Bad name not deserved

Sunday, August 6th 2006, 10:59PM

The unfortunate thing about the collapse of three finance companies in as many months is that they have given the whole sector a bad name - which it doesn't deserve.

It's been a bit concerning to see how the media have dealt with the Western Bay Finance collapse - it was the front page lead in the edition of the Herald I saw. I'd have to say that, editorially, there are far bigger stories around. Heck more investors' money has been lost through the Feltex meltdown, and the government has successfully managed to destroy a whole bunch of investors' money through its regulatory plans for Telecom.

Likewise it is incorrect to say that all finance companies that lend money on motor vehicles are suspect.

There are companies out there which lend in this space and are sound.

The issue is that in each of the sectors, whether it be car lending, consumer finance, property, plant and equipment etc, there are different spaces.

Some companies will do all the good, lower-risk lending, and others will operate at the lower quality, higher risk end. Investors need to understand where a company sits in each sector.

It would be fair to say that Provincial played in the bottom end of the car lending market, and it appears to have had poor management practices and systems.

Western Bay was doing consumer lending in areas which one could consider low quality.

One of the less clever marketing strategies being employed by some finance companies is to promote the fact that they lend on something other than cars (generally property).

Well I reckon it's a good beat to say a property-focussed finance company will fall over before Christmas. What's the marketing strategy then?

The key point of this Blog is to remember are that not all finance companies are bad or dodgy.

There is clearly a place for them in the financial markets, however the rules they operate under need to change.

My expectation is that there will be some form of prudential supervision under the Reserve Bank. However there needs to be better disclosure of material events.

I still can't believe Provincial got away with not telling the market that Westpac had withdrawn its funding line to the company.

Additionally, and these views have been clearly made previously, better research needs to be available to investors and advisers.

Investors and advisers need to change as well. They should read all the documents thoroughly and understand what a potential company they want to invest in does.

Unfortunately that can't be legislated for! (Not even under this government).

I would love to hear your thoughts on this topic. Please email them through to me at Blog@goodreturns.co.nz

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