Inquiry launched into deposit guarantee scheme

Auditor-General Lyn Provost has confirmed she will conduct a performance audit of the government’s initial Retail Deposit Guarantee Scheme, which expires tonight having paid out nearly $1.9 billion to investors.

In a letter to Finance Minister Bill English, Ms Provost said the audit will cover the original, revised and extended scheme, which runs until the end of 2011.

The audit will include an investigation into how the scheme was implemented and managed by The Treasury.

It will assess how effectively and efficiently The Treasury:

- identified and monitored the risks to the crown, including the monitoring of South Canterbury Finance, whose collapse triggered a $1.6 billion payout;

- Identified and monitored how well the Scheme has met its objectives;

- attempted to improve the scheme; and

- explained through its disclosure of information, the purposes and functions of the scheme to parliament and the public.

The scheme was set up by the previous Labour government in 2008 to offer protection to investors from fallout of the financial crisis and consequently help financiers raise funds.

Mr English said he welcomed confirmation of the audit and expected the findings to be reported to parliament by June 30 next year.

An independent audit was "timely and appropriate" given the Crown’s payout last month to South Canterbury Finance investors, he said.

“This is certainly preferable to some kind of ill-defined and politically-motivated inquiry, which opposition parties called for in the days following South Canterbury Finance's collapse."

Meanwhile, the Treasury is expected to publish later this week a large number of documents related to South Canterbury’s membership of the scheme and events leading up to its receivership in late August.

The release of the documents follows a storm of Official Information Act requests.

Mr English said the documents “will confirm that the government and officials worked carefully and thoroughly through the issues on behalf of taxpayers.”

Evaporating fortunes, dwindling numbers
New Zealand finance companies once numbered over 100. Since May 2006 when National Finance 2000 collapsed, a total of 61 non-bank deposit taking institutionas have either fallen into receivership or frozen investor funds.

More than $8.5 billion of investor money was put at risk, over half of which has evaporated. In September 2008, in response to the global financial crisis, the government legislated a guarantee on retail deposits.

A handful that applied for and were granted an extension until December 2011.

The six institutions that have defaulted and triggered the Crown guarantee are:

South Canterbury Finance – with about $1.6 billion of principal and interest to be repaid to eligible depositors; plus a loan of $175m to cover third party lenders.

Allied Nationwide Finance – with about $130 million;

Mutual Finance – with about $9.3 million;

Rockforte Finance – with about $3.2 million;

Vision Securities – about $9.4 million;
 
Strata finance – $300,000;
 
Mascot Finance - $69.4 million

The government has made provisions in its accounts for $934 million, the bulk of which relates to South Canterbury Finance.

The Crown had largely collected about $200-$250m in fees from retail deposit scheme participants. 

Once an additional $200-$250 million from wholesale guarantee participants is collected, combined with recoveries from receivership, the government has put the net combined cost of the scheme at $300-$400 million.