Our advice

• Go to the bank - bank on-call accounts are a much safer option. Why take the risk when you can have on-call funds with much more security and a good rate of return?
   
• Read the prospectus and the investment statement - the good or bad news is always in there somewhere. It may pay to start with the small print at the back rather than the glossy pictures up front. If you're having trouble understanding the documents, seek advice from a financial adviser.
   
• Find a reliable financial adviser - we recommend you use an adviser who charges a set fee or hourly rate, rather than one who earns a commission.
   
• Check the security behind your secured investment - check the quality of the finance company's loans.
   
• Avoid concentration of risk - before you invest, make sure you know exactly what the finance company is doing with your money. Look for a spread of investments (including property, consumer finance and others). Also look for lending that is not concentrated on one borrower or business, especially if it is a related party.
   
• Check the interest rate risk - a high return doesn't make up for the risk. Be wary of companies with lower interest rates which seem to be risky as well.
   
• Look for flexibility - with fixed-term investments you can't withdraw your money until the end of the term, even if the finance company's financial position deteriorates. A bank on-call online account is a better option but has a lower return.
   
• Get accurate rate information - for up-to-date term-investment rates see Term deposits.

Ramping up the regulations

We think it's high time that the finance company sector was cleaned up. Changes to strengthen existing regulations were proposed in the recent Review of Financial Products and Providers (RFPP), and they're now underway.

The trouble is some of them won't happen until 2010, although compulsory ratings and a few other requirements will come into force earlier. Commerce Minister Lianne Dalziel recently fast-tracked others - such as a review of trust deeds, a public information campaign about risk and return, and implementation of parts of the RFPP ahead of schedule.

Some of the proposed changes include mandatory credit ratings from ratings agencies approved by the Reserve Bank, licensing of finance companies (and building societies and other deposit takers) by the Reserve Bank, minimum capital of $2 million, restrictions on related party lending, and fit and proper requirements for directors and senior managers of these companies.

We'll see the first round of these regulations come in either late next year or in 2009. We made a submission to the RFFP in support of mandatory credit ratings, a consumer disputes-resolution process with real teeth, and regulation by the Reserve Bank.

More information

• Australian Securities and Investments Commission: www.asic.gov.au
• Chris Lee: www.chrislee.co.nz
• Fitch Ratings: www.fitchratings.com.au
• FundSource: www.fundsource.co.nz
• Moody's Investors Service: www.moodys.com.au
• NationalBusiness Review: www.nbr.co.nz
• New Zealand Companies Office: www.companies.govt.nz
• New Zealand Insolvency and Trustee Service: www.insolvency.govt.nz
• New Zealand Securities Commission: www.seccom.govt.nz
• Standard & Poor's: www.standardandpoors.com.au
• Stuff: www.stuff.co.nz
• The New Zealand Herald: www.nzherald.co.nz
• Trustee Corporations Association: www.tca.org.nz

Report by Rachael Bowie