The review focused on key areas such as disclosure of the risks of the investment, and the investment activities of the company. Each company’s most recent investment statement, prospectus, financial statements, and advertising were reviewed for compliance with securities law.
Two finance companies had not followed the guidance in the report and still had poor disclosure, especially about risk. Ten others had improved their disclosure on the basis of the report but had fallen short in certain areas.
The commission required these 12 companies to rectify their disclosure deficiencies. All of them amended their offer documents and/or advertisements and one also amended its financial statements. Other companies have agreed to make improvements when next updating their offer documents or preparing advertisements.
“The standard of disclosure in the finance company sector has improved significantly as a result of the Commission’s work. However, there is still room for further improvement, especially with regard to risk,” commission chairman Jane Diplock says.
She says that finance companies can be a high risk investment.
Investors should read the investment statement and the prospectus so that they know who the finance company is lending money to, and how well the repayments are going.
Currently, investing $5,000 in a registered bank for a year gives a return of about 6%. Investing the same money in a finance company for the same term will return about 3% above the bank rate.
That difference might seem small in percentage terms, but it may not be representative of the higher risk an investor takes with a finance company.
"People should realise that an extra 3% return is a 50% increase in interest and so must represent at least a 50% increase in risk," Diplock said.
"Also, the governance of a finance company is very important and the skills and track record of its directors and managers, particularly their skills and experience in financial management and in pricing risk."
Investments with finance companies are generally for a fixed term. Usually this means that investors can’t withdraw their money until the end of the term even if the company’s financial position deteriorates. If they can cash in the investment early they will probably have to pay a penalty.
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