BusinessDesk: New finance company rules stifle New Zealand's capital markets, Chapman Tripp says

By Paul McBeth

The final legislative leg of regulations for finance companies, building societies and credit unions will stifle investment opportunities for retail investors and reduce the availability of credit for riskier ventures, according to law firm Chapman Tripp.

In an oral submission on the Non-Bank Deposit Takers Bill, partner Ross Pennington told Parliament’s finance and expenditure committee that regulation is scaring off companies keen on tapping debt markets and limiting the opportunities for investment in solid fixed interest securities.

“If these measures are designed to improve the outcomes for punters who want to invest in debt securities and so forth, then they’re having the opposite effect of what’s intended,” Pennington said. “New Zealand retail markets are incredibly fragile - it’s very hard to keep them going."

“Issues like the finance companies have a massive impact on them even though they have nothing to do with them,” he said.

Last year, some $1.04 billion of new debt was raised on NZX’s debt market, while the value of trading in listed debt securities fell 11 percent to $1.2 billion.

The bill is the final plank in a legislative series that aimed to improve the quality of finance companies – a sector where more than 50 lenders collapsed over the tail-end of the past decade, destroying billions of dollars of wealth. The bill aims to introduce a licensing regime and give the Reserve Bank greater regulatory powers.

Pennington said finance companies have a role in providing credit to speculative opportunities, such as property development, and that slack isn’t getting picked up by registered banks.

Earlier legs of the legislation that introduced tougher capital adequacy ratios for non-bank lenders encouraged firms to apply for a banking licence, which would let them hold a lower ratio of capital in relation to their riskier loan books, he said.

“Anything done in this sector will tend to reduce competition in the finance market, leading to a sort of oligopoly position of the registered banks,” Pennington said.

David Brown Douglas, executive director of the Trustee Corporations Association, told the committee his organisation supported the bill, but would like to see a narrower definition of non-bank deposit takers to capture just finance companies, credit unions and building societies.

Kirk Hope, executive director of Financial Services Federation, said his group broadly supported the bill, but would like to see the cap for managers and shareholders deemed to be associated persons lifted to 50 percent from the proposed 20 percent.

The lower threshold meant ‘associated persons’ could be held criminally liable without being able to exert control through majority ownership on an entity, Hope said.