June 23

The lack of response to the finance company failures by the Government, Reserve Bank, Securities Commission and Companies Office is a disgrace. The protection of depositors is the foundation of any financial system yet our politicians and regulators failed to anticipate the finance company meltdown.   Why haven’t we learned from our past mistakes?

Mom and dad investors were done over by the reckless activities of company directors and management during the sharemarket boom and bust of the 1980s.  Finance company investors are suffering a similar fate at the hands of a new generation of businessmen although Rod Petricevic has had a repeat performance.

What is wrong with our political leaders and regulators in Wellington? Why are they totally incapable of anticipating major regulatory flaws in the financial system, particularly where there has been a huge increase in household deposits in the non-bank financial institutions in recent years?

As shown in the table below, total funding has increased from $8.1 billion to $31.1 billion since 1998. The majority of the other funding in 2007 was from offshore and this money often ranks ahead of household deposits in a receivership. 

Non-bank financial institutions – Funding ($ billion)

($ billion)	2007	2003	1998
Equity	2.4	1.6	0.9
Household deposits	11.6	8.2	3.7
Bank funding	3.1	2.1	1.2
Other funding	14.0	7.0	2.3
Total	31.1	18.9	8.1

An article in last week’s New Zealand Herald by David Brown Douglas indicates that industry leaders have a very narrow view of depositors’ protection. He is the executive director of the Wellington based Trustee Corporations Association of New Zealand, the industry body for finance company trustees.  According to Brown Douglas “the trustee’s role is to protect the public who invest in deposit takers” and “receiverships are distressing for all concerned and for investors in particular, but they are an indication that trustees are doing their job by taking action to protect the interests of depositors”.

Is he really serious? If so why doesn’t he change the name of his organisation from the Trustees Corporations Association to the Receiverships Association?  Surely the main objective of regulators and industry associations is to erect fences at the top of the cliff? Why is the industry association slapping itself on the back for having a convoy of expensive ambulances, in the form of receivers, at the bottom of the cliff when most of the victims have already lost almost everything?

New Zealand badly needs a realistic regulatory regime to protect mom and dad investors but, based on the feeble response to the excesses of the 1980s, we shouldn’t get too excited about this prospect. 
Brian Gaynor, 23 June 2008