A Failure of Stewardship on All Sides – The Finance Companies Debacle in New Zealand

Abstract

This article represents an analysis on the collapse of a large number of finance companies in New Zealand from 2008 to 2012. It identified a number of failures of stewardship by the board of directors, corporate trustees and the Securities Commission. The paper traces the root of the problem and the government's response to a lax regulatory regime that precipitates the crisis. There were notably similarities to the toxic mortgage crisis in USA. The root cause lies in excessive greed on the part of investors and financial advisors. Investors were chasing high income and so are the financial advisers who were given high commissions (from 0.5% to 2% of amount invested) by finance companies for investing client's money in them. This gave them huge incentives to put most of their client's money into finance companies, exposing investors to high risk that they could ill-afford. An analysis of the government's response indicates that financial reforms to prevent a similar crisis were swiftly implemented following a public outcry but there are still some lingering weaknesses. The lasting impact of the finance companies debacle to this day - investors remain extremely cautious to put their money in finance companies. The well-run reputable finance companies have been tarred in investor's mind by the same brush as poorly run, fallen companies where governance fell by the wayside. This was a preventable debacle which had lasted to this day.