Urgent need for tougher finance rules

Lack of regulation rather than the global economic crisis caused the collapse of New Zealand finance companies, says a University researcher and lecturer who conducted a forensic analysis of four failed companies as part of his PhD research.

Bill Wilson, a lecturer in the School of Economics and Finance, says the Government needs to urgently replacing the "laissez faire" system under which building societies, finance companies and credit unions operate with prudential rules setting realistic minimum standards.

Mr Wilson graduates with his PhD this week at Albany. The topic of his doctoral thesis was the prudential regulation of banks and non-bank deposit takers. As part of his research, he looked at Provincial Finance, Bridgecorp, Five Star Consumer Finance and Geneva Finance, all of which collapsed.

He found finance company managers were quick to blame their failings on the economic downturn when they appeared to be, in fact, managing their institution for their own interests with little consideration given to other stakeholders.

Mr Wilson says New Zealand cannot again afford the destabilising effects, which were devastating for many investors who thought they were making responsible provision for their retirement. In addition it unnecessarily restricted much-needed capital from New Zealand small and medium enterprises, which he calls the “backbone” of the economy.

“The crisis in confidence in the industry is a result of a complete lack of corporate governance, which occurred well before the global financial crisis. The urgency facing the Government is to create a prudential regulation system to ensure widespread failures do not occur on this scale again.”

Non-bank deposit takers are now required to obtain a credit rating and be licensed by the Reserve Bank, which is developing rules around capital standards, related parties and liquidity. Mr Wilson says that because the bank is not taking on a supervisory role for non-banks, they will continue to be supervised by trustees and disclosure requirements must be improved. He says disclosure of non-bank deposit takers is currently ineffective and of no practical use due to its poor quality.

“There is a reluctance by Government to address problems in this important industry. While shortcomings in the regulation of registered banks were addressed with the introduction of the 1996 disclosure regime, deficiencies in non-banks were ignored with no government agency having responsibility for the industry.

"The Government should have realised there was a problem a lot earlier due to the rapid growth, in some cases 50 per cent year on year, of non-bank deposit-takers from 2000 onwards.”

A parliamentary select committee is investigating what went wrong in 2006-08, but Mr Wilson says steps need to be taken now to rebuild confidence. “We cannot wait another couple of years for the rules to come into place."

He expects that the failure of finance companies will have a significant impact on New Zealand for years to come with some industries that were dependant on their finance facing an extended period of stagnation.

His research was published in Management Online Review in February and he presented his paper – Examination of NZ Finance Company Failures: The Role of Corporate Governance – to the Finance and Corporate Governance Conference 2010 in Melbourne last week.