UDC Finance CEO calls for RBNZ's non-bank deposit taker regulations to be extended to include companies that don't borrow off the public

UDC Finance CEO calls for RBNZ's non-bank deposit taker regulations to be extended to include companies that don't borrow off the public

By Gareth Vaughan

UDC Finance, the country's second biggest finance company, wants to see the Reserve Bank's regulatory net widened in a move that would see GE Capital, the country's biggest finance company, dragged in.

Tessa Price, UDC's CEO, told interest.co.nz that UDC wants the Reserve Bank to extend its non-bank deposit taker (NBDT) regime to all organisations in the non bank sector, not just those like UDC that borrow money from the public.

"Day in and out we deal with small businesses who want more certainty and help. To this end, and in line with international practices, we're proposing that the Reserve Bank extends the NBDT regime to all organisations in the non bank sector," said Price.

"Australia requires all institutions that provide credit to hold a licence. Extending regulatory protection would promote better health of businesses across the non-bank sector in New Zealand, which will reduce risk and promote greater confidence among investors and lenders alike," Price said.

"There is about NZ$4.6 billion of business lending sitting on non-bank financial institutions' balance sheets, (and) around 25,000 businesses employing approximately 120,000 people have loans with non-banks. Businesses should be able to plan for growth with certainty and know they're dealing with well governed organisations," said Price (pictured right). "That has to be good for everyone."

She said UDC saw two key risks; the loss of credit lines, which could be mitigated by prudential capital and liquidity requirements, and unregulated institutions. On the latter point a license to operate, with governance standards, would encourage responsible behaviour and protect the non bank sector, added Price. The non-bank sector includes finance companies, building societies and credit unions.

"Whilst the impact of one of those (non-bank) players withdrawing might not be big if you look at the overall banking sector, it certainly would have local and regional impact and it's a big number of businesses and jobs as well," she said.

What is an NBDT?

The Reserve Bank issued a consultation paper last month as it reviews the prudential regulatory regime for NBDTs. As interest.co.nz reported in April, one of the issues the Reserve Bank paper considers is the very definition of a NBDT. The Reserve Bank is looking at changing the definition of NBDT to ensure it better catches all entities that might create systemic risks in the NBDT sector. A licensing regime will also be introduced. Existing NBDT prudential requirements include a capital ratio, liquidity policy and limit on related party exposures.

A NBDT is currently defined as a person that offers debt securities to the New Zealand public, and carries on the business of borrowing and lending money, or providing financial services, or both. However, the third of three proposed definitions of NBDTs listed in the consultation paper is; "Defining NBDTs as entities that carry on the business of borrowing and lending, and/or providing financial services, with greater use of statutory carve outs." This option makes no specific mention of whether to be a NBDT an entity must take deposits from the public or not.


The Reserve Bank paper notes that as a starting point entities carrying on the business of borrowing and lending should be treated as NBDTs where they are not already registered banks.

"Entities carrying on the business of borrowing and lending will inevitably have a high degree of interconnectedness with other participants in the economy, and will often offer essential transactional accounts to unsophisticated investors. Taken together, we consider that these are the fundamental reasons why NBDTs should be prudentially regulated."

GE Capital incorporates GE Finance & Insurance (GE Money), Custom Fleet, GE Commercial Finance NZ and GE Commercial Finance (USD) New Zealand, and is a subsidiary of US conglomerate General Electric, through whom it sources its funding.  KPMG's 2012 Financial Institutions Performance Survey notes that with total assets of NZ$2.5 billion, GE Capital is New Zealand's biggest finance company by assets, ahead of UDC - a subsidiary of ANZ.

A GE Capital spokeswoman would only say; "“We are aware of the Reserve Bank consultation paper and while we won’t be making a submission, we will continue to monitor developments closely.” Submissions closed last Friday.

GFC pull-out

Meanwhile, Price said during the height of the global financial crisis a lot of businesses approached UDC as some of its competitors, especially in car finance, were scaling back their New Zealand business - or pulling out of the country altogether. These businesses were "suddenly really concerned" about where they would get money from and wanted UDC to step in.

"Some (car) dealers got to the last week to find money to keep their business going. Now these are healthy businesses, but some players (lenders) in the market didn't have the funding in place," said Price.

"I don't want to name names. But we had a particular organisation that came to see us, and did the right thing by their customers, to say they had a number of franchised dealerships across the country with wholesale (borrowing) facilities and they needed to find quite a large number to replace. They asked if we could pick those customers up and replace the funding. We funded about NZ$125 million."

GE pulled out of car financing in New Zealand in 2008.

Price said she wasn't aware of any major finance companies wanting to pull out of New Zealand at the moment.

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Strange article. Ge report to the RBNZ now because of size. This even though they aren't classified as a NBDT. UDC touts itself as the great white knight. They are funded by a parent in the name of ANZ. ANZ pulled funding facilities with numerous NBDTs during the height of the GFC tipping many over, and many well run businesses in the process.. Price should take a look in the mirror.

The Reserve Bank is the prudential regulator of banks, non-bank deposit takers and insurers. GE is none of those.

GV any company with a loan book greater than $5m has to report to the RB now. GE arent exempt from this requirement.

The issue is what power does the RB have? Provided GE don't have private mum and dad investors, and GE don't break any of the laws of the land they can do whatever they like. We are a capitalist society after all and free to do what we want.

I am more concerned about Price frankly. Again strange comments.

Under what legislation do they report to the RBNZ in terms of this $5 million figure?

Ah, I assume you are talking about statistical reporting to the Reserve Bank. As I noted above, hardly prudential regulation.
The Reserve Bank’s annual survey of non-bank lenders has a cut off of $5 million, with the data used in the RBNZ's monetary and credit statistics. This data is collected under Section 36 of The Reserve Bank of New Zealand Act 1989.
Separately, I disagree that Tessa Price's comments are strange, as you put it. Think about it in terms of GE. It's outside the NBDT regime, and would like to stay there, but is UDC's biggest non-bank competitor. If you were running a major company wouldn't you want your major competitors to abide by the same regulations that you do?
Furthermore, why should one side of the ledger - borrowing - be prudentially regulated when the other side - lending - isn't? This just shows the hastyness the NBDT regulations were thrown together with in reaction to the meltdown of the finance company sector.
Here's Section 36 of the RBNZ Act:

Bank may require financial institution to supply information

  • (1) For the purposes of enabling the Bank to carry out the functions and exercise the powers conferred on it by this Part, the Bank may, from time to time, by notice in writing to any financial institution, or by notice in the Gazette applying to any specified class of financial institutions, require the institution or, as the case may be, institutions of that class, to supply to the Bank such information and data relating to the business of the institution or institutions of that class for such periods, and in such form, as may be specified in the notice.

    (2) Without limiting subsection (1), a notice may require information and data to be supplied relating to the assets and liabilities, income and expenditure (including interest rates charged and payable), fees and charges, obligations and commitments, and risk exposures of, and classes of transactions entered into by, that institution or class of institutions and any associated person and, where specified, in consolidated form, in respect of business carried on in New Zealand or elsewhere and whether as principal, broker, agent, or intermediary.

    (3) A notice given pursuant to this section may, by a subsequent notice, be revoked, varied, or amended by the Bank.

    (4) Information and data required to be supplied pursuant to this section shall be supplied to the Bank at such place in New Zealand and at such time as are specified in the notice.

    (5) A financial institution shall not be required to supply data or information under this section relating to the affairs of a particular customer or client.

    (6) Sections 156G to 156I and 156J(2)(c) and (d) (which relate to the publication or disclosure of information or data supplied to the Bank) apply with all necessary modifications in respect of information and data supplied to the Bank under this section as if for each reference to section 156C in sections 156G(1) and (3) and 156J(2)(c) there were substituted a reference to section 36.

    Compare: 1964 No 134 s 38H(1), (2), (4)–(6); 1986 No 131 s 10
    Section 36(6): added, on 10 September 2008, by section 10 of the Reserve Bank of New Zealand Amendment Act 2008 (2008 No 59).

Thats it Gareth!

Not sure what your point is? There is no direct loss to nz Inc. If GE collapses?

How can you enforce the stautory appointment of a trustee, or auditor, when there is no public investment at risk? It would be public interest?

If the RBNZ requires GE to report then all large privately owned business' that extend credit would be caught. Think about it- is GE providing credit to hundreds of thousands of individual nzers or half a dozen credit facilities to a bunch of large retailers, Harvey Norman being one of them?

Believe me the view within the industry is option 2.

Not a straight forward exercise, and most regulations are easily avoided anyway, or pointless when you have a large organization motivated by profit, with such a massive interest margin.

ie. The prudential regs work well for the banks operating on slim margins, but have no teeth in the case of GE. After half a dozen years of no dividends gearing would be 50%. risk weightings are meaningless for similar reasons. Supplying credit is process driven. Having independent directors would achieve nothing. I suspect GE could operate well with one Director based offshore.

If Price wants a level playing field then UDC should be de-merged from ANZ, as this gives it a competitive advantage.

The RBNZ needs to be clear on what it wants. There are two outcomes. 1) protect public through prudential regulation. 2) control the level of credit into nz, sector specific.

price is referring to 2. In the case of GE, and the rbnz regs. Don't work in this case as they are mutually exclusive.

Meanwhile, Price said during the height of the global financial crisis a lot of businesses approached UDC as some of its competitors, especially in car finance, were scaling back their New Zealand business - or pulling out of the country altogether. These businesses were "suddenly really concerned" about where they would get money from and wanted UDC to step in.
Interesting to know if Price means GE - they are now operating under the regulatory umbrella of the US Federal Reserve.
But it must be noted that UDC's parent sought and received NZ Crown Wholesale Guarantees - same remains outstanding - an unfiar advantage that certainly requires remedial action to create a fair playing field for all interested parties.