July 11, 2009
 By Bruce Cameron
The Financial Services Board (FSB) is toughening up its stance on wayward players in the financial services industry. This week it placed under provisional curatorship a life assurance company selling funeral assurance and instructed a number of financial intermediaries to stop selling the shares of a fragile property development/syndication company.
The action comes against the background of an increasing number of high-risk so-called "investment opportunities" running into trouble. Two weeks ago, the FSB successfully applied for the curatorship of Corporate Money Managers (CMM), which had run into liquidity problems because it was, contrary to regulations, using investor money to finance high-risk property developments.
The implosion of CMM has also seen the FSB questioning the role of credit rating agencies, which are used to rate assets held by collective investment schemes (unit trust funds), and the custodians or trustees of the schemes' assets.
Many of the problem areas, particularly property syndications, are being found wanting because no new investors can be found and property prices are on the decline.
The latest targets of the FSB are a Wellington-based property development/syndication company, King Financial Services, and a funeral assurance company, New Era.
Three weeks ago, property syndication company City Capital SA Property Holdings, which included parts of another syndication company, Dividend Investments, was placed under provisional curatorship after it failed to pay investors.
King Financial Services
The King group and its subsidiaries are teetering on the brink of collapse, because of the significant drop in property values caused by the credit crunch, says the companies' legal representative, Peter Kemp of Eversheds. He says banks are refusing to finance the completion of developments or provide loans for purchases, and tenants of commercial properties are reneging on rent as they go out of business.
Last month, King Financial Services stopped paying interest to investors in one of its property products, Edrei Investments, which owns commercial properties.
Eversheds and a business consulting company, Arcay Corporate Advisors, are currently trying to rescue the company by arranging new finance. Part of the plan is to place the company under the control of a management company independent of the controlling shareholders, the King brothers - Adrian, Paul and Stephen.
Kemp says that if the plan does not succeed, many investors, including pensioners, could lose their life savings.
Meanwhile, Gerry Anderson, the FSB deputy executive in charge of financial advice, has instructed six financial services providers (FSPs) to stop selling King Financial Holdings shares, because "the company has not complied with the Companies Act in that the offer for the subscription of shares was not accompanied by a prospectus and that no prospectus has been registered with the Companies Registration Office".
The FSB has provisionally withdrawn the FSP licences granted to two King companies, King Financial Services and Kingvest 23.
Anderson says a draft inspection report has been provided to the King group for comment. The report will then be finalised, he says.
Adrian King, the chief executive of the group, says the company was advised there was no need for a prospectus because the shares were being sold to existing clients.
He says the marketing of the King products has been suspended until further notice.
Most investors were initially sold one share in a scheme, with the share linked to a shareholder loan.
Kemp says investors were approached last year to convert the share and loan in one specific project into a share of all the assets (mainly property) held by the King group and its subsidiaries.
Kemp says this converted expensive shareholder loans into equity, giving investors more protection, as it spread their risk across the entire portfolio of properties.
New Era
This week, the FSB applied for the provisional curatorship of New Era Insurance Company after an FSB inspection of the company found that it was allegedly contravening various sections of the Long Term Insurance Act, including not having provided proper reports to the FSB since 2007.
The company has 227 000 lives assured, for which it receives premiums of R70 million a year.
Jonathan Dixon, the FSB deputy executive in charge of insurance, says New Era is solvent, "so we don't anticipate any risk in terms of meeting policyholder liabilities".
In an affidavit submitted to the Pretoria High Court in support of the curatorship application, Dixon detailed extensive lapses in the insurance company's governance and financial controls.
New Era's chairman and controlling director is Sandile Majali, who appears from Dixon's affidavit to have managed the company with little reference to fellow directors, which resulted in a depletion of the capital the company is required by law to hold as insurance that policyholders will be paid out.
This included the payment of a dividend of R47 million to shareholders and the cession by Majali of two insurance investment policies worth R44 million to Absa to cover the debts of Imvume Resources, which controls the Permit Group, which in turn is the majority shareholder of New Era.
  
 
|
