Finance firms face tough new rules

Lianne Dalziel

Finance companies will face tougher rules under proposals issued yesterday as part of an overhaul of the financial services industry.

The Ministry of Economic Development has proposed a two-tier regulatory system for "non-bank deposit takers" including finance companies.

They will be required at least to meet tougher requirements for disclosure and for their trust deeds which provide investor protection.

The trustees - who ensure finance companies operate within the requirements of their trust deeds - will remain their front-line regulators, but they will be supervised by the Securities Commission.

As well, finance companies - as well as building societies and credit unions - will be able to opt to become "authorised deposit takers".

As such, they would have to be licensed and have a minimum credit rating and would face increased governance and disclosure obligations. They would also have to maintain minimum cash reserves under the supervision of the Reserve Bank.

The ministry is also seeking comment on whether finance companies which choose not to become authorised deposit takers should face mandatory credit ratings, and tougher scrutiny of their balance sheets.

Commerce Minister Lianne Dalziel said recent finance company failures and calls for the Government to "do something" about them had not diverted the review of financial products and providers from the path it was following into a "kneejerk response".

"It is important to stay focused on the big picture and not to overreact," she said

But some of the proposals relating to finance companies match what commentators have suggested after the failures of National Finance 2000, Provincial Finance and Western Bay Finance over the past four months.

Dalziel said the review would ultimately provide "effective meaningful disclosure in plain English, so people can understand what they're getting into" and accountable supervision of the sector.

Businesses would benefit from more effective access to capital and increased public confidence.

Ministry deputy secretary Mark Steel said the review was part of an overall process of financial reform which over the past six years had dealt with the Takeovers Code, supervision of capital markets and insider trading.

"This is the completion of that process."

Other proposals in the review include:

* Clarification and simplification of the Securities Act to improve the level of disclosure for consumers and investors and to ease access to capital for sophisticated investors.

* A single consistent set of regulations for collective investment businesses.

* Greater regulation and disclosure requirements for platforms and portfolio management services

* Updated insurance industry legislation which builds on what the ministry recognises as "strong industry self-regulation".

* Improving the finance industry's consumer disputes and redress process by either replacing the banking and insurance and savings ombudsmen with a single watchdog or setting up several separate ombudsmen with one supporting organisation.

Submissions on the discussion documents close on December 1 and policy proposals will be presented to the Government by April.