Timeliness of info flow from finance companies to trustees, and from trustees to RBNZ, questioned in deposit guarantee scheme review

The length of time finance companies took to provide financial information to their trustees, and the time it took trustees to pass that on to the Reserve Bank, has been questioned during a Parliamentary review of the Crown retail deposit guarantee scheme.

The slow speed at which Treasury, which ran the scheme, decided to become more willing to intervene in the activities of financial institutions covered by the now closed retail deposit guarantee scheme has been well highlighted following a report last year from Auditor-General Lyn Provost on the scheme.

See Gareth Vaughan's article, Auditor General says Treasury lacked financial prudence in administering Crown retail deposit guarantee scheme; Let taxpayer risk grow

Also see Gareth's piece, Opinion: Treasury's ambulance at the bottom of the Crown retail deposit guarantee scheme cliff wasn't good enough

Treasury's non-interventionalist policy when it came to financial institutions, even when the Crown was a guarantor of their deposits, was questioned by Provost, who noted Treasury appeared to have dallied during the first five months of the scheme (set up in November 2008) while financial institutions ramped up their deposit bases - South Canterbury Finance hiked theirs 25% and loaned that out mainly to property developers.

At the time, Treasury was relying on receiving financial information on the companies via the Reserve Bank, which was relying on information coming from the companies' trustees, which were relying on information coming from the companies themselves.

But in mid-2009 Treasury decided to go straight to the companies most at risk, like South Canterbury Finance, itself, after many companies had drastically ramped up the Crown's exposure to them failing (one finance company hiked its deposit base from NZ$800,000 to NZ$8 million after its deposits were guaranteed, the AG said).

So why did it take six months for this to happen?

Appearing before Parliament's Finance and Expenditure Committee to explain the Auditor General's report, KPMG partner Godfrey Boyce, who audits the Treasury for the AG, said evidence showed Treasury initially wanted to follow the existing regulatory model because those were the established channels of communication (company to trustee, to RBNZ, then finally to Treasury).

“That process in itself was problematic in terms of the time it took,” Boyce told the FEC.

With Labour MPs laying blame at the feet of Treasury for not acting sooner (and the Minister of Finance for not asking whether Treasury should have gone straight to the finance companies), National Party MP Maggie Barry asked whether the Reserve Bank's role, which was to collate information from trustees and pass it on to Treasury, should be questioned.

Deputy Controller and Auditor General Phillippa Smith reminded the FEC that the auditor-general's report was not an audit of the Reserve Bank, it was of Treasury.

Boyce said the Reserve Bank was collecting a range of information during those first months of the scheme being put in place.

“They had a richer base of information. But again, there were delays in them getting that information [from trustees]. What we became aware of through the process was that there was disparate information, and non-reconciled information," he said.

The Reserve Bank at the time was stepping into a more enhanced regulatory model of non-bank financial institutions after being very hands off in terms of the non-bank sector. That was because the non-bank sector was viewed as not having systemic risk, Boyce said.

"It’s fair to say that progressively through the period of 2007 onwards, the Reserve Bank took an increasing role in terms of regulation and devoted more resources [to the non-bank financial sector]," he said.

“At the point in time we’re talking about through 2008, there was still a relatively small team, there were significant variances in the quality of information and the timeliness of information coming from the trustees of the different non-bank [companies],” he said.

“I think there were delays in getting that information. There was the desire for it to be as comprehensive as possible. So I think that the onus for the Reserve Bank as a regulator was to push for that harder.

“Equally, Treasury, being at the end of the chain, had to think about what implications it had for itself. I think very clearly it did, because in June 2009, Treasury started appointing inspectors to go directly in to these companies to circumvent the chain that was leading to non-timely information," Boyce said.

Labour Party finance spokesman David Parker asked whether the Treasury as guarantor could have immediately gone straight to the companies, rather than relying on the existing channels.

“If there were 20 finance companies that were growing, they could have written 20 letters and asked them to report monthly as to how much extra they were taking in and increasing the Crown’s exposure?”

To which Boyce answered, “yes.”

“Ultimately that’s exactly what did happen, but the desire was to follow the existing regulatory model in those early days because those were the established channels of communication. Everything started with the information going to the Trustee....”

Why did it take so long for information to come from the companies themselves, and then from the trustees?

In reply to questions from Greens leader Russel Norman on the information flow, Boyce said there were examples of Treasury itself asking the Reserve Bank, trustees or the companies themselves what was going on within the companies from April/May 2009 – some five months after the scheme was put in place.

During those first five months it was using its existing information sources - the Reserve Bank and trustees – for information. The Reserve Bank and trustees provided that information as it became available to them.

“It was more an issue around timeliness.”

Asked whether the problem of timeliness was between the companies and the trustees, the trustees and the Reserve Bank, or the Reserve Bank and Treasury, Boyce replied:

“The biggest issue was between the finance companies and the trustees, thereafter trustees to the Reserve Bank.”

Trustees had the legal right to get information from the finance companies.

“Structurally that is the way that the non-bank sector has been regulated in New Zealand for the last century. That was reviewed by MED six/seven years ago, and will be reviewed again, as I understand it, in the next couple of years,” Boyce said.

While the existing reporting chain was not flexible and nimble enough to deal with a situation of the magnitude of financial events that were occurring, it wasn’t fair to say the Treasury or Reserve Bank weren’t asking for information. Rather it was a matter of timeliness of that information flowing back to them.

So what does it all mean? My view

As noted above, Treasury's failings when it came to the guarantee scheme have already been well-documented.

Yes, it should have gone straight to the finance companies from day one to get regular updates on how they were growing their deposit bases and loan books. Yes, it should have considered taking a more hands-on approach to managing some of these companies.

But did these companies take advantage of the existing communication process to ramp up their deposit bases and lending before Treasury could get around to figuring out they had increased in size by 25% over just four months?

A trustee should be able to ask a company daily about its books. That same day, the trustee should be able to pass this on to the Reserve Bank, which then passes it on to Treasury.

But the fact there were delays in finance companies giving that information to trustees, and then delays in trustees getting that info to the Reserve Bank, raises the very simple questions of, why, and whether this was on purpose?