Deposit takers face new rules

Legislation introducing a tougher regime for non-bank deposit takers -- including small finance companies -- will not be a quick fix to the problems currently plaguing the financial sector, Finance Minister Michael Cullen says.

Wednesday, 12 September 2007

The legislation will require all financial institutions taking deposits to be registered with the Reserve Bank and have to comply with minimum prudential requirements.

Dr Cullen warned investors shaken by the collapse of a number of smaller finance companies that the regulatory framework had taken two years to construct and would still require legislation.

"This is not intended to be a `quick fix' solution and it will not solve all the problems that some finance companies are currently facing," Dr Cullen said.

The new laws would work in tandem with the current regulatory regime under the Securities Act.

Dr Cullen told reporters that he and Commerce Minister Lianne Dalziel had put out around nine discussions documents relating to the financial sector and regulation.

"Decisions have been taken in relation to the responses to those discussion documents. So all we're really doing at this point is bringing forward some of the legislation that was going to be introduced in any case," Dr Cullen said. "I think one of the things it will do very clearly is ensure that risk is priced more accurately. That will tend to reduce the likelihood of the sort of problems we've seen over recent times."

Dr Cullen said reports that investors had lost all their money were exaggerated

"I should emphasis that even some of those who have gone down so far there is a high expectation of a full or near full payout to the depositers."

Dr Cullen told Parliament that new regulations under the securities regime would be ready in a few weeks.

These would strengthen need for public disclosure and place greater obligations on trustees.

The new law to be introduced will cover, finance companies, building societies and credit unions.

The requirements will include:

• A credit rating from a rating agency approved by the Reserve Bank;
• A minimum $2 million of capital;
• The need for a standard ratio of capital to debt;
• Restrictions on lending to people related to the deposit-takers; and
• Fit and proper requirements for the directors and senior managers of deposit-takers.

Many investors hit by the collapse of nine finance companies over the last 16 months are owed about $1.2 billion, but it appears some of those did not understand what credit ratings mean or the risk they were taking.

"The Government is committed to working with the private sector to help and educate ordinary depositers to understand credit ratings and disclosure statements."

Dr Cullen said small deposit takers with assets of less than $10 million will be exempt from credit rating but will have to prominently disclose they are unrated.

Reserve Bank Governor Alan Bollard welcomed the Government's decision on its new role.

Dr Bollard said the proposals were expected to provide a more consistent approach to the supervision of deposit-takers and provide a stronger basis for confidence in the deposit-takers sector.

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