Finance shake-up - after $8b wiped out

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The biggest shake-up of the finance sector in 35 years is under way in a bid to restore shattered confidence, but it will be too late for most of those who invested more than $8 billion in finance companies that then failed.

The bulk of those deposits were not protected by the Government guarantee and many of the inventors will get nothing back from what represents a massive destruction of wealth in the past few years.

The failure of South Canterbury Finance this week is the latest in a string of finance company failures, the bulk of which took place before the deposit guarantee scheme protecting investors was put in place.

Commerce Minister Simon Power said finance company failures accounted for deposits totalling more than $6 billion before the Government took office in December 2008, shortly after the deposit guarantee scheme came into effect.

Depositor funds worth about $2 billion had been affected by failures since then.

Mr Power admitted the pace of finance company failures had lent a sense of urgency to measures to improve confidence in New Zealand's financial markets – but stressed that a massive rewrite of the rules surrounding financial markets had not been designed to remove risk.

"The Government cannot and will not legislate for risk. In the end, investment decisions are made by the component of risk involved. So the changes we are making can't necessarily protect an investment. What they do is oversee and supervise the investment in a way that gives an investor confidence to put their money into a particular product."

The changes had been spurred on by the failure of the 35-year-old Securities Act to protect investors in the latest round of finance company failures.

"When those investors' dollars hit the floor, all the regulators looked at each other and said: `I'm pointing the finger at you'. There wasn't one regulator that regarded itself as having sufficient statutory capacity to get into the space to deal with confidence issues prior to the collapses."

Changes – either already in place or under way – have included a new non-bank deposit takers regime, work toward setting up a new uber-regulator, the Financial Markets Authority, new rules governing trustees and financial advisers and independent supervision of auditors.

The Financial Markets Authority will be established next year and an establishment board is already in the process of seeking a chief executive. Establishment board chairman Simon Botherway said a key task for the authority would be to restore investor confidence in the financial market.

"It's fair to say ... there were problems with a lot of complex structured products, there were problems with various property-based schemes that fell outside the definition of security ... and part of the problem with the finance company sector was that that was compounded by poor advice and poor practices."