S&P floats new ratings for finance companies

Ratings agency Standard & Poor's is developing a new system to measure finance companies' strength, but says ratings need to be accompanied by better disclosure from the companies.

"We have had an overwhelmingly positive response to our ratings scale from the finance companies we have spoken to," said Paul Stephen, managing director of corporate and government ratings.

However, Standard & Poor's would launch the new ratings system only "if a critical mass of finance companies are willing to come on board and support the heightened transparency offered by our new scale".

His comments follow proposals by Commerce Minister Lianne Dalziel last week that finance companies should have a minimum credit rating and face tougher disclosure rules. Under the proposals, only companies which opted to become "authorised deposit takers" would be subject to the tougher regulations.

Stephen welcomed the minister's proposals, but with reservations.

"We view credible credit ratings as one of the factors that can contribute to efficient self-regulation, but ratings are not a silver bullet. A credit rating is not a substitute for adequate issuer disclosure or competent investor advice."

Credit ratings should not be made compulsory, because that created the risk of "rating shopping".

"Our experience in other markets indicates that, over time, investors create a demand for credible ratings and have the power to choose not to invest in debt instruments unless they are rated by a reputable rating agency.

"However, in the case of finance company debentures, the investor base is disparate and hasn't yet developed a strong lobby group. In this case, S&P believes that financial advisers and the issuers should assume the responsibility to demand credibility."

Regulation of finance companies has come under increasing scrutiny after several recent failures.