Gareth Vaughan: Single brush tars finance industry

Finance companies are an industry under siege.

The question is do they deserve it?

The answer is some do and some don't. A diverse industry is being tarred with one brush.

The spotlight is coming from at least four different angles.


Firstly, Standard & Poor's is concerned about risks to finance companies' mum and dad punters if the economy and property market hit the skids. S&P warns few finance company debentures would qualify for S&P investment grade ratings if they were rated.

The major concerns are the rapid growth of the sector, emergence of new, small companies and exposure to the property market.

The likes of Elders Finance and Bridgecorp have lent hundreds of millions of dollars to property developers.

But many traditional finance companies specialise in funding plant, machinery, equipment or vehicles for New Zealand's smorgasbord of small- and medium-sized businesses. Such companies have a wide range of moderate exposures rather than a handful of big ones.

As for property, the four major banks combined hold mortgage books valued at more than $93 billion. That's the vast bulk of New Zealanders' $115.5 billion of household debt.

Financial Services Federation executive director Justin Kerr points out of the $6.5 billion in retail deposits taken by the federation's finance company members, one-third is via UDC Finance which has an S&P AA- credit rating.

The likes of UDC, Marac Finance and South Canterbury Finance, the second and third biggest finance companies, are not newcomers. They have track records and experience of economic downturns.

Secondly, a report from the Securities Commission covering the watchdog's expectations for disclosure is imminent. This follows comments from the commission last year that few finance companies adequately discuss the risks of the investments they offer versus the returns.

Thirdly, there's the Credit Contracts and Consumer Finance Act. It comes into effect on April 1. Covering everything from home loans to hire purchase agreements, this Act affects every creditor in the country.

They will have to provide debtors with more relevant information on how interest and fees are calculated, and present it in a way that will bring it to debtors' attention.

The Commerce Commission will enforce the Act with fines and jail terms as possible penalties for breaches.

Fourthly, and potentially most serious, is probable regulatory change.

Finance Minister Michael Cullen says regulations covering non-bank financial institutions "clearly" need overhauling and updating. Westpac CEO Ann Sherry shares this concern.

New Zealand is well behind Australia in this, Cullen adds, and it may be addressed in the move towards harmonising transtasman banking regulations.

The Ministry of Economic Development is reviewing the Securities Act, under which finance companies are overseen.

But any move towards the more intrusive and costly Australian Prudential Regulation Authority regime will raise hackles.

And an APRA system wouldn't necessarily be more effective.

The HIH Insurance collapse did, after all, happen under APRA's watch.