KEY POINTS:
Many New Zealanders have lost money as a result of the recent failure of a number of finance companies. This has been extremely disappointing for those investors and has provided lessons for all concerned.
Finance companies, building societies and credit unions (collectively referred to as deposit takers) play an important role in the New Zealand financial system. Although deposit takers are much smaller than banks, they provide a significant source of lending to businesses, homeowners and consumers, and have been a well-regarded channel for people's savings. Trustee Corporations have a key role, protecting the interests of depositors.
While the difficulties faced by a number of finance companies have been in the news, most of the sector has performed soundly for many years.
Building societies and credit unions have not experienced the same problems as finance companies because they lend to lower-risk parts of the economy, such as the household sector. They also form an important part of the financial system meeting the needs of borrowers and savers, as they have done for over 100 years.
The trustee's role is to protect the public who invest in deposit takers. Any entity offering investments to the public is regulated by the Securities Act. Among other things, the act requires deposit takers to enter into a legal agreement called a trust deed and to appoint an independent trustee to oversee that trust deed.
The trust deed sets out the rules that the deposit taker and trustee have agreed on to protect investors' interests. These rules typically include a minimum level of capital (shareholders' funds) as a percentage of the amount of depositors' money invested, liquidity requirements, limits on the amount that the deposit taker may lend to particular borrowers, and the extent of any prior charging that may be permitted.
Trustees monitor each deposit taker's activities to ensure they comply with the trust deed.
Trustees also have wide-ranging powers to obtain more information if required, to appoint an auditor to review information and, in more extreme situations, to appoint a receiver.
For the vast majority of cases, the interests of investors have been well served by these arrangements. Over many years, people have invested billions of dollars with deposit takers earning a good rate of return.
However, from time to time, all economies experience periods of stress. Economic downturns see asset prices fall and debt servicing becomes more difficult, a situation we are experiencing in New Zealand. This is one of the main reasons behind the spate of finance company failures.
The receiverships are distressing for all concerned and for investors in particular, but they are an indication that trustees are doing their job by taking action to protect the interests of depositors.
Currently, market conditions for finance companies in receivership are difficult, particularly for those involved in the property sector and this has decreased the likely returns to some debenture holders.
Most deposit takers are strong enough to ride out difficult times, but some have proven not to be. This suggests the need for some to strengthen their risk management systems, tighten corporate governance and increase capital so that they are better placed to withstand economic shocks.
Trustee corporations constantly review their oversight of deposit takers to ensure that they are meeting their obligations, including assessing the adequacy of trust deeds.
We see a need for stronger regulation to better equip trustees to perform their role and to give more teeth to trust deeds.
The Government has recognised this and as a result has announced a wide range of new legislation, including improved reporting requirements and the registration of deposit takers.
The proposed regime will provide greater consistency across trust deeds and a minimum set of requirements that all deposit takers must meet. The requirements for trust deeds pick up the Trustee Corporations Association's guidelines and will ensure best practice becomes industry-standard.
With the proposed Reserve Bank oversight role we believe Trustee Corporations are very placed to continue to act as the frontline supervisor of the sector. * David Brown Douglas is executive director of the Trustee Corporations Association of New Zealand. The Trustee Corporations Association is the industry association for New Zealand's Trustee Corporations.
