KEY POINTS:
Another finance company has collapsed. It's the 13th in less than two years to call in the receivers, and we're told still more will fall.
These failures have exposed some serious weaknesses in the finance industry and raised questions about how some have been doing business. Perhaps not surprisingly, they have also sparked calls for more and tougher regulation.
In response the Government has a raft of new regulations on the way. But that alone won't be enough. However tempting it is to think that what has occurred is a problem for government to fix, the reality is that the business community also has a part to play if the financial markets are to grow.
One of the lessons of the recent rash of collapses is that investors need better information and hyping up the likely benefits of the changes being made defeats that purpose. A more useful exercise is to consider the receiverships as a reality check that raises big questions.
How do we get deeper and wider capital markets? How can we lower the cost of capital? And how do we encourage New Zealanders into the capital markets?
These go well beyond just putting in place new surveillance measures. What's needed is a fresh approach.
New Zealand is living through the end of an era - the era of self-regulation. For two decades proponents have argued that as long as the market was open, sunshine would be the best disinfectant. But that argument is under scrutiny.
The sun did not shine brightly on the financial advisers taking many times the standard incentive payments to recommend certain companies (now in receivership). And sunlight did not help investors see that some of the finance companies were able to access capital at a remarkably low risk premium, suggesting risk was inadequately disclosed, poorly understood, or both.
The result is that New Zealanders, many of modest means and late into their working lives, have lost hard-earned savings. But loss itself is not the yardstick. All investments, tangible and intangible, carry with them the risk of loss.
The real yardstick is whether the investing public believes the rules of the game were fair and applied fairly. If they don't then we all have a problem.
New Zealanders have a well noted bias towards putting their savings into property - the second home or block of flats. That same money, invested elsewhere, could be growing the New Zealand economy, creating jobs and building up new businesses.
The combination of the slowdown in the property market, the new KiwiSaver scheme and portfolio investment entity tax incentives should create an increasing pool of investors and an increasing pool of funds for businesses to access. But in the wake of the finance company collapses, will investors be deterred from putting their money into financial assets? For the economy's sake we have to hope not.
To date, much of the discussion about the finance company collapses has focused on "mum and dad" investors and the businesses in which they put their trust. But the real debate is much bigger than that.
Where business could help is by becoming an articulator of standards, rather than a bystander as regulation is introduced. Traditionally the financial community either calls for regulation or decries it (sometimes both), but almost always on an ad hoc basis.
A new, more constructive, approach might see the financial community define and articulate a series of clear investment objectives, act consistently to advance them, be prepared to publicly debate behaviour and practices that deter from these objectives, and measure the efficacy of new regulation against them.
This would be a rational response to the long-term problems facing the financial markets. But it could also encourage the financial community to show some strong and strategic leadership.
This culture is more likely to be developed and sustained if it is institutionalised. The raft of new regulations for the finance industry provides such an opportunity.
Governments rarely assess the efficacy of regulation once implemented because governments have limited resources and usually new problems to solve. But the financial community has an interest in working with government to fund and research the efficacy of current and new regulation.
The direct benefits are obvious - better financial data, better understanding of what regulation works and what does not, and ultimately better regulation.
But it's the indirect benefits arising out of the financial community taking an active ongoing ownership role in our investment objectives and regulatory settings that may be more important. This culture development may deliver much more than any new regulation ever could. And New Zealand's economic challenges are too great to ignore the benefits of better public-private co-ordination, communication and leadership.
* Frank McLaughlin is a lawyer and a specialist in financial regulation. He is a partner in Chapman Tripp.
