Cullen Michael: Reserve Bank of New Zealand Amendment Bill (No 3) — First Reading 
Cullen Michael: Reserve Bank of New Zealand Amendment Bill (No 3) — First Reading 
[Volume:644;Page:13830] 
Hon Dr MICHAEL CULLEN (Minister of Finance) 
: 
 I move  
That the Reserve Bank of New Zealand Amendment Bill (No 3) be now read a first time. 
 At the appropriate time I intend to move that this bill be referred to the Finance and Expenditure Committee for its consideration. I express my pleasure at being able to address such a crowded and excited House at this time. 
This bill which amends the Reserve Bank of New Zealand Act 1989 will require all non-bank deposit takers to be registered by the Reserve Bank and to comply with minimum prudential requirements. This will see a significant step forward for the stability of the non-bank sector in New Zealand and hopefully for the understanding of New Zealanders about their investment decisions. The bill is part of a package of measures that will strengthen regulatory oversight of our financial sector. My colleague the Minister of Commerce will address some of the other measures later in the debate. 
The work on this framework predates the current difficulties some non-bank deposit takers are facing and it is the Government’s response to the recommendations of a review that I requested from Treasury the Ministry of Economic Development and the Reserve Bank in 2005 on the regulation and performance of New Zealand’s financial institutions. So that in turn led to the review of financial products and providers. That review was aimed at strengthening the current regulatory environment in order to promote confidence and therefore increase participation in sound and efficient financial markets. This bill assists that objective by bringing the regulation of non-bank deposit takers into line with international benchmarks. It does this by requiring non-bank deposit takers to comply with minimum prudential requirements set by the Reserve Bank. Recent collapses of finance companies do however underscore the need for regulation that raises prudential standards in this sector. 
The amendments in this bill implement the first phase of the new non-bank deposit taker framework. A second bill to be introduced next year will cover the remaining amendments required to implement the registered non-bank deposit taker regime including licensing and fit and proper requirements. The bill adds a new Part 5D to the Reserve Bank of New Zealand Act to provide for the regulation of non-bank deposit takers. The power conferred on the Governor-General the Minister and the Reserve Bank under Part 5D must be exercised for the purpose of promoting the maintenance of a sound and efficient financial system or for avoiding significant damage to the financial system that could result from the failure of a non-bank deposit taker. This provision is similar to section 68 in Part 5 of the Act which deals with the registration and prudential supervision of registered banks. Non-bank deposit takers are defined to include finance companies building societies and credit unions that issue debt securities and provide financial services. 
The bill also provides for entities to be declared by regulation to be deposit takers to cover situations where some institutions that are non-bank deposit takers in substance are not caught by the definition but should appropriately be regulated as non-bank deposit takers. The legislation empowers the Reserve Bank to exempt particular deposit takers or classes of deposit takers from complying with any of the non-bank deposit taking requirements in situations where it makes no sense to capture them in the non-bank deposit taker regime. Non-bank deposit takers will continue to be subject to Securities Act requirements—we are setting this to music later—as enhanced by the review of financial products and providers reforms including the need to have a trust deed and a prospectus and investment statement. Trustees will continue to be the front-line supervisors of non-bank deposit takers and will have responsibility for enforcing most of the requirements imposed on non-bank deposit takers by the new framework. 
The bill proposes that non-bank deposit takers will be required to have a current credit rating from a rating agency approved by the Reserve Bank. The bill also includes regulation-making powers relating to the governance of risk management of non-bank deposit takers and the minimum capital a non-bank deposit taker is required to maintain. The non-bank deposit taker and the trustee must ensure that the minimal capital amount is set out in the trust deed. The bill also empowers the making of regulations for the purpose of imposing requirements that non-bank deposit takers and their trustees ensure that trustees include the capital ratio the non-bank deposit taker is required to maintain a maximum limit on exposures to third parties—that is something I think some of us might like to have in this House—and requirements relating to liquidity. In each case the bill provides that there is not only an obligation on the non-bank deposit taker and trustee to ensure that the trust deed includes what is required by the regulations but also an obligation on the non-bank deposit taker to comply with that provision in the trust deed. 
The bill enhances the ability of trustees to perform in their new role. If negotiations with the non-bank deposit taker to agree to an amendment to the trust deed in order to comply with the regulations have not been successful trustees will have the power to make the amendment. The bill creates new offences by non-bank deposit takers trustees and directors of non-bank deposit takers. The legislation gives the Reserve Bank the powers to investigate and enforce the regulatory requirements under new Part 5D. 
As the prudential responsibilities of the Reserve Bank are expanding the bill also makes changes to the institutional arrangements of the bank itself. They include amendments to the bank’s governance arrangements that will include the bank’s transparency and accountability while maintaining an appropriate degree of regulatory independence. The bill does not alter I wish to emphasise the Reserve Bank’s monetary policy functions or monetary policy independence. The bill provides that the Minister can direct the Reserve Bank to have regard to a statement of Government policy objectives relating to the financial sector functions and objectives of the Reserve Bank and to demonstrate in its statement of intent that it has done so. Ministers have the same power in respect of comparable Crown entities. 
The bill enhances the required content in the Reserve Bank’s statement of intent to also bring it into line with Crown entity requirements. In addition the Reserve Bank’s annual report will need to contain an assessment against the intentions measures and standards set out in the statement of intent. The Reserve Bank will be required to regularly assess a report to the Minister on the regulatory impacts of the policies it adopts or that apply in respect of its powers relating to prudential regulation and the oversight and designation of payment systems. 
The legislation will require that the Reserve Bank publish a financial stability report which will be provided to the Minister of Finance at least 6-monthly and presented to the House of Representatives. At present the Reserve Bank publishes such a report but is not required to do so. The financial stability report will be required to contain the information necessary to enable an assessment to be made of activities undertaken by the Reserve Bank to achieve its statutory prudential purposes. The bill also increases the Reserve Bank board’s focus on prudential functions when reviewing the performance of the Reserve Bank and the governor by making specific reference to the Reserve Bank’s prudential functions in the section that outlines the duties of the board. 
In conclusion the Reserve Bank of New Zealand Amendment Bill (No 3) broadens the ability of the Reserve Bank to promote a sound and efficient financial system while retaining the role of trustee as the front-line supervisor. It is a significant step forward in terms of updating the regulation of non-bank deposit takers and improving the prudential standards adopted by these entities and I suspect we will have unanimous support for this bill being referred to a select committee.