The truth about NZ business regulation

I have a mate who theorises that one reason NZ businesses do so poorly in Oz is that they don’t know how to handle regulation when they have to work in a properly regulated business environment. He lives across the ditch and studies these sorts of things, so what would he know?

Clearly not as much as the National and ACT parties, who are always banging on about how NZ business is over-regulated and over-burdened with compliance costs. It would be funny if the business press didn’t reinforce this dopey nonsense at every opportunity.

But wait. Once again, NZ has been ranked second in the world for ease of doing business by the World Bank/International Finance Corporation survey of 181 economies. (Full report — pdf: 7.2 MB — here.) It’s rated 1st or 2nd in each of the six years the surveys been done.

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Regulation for growth

Brian Gaynor makes a powerful case for improved regulation of NZ’s finance system in this morning’s Granny. He concludes:

“Our financial system will remain small, dominated by the four main Australian-owned banks and limited in its ability to provide development funding for the productive sector until we introduce a modern best practice regulatory regime that enforces honesty and encourages widespread investor confidence.”

Noting the dominance of the finance system by the Australian-owned banks and its relatively small size and exposure to the domestic housing market, Gaynor contrasts the highly regulated Australian financial system to the light-handed disclosure and self-discipline regime here. And it is light-handed. Gaynor quotes a 2004 IMF study:

“New Zealand regulators do not carry any duty to protect individual depositors or policyholders, or to safeguard individual institutions, unlike many other jurisdictions.”

The recommendations of the IMF team calling for action on the inadequate disclosure of the finance company sector seem to have been ignored. Haynor seems to suggest that the continued downplaying by the Reserve Bank of the importance of the finance company sector meltdown betrays a lack of understanding of reputational effects on the finance system as a whole.

In the interests of balance, I should note Liane Dalziel’s response to Gaynor’s open letter, on which I posted recently. Arguing that, “We’re building a solid regulatory framework”, Dalziel lists “three bills currently before Parliament that have been designed to address the regulatory challenges you highlight in your letter”, along with a number of other initiatives in recent years: a Takeovers Panel code, a “co-regulatory framework for supervising registered exchanges”, continuous disclosure obligations, strengthened rules relating to insider trading, market manipulation, and disclosure requirements for investment advisers.

Yes, progress, albeit modest. We still don’t have the twin peaks that the Aussies do and that Gaynor details in this week’s article. Dalziel’s reply quickly descends into bureaucratic platitudes like, “the private sector can partner with government to seek solutions that will enable our capital markets to grow.”

The finance company and mortgage fund meltdown shows that our market disclosure and self-discipline regime has failed. We need to be doing more about it. Liane Dalziel seems to have dropped the ball, but the Nats and especially ACT would be ideologically opposed. Sad, for all of us.

Read this!

Forget Peters for just a moment; he’s probably a goner by the end of next week, but we won’t know until Tuesday at the earliest.

Instead, read Brian Gaynor’s “Open Letter to Lianne Dalziel.” It’s dynamite.

It’s not just that the Capital Market Development Taskforce announced this week is too little, too late. He says it’s probably the wrong people, with the wrong agendas, and we can’t afford to wait and find that out sometime at the end of next year anyway.

Finance melt-down continues

Another finance company goes under today. $554 million frozen. Hanover is/was one of NZ’s biggest finance companies, and had a respectable (though not quite investment grade) rating from an international ratings agency.

As I posted a few weeks ago, the finance sector is in meltdown. Even well run and long-established companies have been caught by an unprecedented pincer of collapsing reinvestment rates and cancelled credit lines on the one hand, and a tanking property market on the other.

Finance companies in melt-down

You wouldn’t know it looking at the NZ blogosphere, but the finance companies are in melt-down.

Yesterday’s news that one of NZ’s high-end companies has suspended its money-lending business while it chases some large debts is very worrying. It is the 23rd company to get into trouble over the past two years. Last week another highly regarded and solid company — older than me — also kicked for touch.

In the wake of so many high profile failures over the past couple of years, reinvestment rates collapsed and banks cancelled credit lines. On the other side, the rapidly worsening property market has seen bad and doubtful debts climb. Now, in a third wave of collapses, “investment grade” companies with property market exposure are going under. (Those not exposed to the property market are fine, though.)