By Gareth Vaughan
The Non-Bank Deposit Takers Bill, due to be introduced to Parliament by Finance Minister Bill English today as a key plank in the new regulatory regime overseeing finance companies, doesn't include a Reserve Bank proposal that would've given the central bank powers to seek a court order banning someone from participating in a company for up to five years.
However, if passed in its current form, the Bill will enable the Reserve Bank to both block director appointments and remove them from companies.
English said last week the Bill would be introduced to Parliament this week in a move that would see licensing requirements introduced for NBDTs as the Reserve Bank's oversight of the sector is strengthened.
In a consultation paper released last October, the central bank revealed that it wanted the power to be able to obtain court orders banning individuals from participating in non-bank deposit takers for up to five years. However, a Reserve Bank spokesman confirmed to interest.co.nz that this proposal won't be included in the Bill. He said the Reserve Bank will, however, be able to block appointments of directors and senior officers to NBDTs, and to remove them.
"This (power) was considered sufficient," the spokesman said.
In a cabinet paper on the Bill, English says directors and senior officers of NBDTs - finance companies, building societies and credit unions - must not have a track record that indicates they aren't suitable for their position. A number of “suitability criteria” will be prescribed by regulation, and there must be certification from the directors or the entity's governing body (board) that those concerns don't apply to appointees. Where the concerns do apply, the Reserve Bank will vet applicants.
These suitability concerns are likely to include;
* Bankruptcy;
* Involvement in an entity that has gone into receivership, liquidation, voluntary administration, or been the subject of statutory or judicial management;
* Criminal offending;
* Disciplinary action or adverse findings by a professional or regulatory body for persons engaged in that profession;
*Adverse findings or action taken by any other regulatory authority, market operator or government agency whether taken directly or indirectly through a court or tribunal and;
* Conflicts of interest that could impact on the proper performance of the business.
Jackson & Hawkins wouldn't have been vetted but Petricevic would've been
Interest.co.nz is aware of at least one example where the director of a finance company that was placed in receivership was back raising money from the public through a different vehicle within months and wouldn't have faced Reserve Bank vetting, and another company director who served jail time before re-emerging as the head of a sharemarket listed finance company who also wouldn't have been captured by the proposed new Reserve Bank vetting powers.
John Jackson, the former managing director of Vision Securities, which was placed in receivership in March 2010 whilst its deposits were covered by the Crown retail deposit guarantee scheme, was back last year as owner of Senior Trust Management Ltd seeking to raise up to NZ$10 million from the public to invest in loans to retirement villages. As a unit trust, Senior Trust Management wouldn't fall within the definition of "deposit taker" in the Reserve Bank Act.
Vision Securities was placed in receivership owing 958 debenture holders NZ$28.4 million.
And nor would Allan Hawkins, who re-emerged in recent years with finance company Cynotech Holdings after being jailed for fraud following his days heading up Equiticorp in the 1980s, have been vetted by the Reserve Bank under the proposed regulations because Cynotech never issued a prospectus seeking to raise money from the public.
A "deposit taker" is defined as an entity that offers debt securities to the public and borrows and lends money or provides financial services.
Therefore former Bridgecorp boss Petricevic, now facing charges from both the Financial Markets Authority and Serious Fraud Office after the company's July 2007 crash left more than 14,000 secured debenture holders about NZ$459 million out of pocket, would have been vetted, and potentially blocked, by the Reserve Bank had the NBDT Bill been in place when Bridgecorp was seeking money from the public given the demise of his company Euro-National Corporation in the 1980s.
Too little too late?
The toughening up of NBDT regulation comes after the failure of 64 finance companies and other entities since 2006 which have put NZ$8.6 billion worth of investors' deposits held in nearly 206,000 accounts at risk. See full details in our Deep Freeze List here. Following this dramatic clear out of the sector there are currently only about 15 finance companies, plus co-operative PSIS, about five building societies and six or seven credit unions seeking to raise deposits from the public. See full details on our term deposit page here.
The NBDT Bill continues a process started under the previous Labour-led government when cabinet agreed in June 2007 to a new framework for the regulation of NBDTs with the Reserve Bank as prudential regulator.
Since last December 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 a deposit taker’s related party exposure and liquidity provisions enabling them to withstand a plausible range of shocks. See more detail here.
The new rules have seen NBDTs forced to appoint independent directors, maintain an 8% minimum capital ratio, and limit exposure to related parties as a percentage of capital to 15%. However some companies, including the ANZ-owned UDC Finance, have been granted exemptions by the Reserve Bank to some of the rules.
The tougher rules come as some in the industry question whether there's even a viable future for the retail debenture market. Alastair Macfarlane, managing director of consumer lender Fisher & Paykel Finance recently told interest.co.nz that it remained to be seen whether there will be a retail debenture market post the Crown guarantee period, which ends on December 31, for finance companies without investment grade credit ratings. This is against a backdrop of the risk premium finance companies are paying to borrow money from the public over bank pricing increasing.
In its annual Financial Institutions Performance Survey Review, released in May, KPMG said the current premium from the major banks with AA credit ratings to the BB speculative, or junk, rated finance companies appeared to be between 150 and 300 basis points.
"The future may see a BB+ rated instrument demanding a return of 300 to 500 basis points, but a BB- rated instrument would require an additional 150 to 200 basis points to reflect the additional risk," KPMG said.
No direct statutory management power
The central bank is also set to gain powers of general information gathering and investigation as well as powers to issue directions to distressed or failing NBDTs but the NBDT Bill doesn't give the Reserve Bank direct statutory management powers over NBDTs, rather relying on the Financial Markets Authority and the 1989 Corporations (Investigation and Management) Act. The Reserve Bank spokesman said a final decision on whether direct statutory management powers were needed was yet to be made.
The cabinet paper notes that the Reserve Bank will fund costs associated with NBDT regulation through the taxpayer funding it receives from the government rather than by charging NBDTs fees. However, there is scope for the charging of fees on license applications in the future if it's deemed appropriate.
For now the Reserve Bank spokesman said: "NBDTs are subject to frontline supervision by trustees which they pay for. In these circumstances it was decided not to impose further costs on NBDTs."
The central bank will maintain a publicly accessible registry of licensed NBDTs and it estimates the cost of licensing all expected applicants will be about NZ$160,000. The NBDT Bill will provide for a transition period for licensing of 12 months giving NBDTs the opportunity to secure a license or repay debt securities issued to the public.
The Bill also includes a requirement that transactions that would result in a person owning, or having the power to control, 20% or more of a NBDT's shares or 25% or more of its board, have to be cleared by the Reserve Bank.
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