KEY POINTS:
Discussing the difficulties afflicting finance companies, John Grant, the business director for Wizard Home loans, was in no mood to beat about the bush. "We are definitely in a state where we have a crisis of confidence," he said, before predicting more collapses lay ahead. Companies that have
lent long but borrowed short will always have problems in this sort of environment.
But the damage does not stop there. Even finance companies that are solid, secure and well-managed become ensnared as people seek a safe repository for their money. All this has grim implications not only for those investors caught up in collapses but for the credibility of a sector that plays a significant role in providing loans to individuals and businesses refused funding by banks.
Clearly, this crisis of confidence can be met only by action that reassures present and potential investors. The Government must provide this. At the moment, it presides over a regulatory regime that allows only the sophisticated investor to distinguish easily between the good, the bad and the ugly. In a period during which several finance companies collapsed, it has tinkered with reform options. Changes were finally announced this year. But the strongest initiatives, including mandatory credit ratings and prudential supervision by the Reserve Bank, are not scheduled to take effect until 2010.
Whatever the reasons for this delay, it hardly spoke of a sense of urgency. Astoundingly, this state of affairs was allowed to continue beyond the most notable failure, that of Bridgecorp, with Commerce Minister Lianne Dalziel refusing to countenance anything that might be interpreted as a knee-jerk response. Instead, she asked officials to look for "common threads". Her mind seems to have been concentrated only by last week's failure of Nathans Finance and a subsequent meeting with Securities Commission chairwoman Jane Diplock, who asked the Government to "reprioritise" some aspects of the new regulations, including the introduction of mandatory ratings and a strengthening of the role of trustees as finance companies' frontline regulators.
The minister must heed that advice. Credit ratings provide an immediate reference point and means of comparing company risk profiles for mum-and-dad investors, who are unlikely to study prospectuses or pay attention to other aspects of the current continuous disclosure regime. But there are several caveats to their introduction. First, only internationally reputable rating agencies such as Moody's and Standard & Poors should be employed. It is notable that of the 50 or so finance companies operating in New Zealand, only about six have ratings from those sources. Of these, only three were deemed investment grade. As a second safeguard, all agency findings, good or bad, should be made public, and in a form that is intelligible to the average investor.
There seems little reason why a credit rating from an agency identified by the Government as credible should not become mandatory as early as next year.
Before the rash of collapses, that might have been regarded as hasty. Doubtless, many finance companies would have sought to delay it on the basis of compliance costs. There can be no such qualms now. The alternative in some cases would be the relatively higher "compliance costs" of liquidation or receivership. Some smaller finance companies have already amalgamated to meet the new realities. Others will follow. A shake-out of the sector is inevitable. It could be relatively orderly or it could be punctuated by a string of further collapses. Already, the Government stands accused of doing too little. It must act now to provide reassurance before it is too late.
