KEY POINTS:
The New Zealand sharemarket has never really recovered from the 1987 crash. So badly was confidence shaken that even the introduction of better practice and shareholder protection has not been enough to entice many investors back.
Two decades on, a similar scenario threatens finance companies. The decision by
Hanover Finance, the country's third-largest financial services group, to suspend repayments of its deposits means about half the 49 finance companies operating 18 months ago have either collapsed or are in difficulty.
People have been running scared. Many have withdrawn their money and few have invested. Add in falling property prices and alternate financiers becoming thinner on the ground because of the global credit squeeze, and tribulation was guaranteed.
Hanover co-owner Mark Hotchin has gone so far as to say that "the industry model has collapsed". That may be overly dramatic and somewhat self-serving, but it is clear even companies assumed to be well managed are now in trouble. Indeed, survival for most may depend on whether they have owners or other funding sources with the wherewithal and credibility to ride out the present circumstances.
The sector will survive in some shape or form, if only because of its important role in providing loans to businesses and individuals who cannot get them from banks. But, like the sharemarket after the crash, it will be vastly different.
The number of finance companies is certain to fall dramatically, partly because of liquidations and partly through amalgamation. On the day that Hanover froze $554 million of investors' money, Speirs Group and Allied Farmers merged. This creation of a stronger company was simply an acknowledgment of current difficulties, and those to come. Another consequence will be stricter regulation of the sector, largely to protect unsophisticated investors, many of whom have been misled by glossy advertising. This will be the belated response of a Government that must bear some blame for the present situation because it has dallied over rules that, most pertinently, will introduce mandatory credit ratings, strengthen the role of trustees as finance companies' front-line regulators, and require Reserve Bank prudential standards to be met.
Almost a year ago, Sam Stubbs, then the Hanover Group chief executive, appealed to the Government to fast-track this regulation. His call was echoed by the Securities Commission. Astoundingly, the Government adhered to its schedule, and the regulations will not take effect until after 2009. The reasons for this delay have never been satisfactorily explained. What it means, however, is that the horse will have bolted by the time the rules are introduced.
Indeed, by 2010 the grim times will be past, and rising property prices will be creating a demand for finance-company funding. Placing money there may, however, be a no-no for many shellshocked investors, whatever the comfort provided by the regulation.
More immediately, Hanover's future must be settled. The owners wish to be allowed to manage the company "in a measured way as it works though a restructure plan to allow investors to be repaid over an agreed period".
It is always questionable whether those who run a ship aground should be charged with refloating it. Mr Hotchin and Hanover's other owner, Eric Watson, are dangling the carrot of injecting their own money.
That, of course, could already have been done. Instead, the pair took a $41 million dividend from the company's $44.9 million net profit last year. In Hanover's case, receivership may be a better option. At least, it provides a strong guarantee of a fairer outcome for all parties. In an odd way, that might deliver some desperately needed credibility to a sector that has let so many small investors down.
