By Bruce McKay
Will the last non-bank deposit taker left please turn out the lights?
This form of rhetorical question is often used to signal a negative sentiment towards a particular event – it’s been common in discussions around migration for some years.
But as it concerned deposit takers the question is now quite relevant. There is an increasingly common view that the regulators (Securities Commission, Companies Office, Reserve Bank) mean to do away with non-bank deposit takers and in particular finance companies.
The tenor of Reserve Bank regulation and the indications that have been given by the Reserve Bank about future regulation, clearly indicate that it intends to turn the remaining non-bank deposit takers effectively into mini-banks, but without the benefits of being able to call themselves banks.
This will likely be done by encouraging mergers of organisations, takeovers and seeing deposit takers wind down their businesses and effectively ‘cease to be’. There is evidence of all three things happening right now. Marac, CBS and South Cross Building Society are looking to form Heartland Bank.
SBS Bank is in discussions with at least one building society with a view to acquisition, while others, mainly finance companies are wondering whether their business model is sustainable going forward. The main reason for all this activity has been a massive increase in costs caused by increased regulatory compliance and the fallout of the global financial crisis and the routing of the finance company sector in New Zealand.
For example, the costs of obtaining an audit have increased at least five fold for finance companies, including the move to full six monthly audits. For those with the Crown Guarantee there has almost been a constant demand for information with more recently the costs of inspectors being borne by the company. Trustees have also got in on the act charging higher fees, and making the deposit taker carry the cost of reviews done by firms they have hired as well.
The Securities Commission has been very active in asking lots of questions about deposit takers, which not only chews up internal resources but incurs legal costs as well. And then there is the payments for the Deposit Guarantee Scheme and any number of ancillary charges. Go back a few years and few of these costs existed and the ones that did were by and large much smaller. Non-bank deposit takers with more than $20m in liabilities now need to have a credit rating, and new rules on capital adequacy and related party transactions come into force on 1 December.
One finance company executive noted to me that he never previously used legal advisers when submitting a prospectus to the Companies Office for registration. Nowadays he wouldn’t move without legal advice. And you can also bet that the cost of legal advice to non-bank deposit takers (i.e. the hourly rate as well as the number of hours) has also gone up. But that is not the end of it.
The Reserve Bank earlier this year issued a discussion paper on liquidity, which will likely lead to a similar regime that is now in place for banks. A new bill is planned to go before Parliament that will mandate licensing of non-bank deposit takers, good character tests for non-bank deposit taker directors and executive, similar to what is in place for banks now.
Other measures hinted at by the Reserve Bank include restrictions on change of ownership/control and a framework for dealing with failures of non-bank deposit takers. All this extra cost and regulation makes mergers, takeovers or managed exits obvious choices. If the costs are about the same as being a bank, why not be a bank?
That is clearly the motivation behind the Heartland Bank proposal and Marac’s longer standing desire to become a bank. From a depositors point of view all this regulation and increased oversight makes sense, but for those relying on finance companies to provide a higher rate of interest in their funds the outcome may not be as welcoming as expected.
But given what has happened over the past few years to investors’ funds on the deep freeze list (link to page) there is just no appetite from lawmakers and regulators to allow these types of deposit takes to continue to exist. Regulating them out of existence seems to be the method of choice.
Whether this is good for the economy is another matter… here I’ve dealt with the liability side of the balance sheet, next time I look at the asset side and what the demise of non-bank deposit takers means for the economy.
* Bruce McKay is a director of Saffron Capital and Viaduct Capital, an Auckland-based finance company that is now in receivership. He has written commentaries for The Dominion Post and The Independent.