By DYLAN THORNE - The Southland Times
The Government's deposit guarantee scheme could encourage people to make risky investments with finance companies, the head of a specialist online savings and investment bank said.
RaboPlus general manager Mike Heath warned investors could get caught out when the guarantee scheme was phased out in 18 months.
The deposit guarantee scheme was introduced last year to stem widespread fear and panic about the collapse of financial institutions worldwide.
Initially aimed at banks in New Zealand, the guarantee was later extended to other non-bank deposit-takers following complaints it would drain money away from finance sector parties.
There was widespread concern among banks at the inclusion of higher-risk finance companies in the scheme because they could claim full taxpayer protection while offering higher returns than banks.
Mr Heath said a survey by his bank in 2007 showed 70 per cent of people felt return on investment was the first thing they considered when assessing an investment. Only 30 per cent looked at risk.
"That's despite the fact finance companies had been falling over, people just weren't assessing the risk versus return.
"In 2008 things changed and the No1 consideration was riskiness. The sad thing was that took 18 months and a lot of lost money before people realised they should be looking at the riskiness of investment."
The concern now was that people would again consider returns over risk because of the government guarantee scheme, Mr Heath said
"People are saying, `Why do I have to worry about riskiness when I can get back to 8-10 per cent returns because the Government is going to underwrite it?'," he said.
There was a danger investors would decide to draw their money out when the guarantee scheme ended and this could result in the closure of more finance companies and more people losing money.
"Even with the guarantee scheme, people need to be looking at the fundamentals the history of the institution."
The Government is to review the criteria for finance companies entering the taxpayer-funded deposit guarantee scheme after the bailout of investors in Mascot Finance.
Timaru-based Mascot became the first lender to receive taxpayer funding since the Reserve Bank deposit guarantee scheme was introduced late last year.
The Treasury confirmed on Monday that Mascot's 2550 investors would get all of their $70 million in deposits after the company went into receivership.