KEY POINTS:
The horse has bolted and last week parliament passed legislation to close the barn door.
The Reserve Bank Act has been amended so the central bank is now also the regulator of finance companies, building societies and credit unions, as well as banks.
Many of the 170,000 mums
and dads who have $5.7 billion frozen in 41 finance companies, mortgage trusts and investment funds will believe this has come far too late.
But will the regulation of the sector by the Reserve Bank stop new horses from bolting?
Firstly, there aren't many finance companies left to bolt of any size.
The big ones left standing, UDC, Marac Finance and South Canterbury, already have investment-grade credit ratings and are strongly capitalised with diversified funding, diversified lending and hefty backers.
Many of the rest are smaller, specialised lenders in the rural, equipment finance and personal lending areas, which are less vulnerable to the current collapse in the residential and resort development sectors.
But they will require credit ratings from March 2010 and have to meet minimum capital requirements.
Their boards will also have to have two independent directors and an independent chairman who are deemed to be fit and proper and be subject to removal by the Reserve Bank. They will also have to disclose more information more regularly, but the details have yet to be worked out.
But the biggest element of the new regime is the ongoing role of trustees.
The Reserve Bank has said trustees will continue to have the frontline role as the supervisor for finance companies. This is a role the Reserve Bank occupies as regulator of banks.
Trustees have been criticised over the past couple of years for not being aggressive enough in identifying problems within finance companies and not blowing the whistle on problems when they arise.
They are supposed to be the debenture holders' representative inside the company, keeping an eye on its practices and accounts.
Here's what one commenter on our website said last week when reading that trustees would remain the frontline regulators for finance companies: "Is this a joke? The trustees have proved themselves to be totally ineffectual and have been paid to do absolutely nothing.
"If one or two had fallen over that could have been accepted but 20-odd have now been put into receivership or moratorium.
"Time and again finance companies have proved to be nothing other than piggy banks for their owners, who have squandered investors' life savings and will get away with a slap with a wet bus ticket."
This is a common view that shows investor expectations of trustee oversight were not met.
However, to be fair to trustees, they were reliant on the truth of what directors told them and the quality of the audited accounts.
Their powers were beefed up in the last year so they could appoint independent auditors and advisers to scrutinise a finance company's activities. They also got the power to require six-monthly audits.
They have used these new powers quite aggressively in several recent cases to expose poorly managed and valued loan books, including those of Lombard and Dominion.
But I still query how independent and robust this oversight can be when it is paid for by the finance company. I hope that the Reserve Bank gives the trustees plenty of their own oversight as the system evolves.
The more important aspect of the new regime will be disclosure.
Finance companies have reported results and given financial updates much more slowly and less often than NZX-listed companies.
In some of the worst cases - Bridgecorp and Capital+Merchant - they were so obstructive and complicated in their reporting as to be virtually impossible to read. I hope the Reserve Bank is aggressive in ensuring accurate, fast and open disclosure.
None of this is a guarantee. Investors will simply have to be more vigilant and do more work to understand what they're investing in.
Bernard Hickey is the managing editor of www.interest.co.nz, a website for investors and borrowers wanting free and independent news and information about interest rates, banks, finance companies and the economy.
