Finance companies: let the ratings begin

Following a string of collapsed finance companies, all non bank deposit takers are now required to obtain a credit rating. Photo / Martin Sykes

A new era of seriousness began for the finance company sector last week with the announcement that all non bank deposit takers (NBDTs) will require credit ratings from one of three officially-sanctioned agencies in order to operate.

As Reserve Bank governor Alan Bollard said in the statement trumpeting the launch of the credit ratings regime: "Credit ratings are useful as they assist investors to compare the relative riskiness of deposit taking institutions when they decide where to invest their funds."

Which could very well be true, if investors bother to do the little bit of research required to understand what the ratings mean.

The Securities Commission has issued some interim guidance about how the NBDTs can use the credit ratings and while it is directed at the industry, prospective punters may also gain some pointers from the release.

On a more practical level, the Retirement Commission's website Sorted has some useful info about credit ratings, which should help investors see through the blizzard of advertising that will inevitably blanket New Zealand shortly.

There is, however, a slight amendment needed to my first sentence. In fact not "all" NBDTs will need credit ratings – exemptions have been granted to those firms with less than $20 million of "consolidated liabilities". Other NBDTs have been allowed to opt out of the credit rating regime for a range of reasons, including the very good one that they don't really exist anymore (eg Bridgecorp, Capital + Merchant).

The list of exemptions is surprisingly long so check out if your preferred non bank deposit taking institution has made the effort to get rated.

Or just read the exemption list to develop a sense of wonder about the finance industry: what other business could conjure up names such as the Lutheran Laymens League of NZ (Inc) or the Druids Friendly Society of Canterbury NZ Credit Union. And what sort of rates are they offering?