KEY POINTS:
Finance companies will face a much more strict regime, after Finance Minister Michael Cullen announced new regulations for the industry today.
Following a series of eight high-profile finance company failures, the Government has heeded calls for a more regulated operating environment in the finance industry.
All deposit-takers -
which encompasses finance companies as well as banks - will have to be registered with the Reserve Bank and have to comply with minimum prudential requirements.
Dr Cullen warned investors shaken by the collapse of a number of smaller finance companies that the regulatory framework had taken two years to construct and would still require legislation.
"This is not intended to be a 'quick fix' solution and it will not solve all the problems that some finance companies are currently facing," Dr Cullen said.
The regulations will cover, finance companies, building societies and credit unions.
The requirements will include:
* A credit rating from a rating agency approved by the Reserve Bank;
* A minimum $2 million of capital;
* The need for a standard ratio of capital to debt;
* Restrictions on lending to people related to the deposit-takers; and
* Fit and proper requirements for the directors and senior managers of deposit-takers.
Dr Cullen said legislation to implement mandatory credit ratings will be introduced this year, but there was nothing to prevent deposit-takers getting a credit rating now.
Many investors hit by the collapse of nine finance companies over the last 16 months are owed about $1.2 billion, but it appears some of those did not understand what credit ratings mean or the risk they were taking.
"The Government is committed to working with the private sector to help and educate ordinary depositers to understand credit ratings and disclosure statements."
Dr Cullen said small deposit takers with assets under $10 million will be exempt from credit rating but will have to prominently disclose they are unrated.
The new regulations would work in tandem with the current regime under the Securities Act but the need for public disclosure under that act would be strengthened.
Dr Cullen said he hoped the new law could be passed in 2008 with some of the new requirements coming into force in 2009 with a transition period to allow deposit takers to meet the new requirements.
Last week, Nelson-based car finance firm Finance and Investments was placed in receivership owing 370 investors $16 million.
It was the latest in a recent rush of collapses amongst small finance companies, as investors world-wide took fright at riskier investments in light of an international credit squeeze.
The largest collapse came in July when specialist property financier Bridgecorp collapsed owing about $500m to 18,000 investors.
- NZPA