Stories of NZ enterprise success
This is the fifth article in major eight-part NZ Management series: Stories of NZ enterprise success. Leading NZ business journalists Nick Grant and Vicki Jayne conduct sector-by-sector review of the underlying drivers of success in key parts of New Zealand’s economy.
Next month: retail and wholesale.
For the New Zealand finance sector, the past decade has seen both the best and the worst of times. Until the advent of the global financial crisis, which king-hit our economy in 2008, everything seemed to be going gangbusters. Since then, of course, performance has been mixed.
In the context of what’s now widely acknowledged as the worst financial crisis since the Great Depression, Deloitte enterprise risk services partner Richard Kirkland cautions that headline financial figures don’t necessarily provide an indication of underlying performance.
An example? perusal of Deloitte/Management magazine Top 200 Awards figures shows that while Westpac’s total assets grew from $39.96 billion in 2004 to $72.78 billion in 2011, the rate of growth has slowed, with last year’s result 0.9 percent down on 2010’s. Meanwhile, IAG’s total assets have grown in mainly slow and steady manner, from $1.62 billion in 2004 to tad under $2.07 billion.
In general terms, New Zealand’s finance sector has weathered the storm about as well as could be expected.
“Yet, were it not for events like the global financial crisis, you’d never really know what your robustness or capability is,” says Kirkland. “We’re in the fortunate position of having come through that and even been able to see it as learning experience, as opposed to one that completely wiped out our balance sheet.”
So what have we learnt? As far as our banks go, the past few years have provided an opportunity to stop worrying about and learn to love – or at least live with – the fact they’re mostly Australian.
“We have an advantage in having large number of Australian banks,” notes Peter Neilson, CEO of the Financial Services Council (FSC). “If they’d been Austrian, American or UK banks we would have had bigger problem. Because the banks here and in Australia did not get into securitisation of mortgages, were still asking the question, ‘can you pay this back and what is the state of the house?’ – were keeping that documentation and keeping the risk on their own balance sheet – we didn’t have the foreclosure crisis that occurred in the US and other places.”
It’s thanks to the banks’ prudent approach, he says, that New Zealand companies’ capital requirements are currently well catered for. “The only gap in our marketplace is development capital for companies with huge potential but no positive cashflow available for, say, the next three to five years.”
While insurance companies were navigating themselves through the GFC relatively well, Kirkland says it’s easy to understand why many insurers were caught short by the Christchurch earthquakes.
“It’s just part of our mental heuristics. Nothing happens for decades and decades and we get complacent. That’s human. Then all of sudden we’re starkly reminded of exactly what the risks are. Now being humble and vigilant – and contemplating such stressful scenarios in way that in the past may have been pooh-poohed – is pretty much reality.”
While noting there were “very visible” finance company failures during the period, Financial Markets Authority CEO Sean Hughes has been at pains to point out “those collapses in the finance company sector were very small part of the total fundraising opportunities available to New Zealanders throughout the ’90s and into the last decade”.
And, according to Tower Investments CEO Sam Stubbs, although some of the collapses have created the impression the finance sector is the preserve of “rogues and vagabonds”, it’s vital to remember two things.
“The vast majority of people in the business are just trying to earn reasonable living and doing it in proper way. And it’s easy to underestimate the impact of the global financial crisis. The tide was going out on the entire industry; in fact the entire world.”
Kirkland says issues underlying the collapses are self-evident in hindsight: failure of governance and risk management, including “the whole issue of related parties, the money-go-round and lack of independence”, and thin capitalisation.
Give me rehab
Even though factors beyond the control of New Zealand entities created many of the finance sector’s current challenges, the public’s perception of the sector remains jaundiced. It’s an attitude with which Stubbs has some sympathy.
“There’s been big crisis of confidence in the savings and investment sector that goes right back to the ’87 crash,” he says. “And the industry hasn’t given investors any particular reason to feel positive about it up until the advent of Kiwisaver. That’s surpassed all expectations, which were pretty low because of people’s opinion of the industry. So there’s been bit of resurrection of confidence in that one product but not in the industry as whole.”
The local finance sector’s recognition of the need to rehabilitate its image was key driver in last year’s decision by the Investment Savings and Insurance Association of New Zealand to recast itself as the Financial Services Council and refocus its activities around more consumer-centric model. (See box story “First fruits”.)
Neilson says his members’ organisations didn’t collapse. “But given that many people don’t know the difference between bank, finance company or stockbroker, you can’t just stand aside from that. You’ve got to accept that perception is reality, deal with that perception and start turning things around quite dramatically.
“That includes saying, ‘We’re clearly not in favour of having crooks in the industry’, and ‘we’re clearly in favour of making sure consumers are well informed and understand what they’re getting’.”
He acknowledges this has implications for financial literacy. “And we’ve got to be able to take view and lead on issues of public importance that are of interest to our members. We can’t expect others to do that for us.”
Throw in rule book?
A related consequence of the GFC is the (sometimes grudging) acknowledgement that regulation isn’t undesirable by definition. That said, there’s hardly an abundance of appetite for it. Indeed, there’s been push back against regulations already enacted. This is an attitude with which Financial Markets Authority’s (FMA) Sean Hughes has expressed some impatience.
“For goodness sakes, we’re only 12 months old, and the review of the Securities Act hasn’t even been completed yet. So it’s little early to be calling for paring back of regulation and regulatory powers,” Hughes noted in June.
“When we compare the FMA, and the Reserve Bank for that matter, with the sorts of power, responsibilities and roles that peer regulators occupy overseas … I can confidently say that there’s not an excess of regulation in New Zealand.”
The finance sector is keen for it to stay that way. While there’s acceptance of the need for some statutory oversight, says Neilson, “it’s also obviously tempered by the view that it’s got to be effective and the best way of achieving the solution you want. For example, can we make sure the product information provided to consumers is accessible and that we don’t just end up writing longer and longer documents that virtually nobody will read? shorter amount of concise information that can be relied upon and is comparable is probably much more valuable than endlessly extending the requirements for reporting and disclosure.”
Stubbs acknowledges he’s glaring exception in his enthusiasm for regulation.
“Look, it’s been tough to enact and expensive, and everyone’s favourite whinge is how much regulation there is,” Stubbs says, “but at the end of the day we were operating in pretty loose environment before the GFC.
“Investment bankers like to use the phrase ‘expe
