'Low standards' hurt investors

Some dealers have lent investors' money on overvalued cars

Plunging professional and ethical standards since motor industry deregulation are to blame for losses suffered by "mum and dad" finance company investors, finance and vehicle industry leaders say.

Since May, National Finance 2000, Provincial Finance and Western Bay Finance have gone into receivership owing about $400 million to almost 20,000 investors. Those investors face a long wait to see how much of their money they will get back.

Brian Jolliffe, managing director of major finance company Marac, said the failed firms were all lending at the bottom end of the used-car market where there was "no doubt" that professional standards had declined since deregulation in November 2003.

Marac had moved its motor vehicle financing activities "further up the food chain" as a result of the deregulation "because we believed the secondhand car market was going to be opened up to far more unscrupulous dealers than it had been before".

The Motor Trade Association's Andy Cuming said the Motor Vehicles Sales Act 2003 amounted to "quite gross deregulation" of the industry.

"The turkeys have now come home to roost - this is manifesting itself in different ways, one of which is the current sequential collapse of various finance companies.

"We sheet that directly home to the impact of the Motor Vehicle Sales Act, the lowering of standards associated with requirements for registration and the influx of what we would say are opportunist and fly-by-night operators."

Cuming said some finance companies had in effect been using the motor industry as a means to "sell money" by lending on cars with over-inflated values.

"That can quite easily mean that basically they're providing unsecured loans to people.

"Now that house of cards is going to fall down, and there's two types of consumer getting hit: the car buyer who we believe is being ill-served under this current legislation and the investor who is putting money into what appear to be secured operations but in fact are not."

One Auckland used-car dealer told the Business Herald the decline in professional and ethical standards at the lower end of the industry since deregulation went "hand in hand" with the recent failures.

"It's only in the lower end of the market that you've found the likes of your Provincials and your Western Bays operating."

Most dealers in business before deregulation had relationships with established finance companies such as Dorchester, Marac and UDC. The newcomers ended up dealing with finance companies who were themselves inexperienced in the market.

The dealer, who did not wish to be named, said Provincial Finance had been responsible for "a huge proportion" of third-tier car financing in the Auckland market.

"And they didn't even retain control over their lending when they shifted from the South Island ... they handed it over to brokers."

Non-recourse finance - where the dealer or brokerage has no liability if the loan goes bad - had created opportunities for those seeking a quick buck "to get in and get out, shut the company down and walk away from any responsibilities".

Because only two or three finance companies were "stupid enough" to deal at that end of the market without the skills or experience and they had already gone under, the dealer said further failures were unlikely.

But the MTA's Cuming wasn't so sure.

"I would be wary of understating the potential for people to look at the motor industry from a short-term greed perspective."