Watchdog swoops on finance companies

By Deborah Hill Cone

Friday 13th February 2004

The Securities Commission yesterday fronted up to concern over mushrooming non-bank lending, revealing it is launching a review of disclosure by finance companies.

But some finance sources say the ambit of the review is not wide enough, given the risks of New Zealand's overheated property market, and are calling for more regulation in the wake of last year's International Monetary Fund review of New Zealand's financial sector.

The finance company sector has been growing like topsy, with some issuers doubling their loan books each year as they borrow millions from mum and dad investors looking for higher interest rates.

That has led to questions, including investigations by The National Business Review, over the transparency of related-party lending and whether the real risks in these investments, such as exactly what the money is to be used for, are made clear.

Last week NBR revealed how listed company Pacific Retail Group was using cash raised by its hire purchase finance subsidiary to prop up its ailing UK acquisition Powerhouse.

Securities Commission general counsel Liam Mason said he could not comment on the PRG case but the commission was about to embark on a review of non-bank finance company disclosure. The initiative was prompted by concern over the "sheer volume" of this sort of product and some questions about the quality of the disclosure.

"We have got some queries about whether finance companies generally could do a little better to let people know the area of business they are in," Mr Mason said.

Specifically, the commission is worried:

whether enough information is being provided about the purposes of the lending and the use of the money;

whether the interpretation of disclosing "all material matters" is adequate; and

about the disclosure of related-party transactions, including the use of special-purpose companies to raise and pass on debt.

The Metropolis bond issue is one example where a special-purpose company was used to raise cash and investors came off second best.

Mr Mason said the commission would be talking to the industry, trustees and advisers within the next few months, outlining its concerns and asking for feedback.

He was uncertain what the outcome of the review would be but he thought it would more likely be a practice note or guidelines rather than a law change.

That was not wide enough, KPMG banking and finance group chairman Andrew Dinsdale said. "I don't think that's enough in my personal view I'd prefer to see a review of the regulations ... it's long overdue."

Although the finance company sector was small compared with the registered banks, it was important. "A lot of Mr and Mrs New Zealanders have got money on deposit, so the impact on the average Kiwi [of a default] is quite significant," he said.

The KPMG financial institutions survey shows the finance company sector was worth $9.3 billion in 2002, an increase of 22% on the previous year.

Property financiers Bridgecorp, Elders Finance and Strategic Finance reported growth of more than 60% in the size of their loan book.

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