Despite fees collected SCF's failure and Treasury's new policy throws Crown guarantee deep into losses

Thanks to fees paid by participating institutions, the taxpayer was well ahead until yesterday on the Crown’s retail deposit guarantee scheme. But the demise of South Canterbury Finance (SCF) dramatically changed that, plunging the taxpayer hundreds of millions of dollars into the red.

(Update adds provision information).

The collapse into receivership of the government guaranteed SCF leaves the taxpayer with the thick end of NZ$2 billion to pay out to SCF debenture, bond and prior charge holders. Prime Minister John Key hopes to ultimately recover about NZ$1 billion of that.

The bill for SCF dwarfs the NZ$249.1 million owed to investors in the other seven guaranteed finance companies to have previously gone belly up. And although the taxpayer wasn’t facing the balance of the full NZ$249.1 million tab not recovered by the seven firm's receivers - Treasury said it had paid out NZ $79.1 million of principal and interest as of July 19 - it now is.

Treasury announced yesterday, that in the wake of SCF’s demise, taxpayers' will now foot the bill for all depositors of Crown guaranteed finance companies that default up to October 12, including those that have already defaulted, regardless of any previous eligibility criteria in place for the Retail Deposit Guarantee Scheme.

As of May 31, the Crown's total provisioning for potential payouts under the scheme stood at NZ$934 million.

Concession to NZ$1 million plus depositors

For SCF, this includes repaying individual investors who had sank more than NZ$1 million into SCF the full amount they're owed. Previously, Treasury has capped payouts to any one investor at NZ$1 million.

Treasury spokesman Angus Barclay said it hadn't yet been determined whether individual debenture holders who had pumped more than NZ$1 million into any of the seven other guaranteed failed companies would now be paid out their entire investments. Treasury was still working through the details of how the changes announced yesterday would unfold, Barclay said. This included just how much bigger the taxpayers' tab could now be.

Treasury would publish details in due course about the process for repaying previously ineligible depositors.

Just how much the Crown has been paid in fees from entities participating in the guarantee scheme is unclear, although it would be several hundred million dollars. The Treasury only releases the total sum collected from companies participating in the scheme, which was introduced by then-Finance Minister Michael Cullen on October 12, 2008, with its June year end financial statements.

The June 2010 year statements won’t be released until mid-October. From its October 2008 introduction until June 30, 2009, Treasury had received NZ$228 million in fees from the 70 odd entities participating in the scheme. The bulk came from the big four banks - ANZ, ASB, BNZ and Westpac. The total figure includes NZ$74 million collected in guarantee fees plus another NZ$154 million paid in advance by firms to cover future participation in the scheme.

New policy avoids interest payments, pays foreigners

Yesterday Acting Secretary to The Treasury Gabriel Makhlouf said repaying all depositors of all guaranteed companies that default will save taxpayers from having to pay ongoing interest that otherwise would have accrued as thousands of claims were assessed, processed and paid. He said the scale and complexity involved with repaying SCF's depositors altered the costs involved in running the guarantee scheme.

“Criteria relating to citizenship and tax residency will no longer apply and depositors will not be assessed using those criteria. The criteria for being repaid is that you are on the register of debt securities at the date of default,” Makhlouf added.

The decision applies for defaults by approved institutions from the start of the current Retail Deposit Guarantee Scheme in October 2008 until it ends on October 12, 2010. That means all investors who held debt such as call deposits, term deposits, non-guaranteed deposits, debentures, and bonds in the eight failed companies, and any more that fail before October 13, will get paid out. However, investors holding equity securities such as ordinary shares and preference shares remain ineligible for repayment.

The following eight Crown guaranteed firms have defaulted:

SCF owing 35,000 investors about NZ$1.6 billion, plus prior charge holders including Pyne Gould Corporation's Torchlight Investment Fund about NZ$175 million,

Allied Nationwide Finance owing about 4,500 depositors approximately NZ$130 million in deposits.

Mutual Finance owing 340 depositors NZ$9.3 million.

Viaduct Capital with 94 depositors owed NZ$7.3 million.

Vision Securities with 958 debenture holders owed NZ$28.4 million.

Strata Finance had 21 depositors and $448,000 in deposits.

Mascot Finance had 2,558 debenture holders with NZ$70 million invested.

Rockforte Finance owing 70 depositors about NZ$3.2 million.

Treasury also said eligibility criteria including citizenship and tax residency will continue to apply in the event of a default after October 12, 2010 by entities approved for the extended Crown Retail Deposit Guarantee Scheme. It runs from October 12 this year until December 31 next year. So far eight companies, including SCF, have gained approval to participate in the extended scheme. The others are Canterbury Building Society, Equitable Mortgages, Fisher & Paykel Finance, Marac Finance, PGG Wrightson Finance, Southern Cross Building Society and Wairarapa Building Society.

The demise of SCF brings to 61 the number of finance companies, investment funds and other entities and financial products that have failed over the past four years, putting about NZ$8.5 billion worth of investors' money held in about 239,000 accounts on the line. See our Deep Freeze list here.