KPMG financial services head Godfrey Boyce said many of the banks and finance companies that had been approved under the scheme reported that they were awash with money as investors moved funds from financial institutions whose products had not been guaranteed.
"The key issue for investors and a number of financial institutions is the two-year term of the retail deposit guarantee and, in particular, what happens at the end of the period.
"Will the scheme be extended to three years to match the Australian guarantee scheme or will it mature and investors suddenly have to reassess the relative riskiness of the entity holding their hard-earned money?"From the Government's perspective, as the effective underwriter of the New Zealand banking system, there was a huge incentive to identify a viable transition plan for exiting the scheme, he said.
The overriding objective in the transition plan must be to remove the extent of the distortions created by the existing scheme in terms of risk and reward.
"We also believe that a key element should be maintaining consistency with the Australian scheme."
Mr Boyce's comments came with the launch of the annual KPMG Financial Institutions Performance Survey.
The retail scheme guaranteed that the Crown would repay depositors their money if it matured within the two-year guarantee period.
However, before the guarantee was put in place, most bank depositors had very few concerns about the safety of their bank and the guarantee arrived as an unexpected bonus, he said.
It also arrived as an unexpected cost for the banks with total retail deposits greater than $5 billion.
For investors in finance companies, where there were real concerns over the safety of their money, the guarantee had brought huge relief.
Many investors had exposure to other finance companies that had failed.
"Accordingly, the beneficiaries of the retail deposit guarantee were the weaker financial institutions and the retail customers."
The uncertainty about the future of the scheme was reflected also in how banks and finance companies were deploying those funds, with both entities appearing to be lending over a similar timeframe to the scheme's lifetime.
Mr Boyce said there was likely to be another series of winners and losers and the losers could yet be finance companies, if they could not stabilise their businesses before the end of the guarantee scheme.
"Investors would be wise to think past October 12, 2010, when deciding which Crown guaranteed products to invest in."
The underlying issue in the finance company had been, and would continue to be, scale.
The consequence of the low barriers to entry and the resultant number of small finance companies was poor management and light, low-cost regulation, he said.
Times were changing, with the Reserve Bank announcing that non-bank deposit takers were required to have a credit rating by March 31 next year.
They must also adhere to new regulations to be introduced over the next 12 months.
"Rationalisation will occur. Some companies will exit the industry while others will seek to merge or acquire other finance companies," Mr Boyce said.
The number of finance companies could ultimately reduce to no more than 15, with critical mass likely to be total assets of about $500 million.
