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Investors in finance company debenture stock will soon gain a far better idea of the risk they are taking now the Government has confirmed it will introduce mandatory credit ratings for the sector.
The measure was part of a package of new rules for the non-bank finance sector unveiled by Commerce Minister Lianne Dalziel, who said finance company regulation had attracted the most public interest because of "certain finance companies that fell over last year".
National Finance 2000, Provincial Finance and Western Bay Finance collapsed, owing debenture stock investors almost $400 million, sparking fears of more casualties in a sector believed to have more than $10 billion in assets.
Dalziel said the Government had been concerned that investors had been buying products that were "totally inappropriately priced, because they are in fact taking a far greater risk than the return would suggest".
While the Government could not legislate to prevent companies failing or regulate against stupidity and greed, "I can make sure the regulatory framework is commensurate with the degree of risk an individual might be taking".
The Government had yet to decide which credit agency or agencies would be selected to provide mandatory ratings "but we're only talking about the top end ones", which would likely include Standard & Poor's and Fitch Ratings.
Under the new rules, trustees would remain the frontline regulators of finance companies and other non-bank deposit takers, but the Reserve Bank would become their prudential regulator and take responsibility for their registration.
The Government was mindful the new rules could be financially burdensome for some smaller companies and was seeking further advice on how that could be minimised.
The new rules for non-bank deposit takers will supersede existing legislation around credit unions and friendly societies enabling them to expand their range of operations including raising funds on wholesale money markets, something they had been looking to do for some time.
