Creating two classes of finance companies
Wednesday, September 6th 2006, 7:19AM
Splitting finance companies into two groups sounds, like the Ministry of Economic Development suggests, seems like a reasonable idea, but it also seems to have some problems.
Clearly the big guys will opt-in for Approved Deposit Taker status, which by default will make them far more attractive to investors, particularly the conservative ones. In all likelihood theywill get to compete more closely with banks.
Those falling into the other regime will likely be classed as second class citizens. Especially, as the MED points out, because they will have to make it clear they are not ADTs.
What will be interesting is where the split occurs.
What I don't like about it is that a well-run, smaller finance company which deserves to be in the ADT regime won't be able to afford the extra costs.
To me segregating isn't necessarily in the best interests of consumers. It is penalising small, well-run companies.
However mandatory credit ratings are. I have argued for these for ages. To me the key issue is that the government needs to approve ratings agencies. Anyone who plays in this space needs to have the necessary skills and experience and a rating agency should be out there kicking the tyres on the companies it researches. This includes going through loan books and making assessments on the quality of the business.
I'm not sure what the thinking of finance companies is on this regime at the moment as they have all be curiously silent. Only St Laurence has come out publicly in support of the proposals.
The other key point to come out of this, and one MED clear, is that this regime won't remove risk from the sector. As MED deputy secretary Mark Steel said: "Will this prevent failures? No. No regime can prevent failures."
However investors will have much better information available to help them make sound investment decisions.
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