unwisely it had been crafted and amended, is a concept that is fraught.

My solution would be for parliament to invite the banks and the 170,000 investors (through their litigation funder) to find a suitable settlement that acknowledged the banks’ errors, without grossly over-punishing those errors.

Parliament could also instruct all banks to surrender to the Commerce Commission by the end of this year, with any other previously undetected errors, and let the ComCom decide the amount of compensation and the separate sum as punishment.

Perhaps the new law would then note that any unrecognised errors, when discovered in the future, should lead to a penalty, payable to the Crown, that fairly assessed the gravity of the offence.

A typing error in the calculation would be of the “parking ticket” dimensions.

A concealed error would attract an eyewatering penalty.

Errors happen. Cheating is a different matter.

Whatever the outcome, the banks were arrogant and most unwise to attempt to settle their errors unilaterally, without having their formula endorsed independently.

The politicians who processed the flawed law almost certainly were targetting back street cheats, not having the wit to see that main street banks might fail to foresee the potentially extreme costs of a minor software error.

The banks should have read the law and been frightened into micro-managing every disclosure documented.

But the crime cannot be reasonably assessed as being worthy of a fine of hundreds of millions. 

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Travel

Lower Hutt – 29 April – Fraser Hunter

Auckland (Ellerslie) – 1 May – Edward Lee (FULL)

Auckland (Albany) – 2 May – Edward Lee

Palmerston North – 6 May– David Colman

Christchurch – 7 May – Johnny Lee

New Plymouth – 9 May – David Colman

Nelson – 12 May, 13 May – Chris Lee (FULL)

Blenheim – 13 May – Chris Lee (FULL)

Please contact us if you would like to make an appointment to see any of our advisers.

Chris Lee & Partners