Australian Financial Review Matthew Drummond
Failed debenture issuer Banksia Securities offered “at call deposit accounts” potentially in breach of laws that make accepting deposits by non-banks a criminal offence.

The Australia Financial Review has obtained a “statement of a deposit account” issued by Banksia to one of its 3000 clients who are owed $660 million.

A source involved in the investigation confirmed the failed business operated at call deposit accounts.

John Price, the commissioner at the Australian Securities and Investments Commission who will head an internal taskforce into the collapse, said any the question of whether Banksia was illegally running a banking business was a matter for the Australian Prudential Regulation Authority.

Banksia accused of taking illegal deposits

Greg Medcraft says ASiC plans to take a closer look at the debenture industry. Photo: Michael O’Sullivan

APRA did not return calls.

The Banksia collapse has returned the spotlight to the wide regulatory gap between banks, which are closely supervised by APRA, and companies who issue un-rated, unlisted debentures and invest the proceeds in risky construction and property loans.

Such companies receive comparatively no oversight despite many collapses. For the past five years, following the $300 million Westpoint collapse, they have been required to disclose whether they hold suggested minimum amounts of capital and face no sanctions if they do not.

Mr Price said his taskforce would make recommendations to the federal government but ultimately the question of whether such shadow banks should face prudential supervision, as occurs with real banks, was a matter for government.

He added that doing so would be a major change that would overturn a key plank of the 1997 Wallis Inquiry that created Australia’s system of financial regulation.

“The Wallis Inquiry report suggested finance companies should not be subject to full prudential regulation. That leaves open the question of whether there should be a lesser regime for these types of companies,” he said. “That’s a question for government and ultimately it’s a significant decision because in most areas Australia has a very free market in terms of investment products. In most cases as long as there’s disclosure of the risk people can invest, regardless of whether its a very risky product.”

Mr Price said his taskforce would provide data on the debenture sector’s performance and report to the government “in a matter of weeks rather than months”.

Analysis by the Financial Review of the 34 companies identified by ASIC in 2007 as issuers of debentures that are not listed on a stock exchange, not rated by a ratings agency and lend their funds as mortgages, shows that 16 have since collapsed owing investors $1.5 billion.

Of the 18 which still operate 12 do not have enough capital to meet ASIC’s suggested minimum capital ratio. They are free to continue raising money because they disclose their lack of capital in their prospectuses.

The Banksia client who provided her statement of deposit account is an 80-year-old retired dairy farmer who entrusted the business with funds to pay for her funeral.

The retiree, who asked not to be named, said she never felt the need to read the prospectus because she had “banked” with Banksia and its predecessors since the 1960s.

“We treated it like a bank. You could just go in and withdraw your money,” she said. “I wasn’t chasing the big money.”

She received 5 per cent on her term deposit, a rate she could have been obtained from a regulated bank.

Steven Klimt, a partner at law firm Clayton Utz, said it was a criminal offence for companies who are not authorised deposit-taking institution, APRA’s term for banks, to accept deposits.

A spokesperson for Banksia’s directors declined to comment.

“Its sounds like what they were doing may amount to carrying on banking business and as they were not an ADI they may be in breach of the Banking Act,” he said when told of Banksia’s at call deposit business. Mr Klimt added that the “banking business” was not defined in the act and the question would turn on exactly how Banksia operated its services.