Failed finance companies have been severely criticised in a select committee report, with suggestions some companies were in the end acting like Ponzi schemes.
In a Ponzi scheme early investors are paid with money from new clients.
The Registrar of Companies Neville Harris, who contributed to the 2007/2008 Financial Review to the Ministry of Economic Development, said in many cases funds received for investment from new investors were used to repay the maturing loans of existing investors.
"In these circumstances the companies continued taking in funds many months after their position was irreversible, thus exposing investors to immediate losses," Harris said.
Between 2006 and 2008 around 30 finance companies collapsed, taking investor funds, many of them from mum and dad investors, with them.
Harris said the quality of corporate governance was a key failing, with boards tending to lack the breadth of skills needed to manage complex financing operations.
"Too often directors were not adequately informed, misled or failed to take sufficient interest in the affairs of the company," said Harris
Harris also said investors were misled over the quality of loans, with nearly all finance companies rolling-up non-performing loans into a new loan in an attempt to reduce or eliminate loans in default.
Another key failing, according to Harris, was the concentration of loan risk in one industry or a small group of investors.
"The loan books of Bridgecorp and Lombard Finance Limited were heavily weighted to the speculative end of the property market. The exposure of these finance companies was such that they had no choice but to continually roll over poor performing loans until the borrower's development project could be completed," he said.
Bridgecorp collapsed in 2007 owing nearly 14,500 investors almost $460 million. Criminal proceedings have since begun against five of its directors.
Harris said weak trustee accountability has also meant there is little opportunity for redress for investors.
However, business commentator Brian Gaynor says there is a lot of finger pointing when it comes to the failure of finance companies.
"When you look at these reports you've always got to remember who writes them and what there is, is a lot of buck passing," says Gaynor.
"The Registrar of Companies is responsible for prospectuses, so it has a role of overseeing finance companies. It's written this report but it makes no reference to the quality of prospectuses," he says.
Gaynor would like to see an independent inquiry.
"You can't have parties who have been involved in the oversight
of the sector doing investigations into it because they'll give
themselves their own whitewash."
To read more of Harris' comments in the Financial Review CLICK here .