There is an urgent need for tougher rules relating to finance companies, Massey University school of economics and finance lecturer Bill Wilson says.
Lack of regulation, rather than the global economic crisis, caused the collapse of New Zealand finance companies, he said.
Dr Wilson conducted a forensic analysis of four failed companies as part of his PhD research. These were Provincial Finance, Bridgecorp, Five Star Consumer Finance and Geneva Finance, all of which collapsed.
"The Government needs to urgently replace the `laissez faire' system under which building societies, finance companies and credit unions operate, with prudential rules setting realistic minimum standards," he said.
He found finance-company managers were quick to blame their failings on the economic downturn when they appeared to be managing their institution for their own interests with little consideration given to other stakeholders.
New Zealand could not again afford the destabilising effects of collapsed finance companies, which were devastating for many investors who thought they were making responsible provision for their retirement.
The collapse of finance companies unnecessarily restructured much-needed capital from New Zealand small and medium-sized enterprises - the "backbone of the economy".
The crisis in confidence in the industry was a result of a complete lack of corporate governance which occurred well before the global financial crisis, Dr Wilson said.
"The urgency facing the Government is to create a prudential regulation system to ensure widespread failures do not occur on this stage again."
Non-bank deposit-takers were now required to obtain a credit rating and be licensed by the Reserve Bank, which was developing further new rules.
Because the central bank was not taking on a supervisory role for non-banks, these would continue to be supervised by trustees.
Disclosure requirements for non-banks must be improved, Dr Wilson said. Disclosure of non-bank deposit-takers was of no practical use at present because of its poor quality.
He saw a reluctance by the Government to address the industry's problems. While shortcomings in the regulation of registered banks were addressed with the introduction of the 1996 disclosure regime, deficiencies in non-banks were ignored, and so no government agency had responsibility for the industry, Dr Wilson said.
The Government should have realised there was a problem much earlier, he said.
