Crown Retail Deposit Guarantee Scheme Bill

Hon CLAYTON COSGROVE (Labour—Waimakariri) Link to this

I am delighted to again speak in this debate on clauses 1 and 2, the title and commencement. I note with interest that we are privileged to have the Minister of Defence, the Hon Wayne Mapp, in the chair. He has assured me this morning that, unlike the Minister of Finance, he will be available for exhaustive questioning, commentary, and analysis on this very important bill. I know that my whip may not appreciate this, but I am very happy to yield to the Minister if he would pick up where last night’s debate left off and answer the myriad of questions that the Opposition put up on what is a very important bill, which, I have to say, has the support of the Labour Party and, I believe, most, if not all, parties here. It is a very, very important bill. We are here under urgency because of the nature of this bill, and I see that the Leader of the House is here and that the reinforcements have arrived. The Minister of Defence is in the chair and the 25 pound howitzer is in the Chamber as well. So a military connotation is taking over this debate—the blunderbuss is on the way!

I just reiterate a number of the questions that colleagues put up last night in this debate, because we are under urgency. This is an important bill, but we fail to see the Minister of Finance—but I am sure this Minister in the chair, Wayne Mapp, will be equal to the challenge—taking up and responding to a number of important questions that the Opposition raised.

JO GOODHEW (Junior Whip—National) Link to this

I move, That the question be now put.

Hon DAVID PARKER (Labour) Link to this

I am awaiting a response from the Minister in the chair. I have made this point in the first and second reading debates on the Crown Retail Deposit Guarantee Scheme Bill, and I make it now in the debate on the title clause of the bill, about how we propose to transition out of the deposit guarantee scheme, given the distortions that it causes in the financial markets. I repeat my concern, because the current Minister in the chair, Dr Mapp, is not the Minister who was there last night. I raise with Dr Mapp the issue that is touched upon in the regulatory impact statement: the distortion that is caused between different classes of investments.

The bill says one of its objectives is to minimise those distortions. That is tantamount to an admission that it creates them. The regulatory impact statement itself highlights one of the distortions that have been caused, and that is in the finance company sector. Because some of the risk that is normally faced by depositors in finance companies is being taken away by the Crown guarantee, the amount deposited into finance companies has increased quite substantially, against a prior trend where, because of perceived risk, the amount deposited in that sector was decreasing. That is one distortion that we have caused; we have had an increase in finance company deposits.

A related but different distortion is that we have seen a flight of funds away from safer investments than traditional finance companies, such as investments in mortgage trusts. Mortgage trusts are where people invest their money in a trust vehicle. It can be a group investment fund or a unit trust under the Unit Trusts Act, and in some cases it can be a contributory mortgage. But in all those three cases, the investor is effectively investing in a first mortgage over land. The nature of investors’ security is a debt security; they are owed money. It is not nominally a debt security within the definition of the Securities Act, but it is very similar to other debt securities in that investors invest a dollar amount, it is secured—in this case, over land—and their right to repayment is the right to repayment of the capital they are investing plus the interest that they get. Effectively that is the interest paid by the mortgagors under the mortgages. That is a far more secure sort of investment than a finance company investment, yet it is not covered by this guarantee scheme. So one of the distortions we have seen under this financial guarantee is increased money going into the more risky end of the market—the finance companies—and we have seen a run on the funds invested in the mortgage trusts. They have been serious runs on funds.

We in this Committee all know that one of the two primary reasons that we have this legislation is to ensure liquidity and protect against runs on funds. Without this guarantee scheme, effectively there were concerns that there would be runs on financial institutions. We were already seeing that occur in the finance company sector, and that contagion could easily have spread to the banks. Confidence is all in financial institutions, and no financial institution can easily withstand a run on its funds. All those institutions anticipate having reasonably secure deposit books. We have a distortion being created, and we have not yet heard from the Minister about how he plans to exit from the scheme.

Through this legislation we have some new rules. A minimum credit rating of BB is required for anyone to participate in the retail deposit scheme, and that will in itself cut off some of the smaller financial institutions. That causes another distortion that we are creating here: we are preferring large institutions over small institutions by virtue of the nature of this guarantee. Again, I have a problem with that, because I think that in New Zealand we are overly reliant on a small number of very large institutions. Hyman Minsky, a now deceased American economist, has had recent accolades for his prediction of some of the things that went wrong in the recent financial crisis around the world. He believed that financial institutions, rather than being self-correcting and essentially levelling, would always participate in riskier and riskier behaviour the longer the period of stability was, and he was right about that. One of his other theories was that financial institutions should reflect the size of the economy. He believed that a small economy that had a lot of small businesses should have a large number of smaller financial intermediaries, rather than being reliant on a small number of large intermediaries. This legislation goes in the other way from that, because it gives preference to the interests of the big end of town.

Hon LIANNE DALZIEL (Labour—Christchurch East) Link to this

I want to pick up the point that my colleague David Parker was referring to and come back to the detailed regulatory impact statement, which is to be found only on the Treasury website. I repeat how disturbing I find it that the detailed analysis that this statement contains is not available to the general public by way of the Crown Retail Deposit Guarantee Scheme Bill, which is the normal place to find the full regulatory impact statement. I think that is an undesirable course of action.

I refer to a couple of matters that are in the statement. I would like the Minister of Finance to take a call to explain them. One of the matters is directly related to an issue that we were debating last night around collective investment schemes. First of all, paragraph 26 of the regulatory impact statement states that “Blanket retail deposit guarantees are generally undesirable because of the economic distortions they create.” That is exactly the point that my colleague the Hon David Parker was making. “Economic distortions include encouraging guaranteed depositors and deposit taking institutions to make riskier investment decisions since gains are privatized and losses are socialised.” This is from Treasury, which actually gets the problem that we face when we privatise the gains but socialise the losses. This has a huge distortionary impact on the market and is described as a moral hazard.

I come to paragraph 43, which states: “There is a significant degree of uncertainty associated with what could happen if the current DGS is left to expire on October 2010. This reflects uncertainty about whether and how quickly the economy will recover over the next 18 months, whether financial markets will continue to stabilize, and what will happen to asset prices. It also reflects uncertainty about the position of entities in the scheme, the extent of likely contagion resulting from the failure of any entities in the scheme, and the extent of any possible deposit flight to Australian guaranteed banks due to the mismatch of guarantee periods. The impact will also depend in a large part on depositor sentiment, which is very difficult to predict.” In the report the officials say that the banks do not think there is any risk of this flight to Australian guaranteed banks. I have to ask the Minister why we are doing this. I honestly think that some larger contribution to the debate could have been made if we had had a couple of days at the select committee, where we could have debated the detail with officials. I am not saying that we are opposed to it; in principle, we are not, and we support the passage of the bill. But we think that it is an important issue that the Minister should respond to in some detail. The strongest argument for this change is in order to match with Australia, yet the very reason why we would match with Australia is not regarded by the banks as a priority in the decision making in this area. In fact, according to the regulatory impact statement, the banks do not support the extension of this scheme.

Last night I was asking the Minister in the chair—who was the Minister of Finance, Bill English—about collective investment schemes. I said to him that these were not dealt with in detail in the regulatory impact statement. He referred me to page 20. Page 20 is one of the annexes to the regulatory impact statement. So, yes, the collective investment schemes are dealt with in this particular part of the statement. But I advise the House that the detail there does not answer the question that I raise.

Let me again read into the record what the regulatory impact statement says: “Removing this limited category of CISs from the extended DGS’s coverage would be consistent with the core coverage of the DGS.

It would also reduce one of the boundary issues that has arisen between CISs and other institutions (such as mortgage trusts)”— this was the point that my colleague the Hon David Parker was making—“with similar legal structures (but different investment approaches) that are not covered by the present DGS, and result in slightly reduced administration costs associated with managing separate deeds of guarantee. There may be some shifting of investors from CISs to guaranteed deposits, but this would be minimal.” What is that based on?

CRAIG FOSS (National—Tukituki) Link to this

I move, That the question be now put.

Hon LIANNE DALZIEL (Labour—Christchurch East) Link to this

The point I am making is about the claim that there may be some shifting of investors from collective investment schemes to guaranteed deposits, but that this would be minimal. What is that claim based on? What have the officials based that advice on? How much shifting is classified as minimal? Why are we again allowing a potential risk to our collective investment schemes, the portfolio investment entities that are all registered there at the moment, when we do not what the risk is? The statement says the risk would be minimal, but how do we know? What is the basis for it?

The statement says: “Retaining CISs in an extended DGS would not cause any particular issues, other than potentially raising again the boundary issues with non-guaranteed schemes. The extended DGS proposes excluding CISs, in order to assist with moving toward tighter and more limited coverage.” Well, that goes against the whole theory of the extension, which is to allow for an orderly transition out of the scheme. I have this terrible fear we are delaying the inevitable, because it will not be the case that all finance companies that are currently in the scheme will be able to opt into this scheme with the BB rating requirement that will be in place from October next year.

I think we are entitled to ask these questions in this Chamber when debating a bill that has been introduced under urgency, a bill that we did not see until it was laid on the Table of the House. We have been denied the opportunity for a select committee hearing, which Treasury officials themselves recommended take place for 1 to 2 days, and which would enable us to ask these questions and have a proper discussion about it. I think we have been denied the opportunity to properly scrutinise this legislation. As my colleague the Hon David Cunliffe has said on many occasions, this is only framework legislation. It will allow the Minister to extend the scheme on whatever conditions are negotiated or agreed with Cabinet. I think Parliament ought to have a greater say over this legislation.

This week is Financial Awareness Week. I am almost speechless at the way the Government celebrates the fact that a lot of investors in this country have absolutely no idea of the level of risk they are taking with their hard-earned money. The Commerce Committee is undertaking an inquiry into certain elements relating to the collapse of the finance companies. Why? Because there are gaps and, clearly, a lack of understanding of risk. The other thing we have seen is that finance companies that have failed have, almost without exception, underpriced the level of risk in order to disguise from their potential investors the level of risk they were taking with their hard-earned money. This scheme is almost saying they are off the hook for another year before they have to face up to the reality of the market in this situation.

I have some really serious concerns about the quality of the debate around this important matter. We have seen this debate deliberately shut down on many occasions so far. The Minister of Finance has taken about three calls in the entire Committee stage of this bill, and they have been very short calls, pointing me to annex 2 of the regulatory impact statement on page 20, for example, on the collective investment scheme, and basically reading out a paragraph from the regulatory impact statement. That is not the sort of quality discussion that one would expect to occur in such an important debate. I am very disappointed in the way the Government has chosen to treat this particular issue.

As I say, the Opposition is not opposed to the concept of extending the scheme. But I think we ought to have a much clearer exposition from the Government as to why the extension is a year long, why conditions have been attached to the extension, and why collective investment schemes are excluded from the ability to renew their coverage under the deposit guarantee scheme when the new one comes in. The Minister has not even discussed the issues around the content of the agreement.

STUART NASH (Labour) Link to this

I will back up a lot of what my colleagues have said around the Crown Retail Deposit Guarantee Scheme Bill. Labour supports it for a number of important reasons. The first of three main reasons relates to the fact that, at the time the retail deposit guarantee scheme was set up by the Labour Government, the world was going through a period of intense financial crisis. I mentioned that the BNZ was literally days away from putting in place its crisis management strategy plan for operating a major financial institution without the ability to raise overseas funds. That was done on a Sunday evening. I think Dr Cullen worked for 48 hours flat without sleep to get it implemented, and I think it was done a day after the Australians announced their scheme. It came in at pretty much the same time. The reason for that, as has been outlined, is that there was a belief that if the Australians had set up such a scheme and New Zealand had not, then there may be a run on funds from New Zealand banks across the Tasman, therefore necessitating the collapse of the New Zealand banking sector. We all know that would have been a complete and utter disaster for our economy.

First and foremost, the measure was undertaken to shore up the financial sector. That was vitally important. The second reason why we support this bill—and it relates to a lot of Part 2—is that a social cost is involved. It is disappointing, because I do not think the National Government has once mentioned the social benefit of this scheme.

Hon DAVID CUNLIFFE (Labour—New Lynn) Link to this

I appreciate the opportunity to take a quick call on this discussion on the bill’s title and commencement. I will pick up on a couple of themes that my colleagues have raised. My colleague Lianne Dalziel has rightly raised the issue of process and the lack of consultation, and she was very effective in that regard. I also realise that we have had some important discussion by the Hon Lianne Dalziel and the Hon David Parker around collective investment vehicles and the fact that they are excluded from the coverage of the bill.

The Labour caucus has had particular concern about the status of bonus bonds. Many hundreds of thousands of New Zealanders have bonus bonds. They are an important part of investment for many small investors—rational or otherwise. Bonus bonds are excluded because they are a form of collective investment vehicle. The analysis of the bill is that 70 percent of the underlying securities are covered through various means by the intended legislation. But none the less we considered introducing an amendment to specifically list them. However, we decided that it would do too much damage to the structure of the coverage, and we moved away from an amendment. But I say particularly to bonus-bond holders that the Labour Opposition has specifically considered their case.

AMY ADAMS (National—Selwyn) Link to this

I move, That the question be now put.