Ex-finance company CEO lets rip at the Securities Commission, Reserve Bank rules and prospectuses

By Gareth Vaughan

Rudi Kats, the recently departed CEO of consumer lender Broadlands Finance, says the Reserve Bank's new regulatory regime for finance companies is penalising the survivors who successfully negotiated the turbulence of the last few years as many others collapsed.

Kats, who says he has stepped down from running the Tony Radisich owned Broadlands after four years of "hard yakka" to spend more time with his young family, told interest.co.nz he was concerned about finance company regulation.

The Reserve Bank has taken on the regulation of non-bank deposit takers (NBDT) - finance companies, building societies and credit unions - amid the demise of 63 finance companies and other entities that raised money from the public over the past five years. These collapses put NZ$8.59 billion at risk held in more than 205,000 deposits. See our Deep Freeze List for full details.

Kats says the NBDT regulations, with "capital ratios and all that sort of rubbish," look like an attempt to turn finance companies into banks.

"At the end of the day if that’s what’s going to happen, that’s the way we’re going to go, finance companies are going to offer 4% (interest) just like banks and then what is the future of debenture funding? Once upon a time mum and dads needed finance companies to get 9% or 10% for their money so they could send kids to private school or whatever," Kats says.

'Penalising the survivors'

The regulators were now effectively penalising the finance companies that successfully negotiated a path through the crash.

"Now they’re saying 'all these guys that successfully managed their businesses, they’re going to live under a regime that none of them would want if they had a choice.' And why? Because they were running good businesses, that’s how they survived," Kats says.

"They didn’t survive because of luck. They survived because the business was run properly. You knew every day what dollar was going to come in the door and if you weren’t sure it was going to come in the door, we didn’t count it."

Broadlands, like most finance companies, was covered by the Crown retail deposit guarantee scheme between October 2008 and October 2010.

'A prospectus is a just a warning to people saying why would you invest with us?'

Now, Kats suggests, Reserve Bank staff and other government employees are striving to prevent any future crises.

"Well, they’re going to kid themselves because (people) will just find another product of some description. There are guys out there that I guess today are looking and saying ‘how can we raise funds from the public without having to go through the Securities Commission, without prospectuses'."

And, Kats notes, there's now debate about prospectuses being too complicated.

"Well, who made them complicated? The Securities Commission made it complicated because they said if we didn’t have the proper disclosure it could be a criminal offense. You read Broadlands' prospectus. We just instructed (lawyers) Bell Gully to make it as bad as they could. The prospectus is not a marketing document, it’s just a warning to people saying ‘why would you invest with us?’"

Furthermore, Kats says, a set of accounts used to amount to just two or three pages.

"Now we’ve got auditors putting in their remarks and what they think. Most of those guys wouldn’t know how to run a business. It’s going to be more and more complicated and I could see a whole lot of frustrations coming for me that I didn’t need. And I think other people are going to go the same way. How many prospectuses are their in the market today trying to raise funds from the public in finance companies?"

Eleven versus more than 60

There are currently just 11 prospectuses in the market from finance companies looking to raise money from the public, including Marac Finance which is now part of Building Society Holdings, and UDC Finance which also has an NZ$800 million credit facility in place with its parent ANZ. The 11 compares with more than 60 prospectuses five years ago.

Broadlands last year replaced its auditor BDO with Grant Thornton and saw its allowance for impairment on its gross finance contract receivables more than halve to NZ$5.2 million at September 30 on NZ$34 million worth of receivables, from NZ$11.8 million on NZ$35.4 million worth at March 31.

Some of the more recent finance companies to fail, such as Finance & Leasing, have blamed the NBDT regulations for their demise. Others, such as Equitable Mortgages, made changes specifically designed to comply with them yet ultimately met their Waterloo anyway, and Oxford Finance, recently replaced debenture funding with a BNZ loan, citing the NBDT regulations among its reasons for doing so.

The Reserve Bank, meanwhile, hopes to have a second NBDT bill reach Parliament mid-year covering rules around the licensing of finance companies, fit and proper requirements for senior office holders, change of ownership requirements and powers for the central bank to use in managing a distressed or failing institution. See more detail on what the legislation might mean here.

Since December last year NBDTs have been required to have a credit rating from an approved rating agency, governance arrangements designed to ensure they give proper consideration to the interests of all stakeholders, risk management programmes outlining how they will identify and manage key risks such as credit and liquidity risk, minimum capital requirements included in trust deeds, and restrictions on related party exposure and liquidity provisions enabling them to withstand a "plausible" range of shocks. See the full details here.

Despite his concerns about the heightened regulation of finance companies, Kats says Broadlands is in a "good spot" and if it plays its cards right, should be able to do a "whole lot of good things" in the future.

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