By Kent Atkinson of NZPA

Wellington, July 24 NZPA - Massey University financial investment expert Chris Malone says it is a concern that the finance sector crisis has not been adequately addressed by the Government and the Reserve Bank.

"Any initiatives that help restore confidence in the financial system are worth being fast-tracked, irrespective of whether they will resolve the current crisis in the finance company sector in New Zealand," he said today.

New rules now before Parliament are expected to be put into law before the general election, but some of the measures will not take effect until next year.

Credit ratings for finance companies from a reputable ratings agency might not fix problems straight away, but a classic economic theory by Nobel Laureate economist George Akerlof said: "When you cannot distinguish who is good and who is bad, the market will fail".

Yesterday, Mark Hotchin, an owner of one of the nation's biggest finance companies, Hanover Finance Ltd, said: "The industry model has collapsed". He was announcing a freeze on $554 million of funds owed to 16,500 investors and blamed bad loans, a run on investors wanting to quit the company and a scarcity of new funds from investors.

Finance companies borrow from the public for a fixed term of one to five years, offering interest rates about 2 percent higher than banks, and lend to groups including consumer finance (hire-purchase) companies, and property developers, at higher interest rates.

Only a few big finance companies have credit ratings at present.

Dr Malone said that in addition to credit ratings, another option was for the companies to provide first class, transparent financial statements, and a transparent business model and governance structure.

"You can get a regulator to do the job, or the firm itself can provide information and warranties to the market about its quality," he told NZPA.

"It is nearly always better if the firm itself provides the guarantees/warranties and information that assures investors about its quality."

Using a regulator or auditor was an important part of a good governance system "but reliance on a regulator alone is prone to fail when fraud is involved," he said.

Law changes the Government plans to introduce before the election mean there will be more "due diligence" tests of non-bank deposit takers (NBDTs) and less likelihood that low quality operators can pass themselves off as "safe" investments.

"If the Reserve Bank stepped in, in a monitoring role, it would give the creditable companies in the sector a significant boost," Dr Malone said.

But a problem with the regulatory approach was that it could stifle the emergence of new entrants and innovation, and encumber existing players with significant, "and perhaps prohibitive", expenses.

A spokesman for Finance Minister Michael Cullen said that though the problems facing the finance sector were worrying for investors, they did not pose major threats to the rest of the economy.

Legislation to enable Reserve Bank regulation of the sector is before Parliament.

"The Government is committed to passing this legislation before the election," the spokesman said.

Non-bank deposit-takers, including finance companies, building societies and credit unions, will have to be registered by the Reserve Bank and to comply with minimum prudential requirements.

The new rules will require:

* a rating from a credit agency approved by the Reserve Bank;

* minimum capital of $2 million;

* restrictions on lending to people related to the deposit-takers; and

* "fit and proper" directors and senior managers of deposit-takers.

Small deposit-takers with total assets of under $10 million will be exempted from the need for a credit rating, but will have to disclose that they are unrated.

NZPA WGT kca nb