Hon SHANE JONES (Minister for Building and Construction) Link to this
I move, That the Reserve Bank of New Zealand Amendment Bill (No 3) be now read a third time. Tēnā koe, Mr Assistant Speaker, tēnā tātou katoa. E te mātāmua e Winitana, kia ora.
[Greetings to you, Mr Assistant Speaker, and to all of us. Greetings to you, Winston, the elder statesman.]
This bill establishes a framework for the regulation of non-bank deposit takers, with the aim of promoting a sound and an efficient financial system. The bill will do this by establishing prudential standards and providing depositors with a clearer basis for distinguishing between lower risk and higher risk entities. The House has already spent quite some time on this bill this morning, so I do not plan to go back over ground that has been well traversed. However, I think it is important to note that this legislation is a significant step forward and should provide more confidence in a sector that has faced a number of challenges over the last year or so. It complements some important work that is being undertaken by the Minister of Commerce, the Hon Lianne Dalziel. This is important legislation, which has broad support from the House.
I commend the bill to the House.
TIM GROSER (National) Link to this
In the course of the discussion around the Reserve Bank of New Zealand Amendment Bill (No 3) over the last few months, one of New Zealand’s experts suggested to me that the position of the Reserve Bank is a little like that of a parking attendant who has a closed circuit television trained on a number of different levels in a parking building, and whose responsibility it is to make sure that everything is tidy and safe. From time to time the regulator—in that case, the parking attendant—will look through and see something slightly dodgy going on at one level of the parking building, which justifies his or her zeroing in and trying to respond in a policy sense to it. Most of the time, it is a sort of cat-and-mouse game. I think the cat wins most of the time, but occasionally the mouse may win.
That is an elaborate way of describing the process that goes on in any financial system. The Government of the day will regulate one part of the financial system, thereby putting into place, almost automatically, an incentive on the part of other operators to try to lower their costs by getting around the regulatory frameworks that the Government has just created and creating a new niche in the market. So we have a situation here in which we have, I think, a very sound regulatory framework for the banking sector of New Zealand, as defined very precisely in New Zealand law, and any institution that wishes to carry the title “bank” in its name, as my colleague Mr Foss pointed out during the various stages of this bill, has a legislative requirement to conform to the very technical and demanding provisions relating to banks. But, by definition, we have created in the past an incentive structure for a non-bank deposit taker sector to emerge, and it is now quite apparent that the light regulatory frameworks that have governed that sector are inadequate. The cat is catching up with the mice again.
Unfortunately I am quite confident that a future Parliament, at some stage, will have to do exactly the same tidying-up effort as this one. As soon as one loophole is closed, by definition that opens the opportunity to game the system and create the opportunity for new loopholes. However, that is the nature of the process, and in this bill Parliament is solidly behind the effort to try to improve the non-bank financial sector.
The reasons for that, I think, have been well traversed. Amongst the many things that make up a sound society, the rule of law, property rights, an independent press, and a sound financial system are clearly of central importance to a well-functioning society. We have learnt, of course, about the importance of the financial system from Adam Smith onwards. He said that when two or three merchants gather together, it is usually for the purpose of deceiving the public, so the very founder of the whole free-market philosophy still accepted that a free market needed to have appropriate regulatory frameworks put around it. There is no more important sector than the bank and the non-bank financial sector in which to ensure that we do have an appropriate regulatory framework. Unfortunately, I suspect that we will not ever overcome the old saying that a fool is very quickly parted from his or her money, but we at least can minimise some of the risk around that through appropriate regulation.
We have here in the bill, I think, a pretty sound framework. My understanding is that the Finance and Expenditure Committee—I was not part of its process—has had access to some excellent international-quality advice, and I think that the end result will ensure that as we move now to regulate beyond the first tier of the financial sector, the banking sector, into the second tier, we have a structure that will provide a robust framework, looking forward. Obviously, we are looking at only the major institutions here in the sector. There is a licensing threshold—from memory, it is around $10 million—that an institution has to meet before this quite demanding framework comes into play. And then, as we have discussed in the various stages of the bill, there are minimum capital adequacy ratios and governance requirements that need to be met. Quite a lot of bespoke engineering has been going on in this bill—for example, in respect of building societies. It is carefully defined in the bill that building societies are not themselves operator banks. There are quite specific governance structures that reflect the reality of a building society.
We have had a very serious look at the two opposing sides of the argument in respect of credit ratings. On the one hand I think there has been widespread recognition amongst members that credit ratings are not a panacea. My colleague Chris Tremain pointed out that the most recently collapsed firm, I think, Hanover Finance, was one of the non-bank deposit takers that had actually found it in its own interest to go out and get a credit rating. But that did not stop Hanover Finance falling over. I think members have been aware that, in reality, there is a bit of a moral hazard around that issue. The public may interpret it that if a company has an international credit rating under the provisions of this legislation, that somehow takes risk out of the equation. Well, the bill has done what it can—quite explicitly, in fact, in its principles—to make it clear that that is not the intent of the bill. The legislation probably will be misread at some future point, but the House has done what it can to lay down the realities. At the end of the day we are into risk minimisation, not risk elimination, on this issue. So on balance, although there was a strong argument against credit ratings, the bill has come out in favour of them for the non-bank financial deposit taking sector.
There is a whole series of provisions around financial disclosure, including some provisions we have just debated in respect of the bank’s own legislative requirements and in respect of its supervisory role, in terms of putting information before a narrow group, a group of international and domestic experts, who do need access to information of a highly technical nature in order to make an informed judgment about the soundness of the system. I am sure that the improved reporting procedure across various aspects of the bank’s responsibilities will further enhance the financial stability of this country.
To sum up by referring to the bigger picture, I think we all understand that although this bill is deeply technical, the soundness of the financial system is of central importance to this country. We have taken a beating in the non-bank financial sector recently, but the majority of New Zealanders have had the protection of a very sound system, which is one of the world’s best systems. It has been put under pressure, obviously, as the effects of the subprime crisis have worked their way through the system. I think there are some improvements here. I am sure this is not the last word, for the incentive reasons I have tried to explain. The process of financial disintermediation is an ongoing process, and we will have to deal with it again. But I do think New Zealanders should be confident that we are going in the right direction.
R DOUG WOOLERTON (NZ First) Link to this
New Zealand First wholeheartedly supports the Reserve Bank of New Zealand Amendment Bill (No 3) and its intentions. To follow on from Mr Groser, I say that we absolutely support the free market, even though we sometimes criticise aspects of it. We recognise that regulation is needed to give confidence, because this bill, apart from anything else, is about confidence. If we have a situation where those with the money are reluctant to lend it on to those who need it, then that will stifle business and stifle the growth of this country. This bill will ensure that that does not happen, by putting in place some light regulations around that area.
Speaking personally, I am one of those who are criticised in this country. My family, coming from farming stock, like to be able to see, touch, and walk over their assets rather than have somebody look after them. We have a stockbroker in the family by marriage, and he is far wealthier than the rest of us, so maybe that proves something.
I think that credit ratings for the non-banking sector, which this bill brings into play, are important. I am in agreement with Mr Groser that it would be wrong for that sector to give the general public the idea that there was no risk and that they could rely absolutely on those ratings. However, it is another step forward in terms of supplying more information to the public. We applaud that and think it is long overdue. If we have a situation where confidence goes down the tubes, we will have a country that forever has a stop-start economy. We would not like to see that happen. One of the previous speakers spoke about this aspect of the financial sector being mainly New Zealand - owned. I just want to say that we should not take anything from that, apart from the fact that there has been less regulation in this area than in others.
New Zealand First looks forward to the day when more banks, as opposed to the second tier of financial institutions, are owned by New Zealanders. We would like to see our first tier of banking institutions owned by New Zealanders, and we believe they could run them with aplomb, dignity, and absolute surety, just as they do with Kiwibank and the Taranaki savings bank. The banks can make sure their depositors do not lose out.
New Zealand First is keen to see the Reserve Bank of New Zealand Amendment Bill (No 3) progress, so I will not take up any more time of the House. I say again that New Zealand First enthusiastically supports the passage of this bill.
CRAIG FOSS (National—Tukituki) Link to this
I rise to speak on the Reserve Bank of New Zealand Amendment Bill (No 3) for the last time. We are up to the third reading, and I have already covered many of the points that I and my party have been concerned about.
I acknowledge the previous speakers; I think we are pretty much all on the same page. The bill is quite technical. It is about my field—finance. The bill says a lot about the need for many New Zealanders, or for New Zealand per se, to have a better understanding of all things financial. We have our house and we have our income, but sometimes some of the biggest risks we take are financial risks, and many of us are not fully aware of the underlying risks we take.
For example, we see advertisements for investments over 3 months, 6 months, 1 year, etc., and underneath we see the word “Terms”. Those terms may state that the deposit is guaranteed by first debenture, or guaranteed by so-and-so, or has a triple B rating from some outfit we have never heard of. If we are not in the finance sector, or if we do not have an awareness of it, then it all sounds legitimate, but it is quite deceptive. That is one of the reasons why the National Party is voting for this bill and for the other bills I alluded to earlier—the Financial Advisers Bill and the Financial Service Providers (Registration and Dispute Resolution) Bill. When the report of the Finance and Expenditure Committee on the inquiry into monetary policy comes out, I am sure we will see a familiar theme along those lines—from the National Party, at least.
I point out that if, for example, a non-bank financial institution states that it is taking deposits and that they are guaranteed by person B, that sounds great to a lot of people, but it all depends on the integrity of person B. Effectively, the depositor is lending money to person B, not to the headline institution with the nice, flashy brochure that is doing a roadshow around town. Once these prudential declarations have come out and the frameworks are in place, and after the initial hiccup or two that is bound to happen, then, at least, what is at risk—a very important term—will be exposed to daylight. There is nothing like a bit of daylight, particularly in relation to finance, to make sure everything is clean and certain.
I reiterate what I said earlier: the mission of this bill, which, I think, Mr Groser alluded to, is not to take away risk but to declare fairly and transparently the actual risk being taken by, first, the depositor and, second, the institution taking the deposits. This bill is not retrospective, by the way, so, unfortunately, many of the difficulties we are having with many finance companies will not be fixed by it, but, hopefully, at least it will provide a platform and a framework that will decrease the number of such events in the future. It would be very naive to say we will not see a repeat of those failures in the future. It is very important that what is called the “funding risk” is transparent. As I said earlier, the Serious Fraud Office and other agencies, with all their powers, are looking at some of the institutions that have allegedly misled depositors—the public. Under this legislation, some of the related-party transactions would have come out in the wash, in the various declarations.
Some institutions have failed because of dubious behaviour, which the authorities are looking into—and all speed to them, and I hope those people who have misled the public get their comeuppance—but other institutions are suffering because of the scarcity of capital, the scarcity of committed funding against whatever assets they have. In fact, some institutions have frozen funds in order to secure their assets. Interestingly, some institutions have frozen only withdrawals in excess of a million dollars. They have got a bit of grief for doing that, but they are trying to protect their smaller depositors, because the larger institutions that have on-deposited to them, if you like, have moneys in excess of a million dollars. The result is the small investors are quite OK and can withdraw funds. Those institutions argue that the asset—the building, the apartment block, or whatever it is—will still be there in 5 or 10 years’ time, and they just need to taihoa and to get themselves through this trough.
That does not mean much to someone who is suffering at the moment, but my point is those institutions have a funding issue and a funding crisis, and that would have been apparent and would have been declared under the capital ratios that this bill brings out. As long as it is declared and is apparent to everyone, then there is no problem at all. I think most parties would agree with that.
The legislation has been tidied up a lot on its way through the House. My main concern has been the various holes in the legislation. The extreme, almost absurd, example in earlier drafts of the bill was the possible politicisation of monetary policy in New Zealand in so far as non-bank financial deposit takers are concerned. As we spoke about earlier, the people who borrow a lot of funding off these institutions are very, very vulnerable. They will be looking for somewhere to get credit. That is one point, and the select committee’s inquiry into monetary policy may come up with a similar theme. Hopefully, that report is not too far away.
One thing that was not mentioned in the Committee stage was an obvious change that the Finance and Expenditure Committee made to the definition of “deposit taker”. The commentary on the bill states that the committee recommended that the “definition be extended so that a person who had offered debt securities to the public that remained unpaid could be subject to the regime.” That was a very important point. If an institution advertised for investments, and if something untoward happened to it between someone committing to send a deposit to it and the funds actually arriving, under the bill as originally drafted only funds that had already arrived would have been looked after. Of course, we are talking about intent here, and if there is an intent to mislead or not show as much information as an institution should in order to be fair and transparent, then I say well done to the committee and the officials for picking that up, and for many of the other improvements to the bill.
I spoke before at length about the various capital adequacy bits and pieces, and I also alluded to my interest in the Reserve Bank’s own books and balance sheets. It is quite interesting, in that it is very difficult to go and look at the Reserve Bank’s books. We cannot go via the Auditor-General; there has to be an independent auditor, and we have to go via that organisation. That is an interesting challenge for us; I am spending a bit of time on working out how to get that one put before various committees, etc.
Finally, I acknowledge the various speakers and the Minister in charge of this bill and the other two bills that the National Party is voting for. The bills set up a more transparent, viable framework. They are good for New Zealand, but we have to make sure that we are not skewing the system in favour of, or disfavouring, one part of the sector. There is an internationalised, global financial system. New Zealand gets its capital, its funds, from elsewhere, from outside our borders. We do not fund domestically, so we should say thanks to the Japanese housewife, etc. So we have to make sure that whatever we do in this bill, and whatever we do prudentially and in and around our central bank, does not politicise in any way the operation of our regulatory body—our central bank—and does not put us out of step with the other partners and parties we deal with around the globe.
Thank you, Mr Deputy Speaker. I have enjoyed speaking on this bill, and I thank the earlier speakers.
SUE MORONEY (Labour) Link to this
It is my pleasure to take a short call on the third reading of the Reserve Bank of New Zealand Amendment Bill (No 3). This bill establishes a framework for the regulation of non-bank deposit takers, with the aim of promoting a sound and efficient financial system. The bill also promotes a sound and efficient financial sector in which the public has confidence. It will increase the public’s confidence in the professionalism and the integrity of the advisers, so it is very timely from that perspective.
This bill is part of the largest-ever reform of the non-bank finance sector, and it has been conducted with wide input from, and the support of, that industry. It also promotes the development of a more consistent regulatory framework for financial services, and coupled with the advent of KiwiSaver it will promote a stronger savings culture and encourage greater levels of investment. This issue was well traversed with the previous bill passed by the House, the Employment Relations (Breaks and Infant Feeding) Amendment Bill. We want to ensure that we shift from the credit card - type culture that has developed here in New Zealand to a stronger savings culture, and this bill will aid and abet that process. Thank you.
CHRIS TREMAIN (National—Napier) Link to this
National will be supporting the Reserve Bank of New Zealand Amendment Bill (No 3). In the Committee stage debate on Part 2 we discussed the financial stability reports and some changes around them. It is on that note that I wish to start my debate in the third reading, and refer to page 30 of the financial stability report presented in May 2008 that lists the financial companies that have gone into receivership in the last couple of years. The total number of financial companies in receivership or in moratorium relates to $1.925 billion in deposited funds. That is a significant amount of this country’s money, earned by hard-working Kiwis. The companies in the $100 million - plus category are Provincial Finance, $300 million; Bridgecorp, $459 million; Nathans Finance, $149 million; Capital + Merchant Finance, $187 million; Lombard Group, $127 million; Geneva Finance, $141 million; and MFS Boston, $319 million. All in all, these total $1.295 billion. That is justifiable reason to be standing here debating this legislation today and taking it through its third reading, and that is why National supports the bill.
The bill does not cover all the companies that have gone into receivership or into moratorium during the credit crisis that has been in place. There are companies like Blue Chip New Zealand, property investment development companies, that many New Zealanders have suffered at the hands of. I can talk only about my own electorate of Napier, where a number of people who have come into my office had invested money with Blue Chip and bought not just one but two investment apartments, using their home as security. Unfortunately, they will lose their home as a result of that investment decision.
This legislation will not fix that, but it will add some more prudential supervision to those second-tier finance companies. Although the bill will not fix it entirely, hopefully it will provide a high level of scrutiny and more security to New Zealand investors in those second-tier companies. If we go back 2 years and look at the balance sheets of those companies, most of them were in pretty good shape then. The problem was that when the credit crunch came, many people got the jitters. These companies had borrowed from depositors, short term, and had lent long term, and all of a sudden the investors wanted to withdraw their funds from these companies. They were faced with not having the strength in their balance sheets to be able to sustain a run on their funds, and that put them into a difficult position.
Although the prudential requirements from the Reserve Bank that will be implemented by this bill may improve the balance sheet requirements, in a credit crunch there will still be times when it will be difficult for these companies to stop a run on their funds, so I do not see how we can overcome that problem in all situations.
The bill introduces a new regulatory framework for non-bank deposit takers. I have canvassed that during the Committee stage today and I will not go into it in any more detail than is necessary. I just want to say that although the bill does add a higher level of prudential requirement to second-tier deposit takers, it will not solve all the problems in that area.
Under the new arrangements, the Reserve Bank’s role will be to license deposit takers, to develop and enforce minimum prudential and governance requirements, and to apply credit-rating requirements. Trustee corporations will continue to be the front-line supervisors of deposit takers. There will always be a risk in any investment, and it is important that that is understood by all consumers. Take, for instance, Bridgecorp with a credit rating of BB+. This business, to all intents and purposes, had an investment rating, yet it still went into receivership. Although we will introduce credit ratings across the second-tier financial sector, it will be important that a strong education programme follows so that consumers out there understand, firstly, what the credit ratings mean, and, secondly, that a credit rating does not guarantee that their funds will be safe 100 percent of the time; they need to understand that.
This new bill is, however, a means by which New Zealand can add more checks and balances on non-bank deposit takers to provide depositors with another level of security. I will say, lastly, that this will not reduce or remove all risk from the equation. There will always still be a risk at this level, and that must be taken into account at all times. Thank you, Mr Deputy Speaker.