KPMG ponders future of finance companies
The biggest issue facing the surviving finance companies now is winning back the trust of their investors, says John Kensington, a partner at accounting firm KPMG.
Thursday, January 13th 2011, 6:48AM
by Jenny Ruth
"A lot of mum and dad investors have had their trust completely shattered," Kensington says.
KPMG's latest survey of non-bank deposit takers suggests one of the consequences of that loss of trust is that financial advisers and brokers may no longer be paid commissions by the companies but will rather charge their customers for advice.
"This will eliminate the inherent conflict that currently exists whereby brokers could be influenced (by commissions) in the referrals they make," its survey says.
Even though the investment adviser disclosure regime simply requires the transparent disclosure of such commissions, "we can see a time when the removal of these fees will eliminate the potential that they are seen as an influencing factor in the decision-making process of the broker."
The extent of finance companies' dependence on investment advisers or brokers isn't known.
Kensington says trustee companies, currently the front-line regulators of finance companies, "are very much on a last chance."
The survey suggests the Reserve Bank, which is now overseeing regulation of the sector, has given trustee companies "a challenge," the outcome of which may determine whether they have a role in future.
"If there are any further issues or doubts over trustees' performance, I think it's something the Reserve Bank will, reluctantly, pull back into its own control," Kensington says.
The central bank would be reluctant simply because of the enormity of the task, he says.
"It takes a lot of people power. When you delve into those accounts, you would be more than likely to find that a small $20 million finance company may take almost as much time to supervise as a bank."
KPMG expects a small group of core finance companies with an intimate knowledge of their niche markets, strong management teams and appropriate risk management strategies will survive.
It also expects investors will demand returns more commensurate with risk.
"Currently the premium from the AA rated banks to the BB rated finance companies appears to be between 150 and 300 basis points," it says.
"The future may see a "BB+" rated instrument demanding a return of 300 to 500 basis points but a "BB-" rated instrument would require an additional 150 to 200 basis points to reflect the additional risk."
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