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Big finance companies to be treated like banks

One of the most significant proposals in the Government’s review of non-bank products is it plans for the finance company sector.

Friday, September 1st 2006, 6:34AM
It is looking to introduce a two-tiered regulatory regime with companies been given the choice of opting-in to a regime similar to what banks operate under with the Reserve Bank being the regulator.

The second, lower level of regulation would come under a system governed by the Securities Commission and trustees. The two models proposed are:

Tier One (Opt-In): Authorised Deposit Takers (ADTs)
Any deposit-taker could elect to become an ADT provided that they meet the licensing and ongoing supervisory requirements imposed by the prudential supervisor, the Reserve Bank.

These requirements would include a minimum level of capital, a minimum capital adequacy ratio, a minimum credit rating, a limit on related party exposures, and some governance and disclosure requirements.

Tier Two Deposit Takers (Enhanced Trustee Model)
These entities would face enhanced disclosure requirements and would be supervised by trustees and the Securities Commission.

It is proposed that they also meet other requirements such as a minimum capital requirement, possibly a mandatory credit rating, enhanced disclosure, capital adequacy measurement framework, more fit and proper person requirements. Importantly they would be required to disclose prominently that they are not an ADT.

The government’s concerns are in many cases investors can’t determine what level of risk they are taking on when they invest in this sector currently.

It also points out that because a finance companies lends money to a range of borrowers “there is a potentially substantial level of contagion risk with deposit takers, both because of their funding nature and because they tend to be viewed as like entities.”

It also says that these deposit taking firms tend to be relatively highly geared compared to other forms of debt issues.

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