Reserve Bank of New Zealand Amendment Bill (No 3) — Second Reading 
Reserve Bank of New Zealand Amendment Bill (No 3) — Second Reading 
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Reserve Bank of New Zealand Amendment Bill (No 3) 
Second Reading 
Hon Dr MICHAEL CULLEN (Minister of Finance) 
: 
 I move  
That the Reserve Bank of New Zealand Amendment Bill (No 3) be now read a second time 
. I want to begin by thanking the members of the Finance and Expenditure Committee for their prompt handling of this bill. Some 17 submissions were received and most were supportive of the objectives of the bill. 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 would do this by establishing prudential standards and providing depositors with a clearer basis for distinguishing between lower-risk and higher-risk entities. This is a significant step forward and should provide more confidence in a sector that has clearly faced a number of challenges over the last year or so. 
One requirement that the bill imposes is the requirement to obtain a credit rating. As it will take time for deposit takers to comply with this requirement and for the Reserve Bank to recommend regulations that approve rating agencies the select committee recommended a transition period of 18 months after the commencement of the Act. The definition of deposit takers as introduced by the bill targets the substance of deposit taking to ensure the activity is captured instead of particular types of organisations. The Reserve Bank will be empowered to assess which institutions are captured on a case by case basis with a view to exempting those that might be inappropriately caught. The wide definition does place emphasis on how the exemption powers will be used. It will provide more certainty about how an exemption decision could be made. 
The select committee agreed to amend the bill to provide statutory tests that must be met before an exemption can be granted and guiding principles that the bank must follow in exercising its discretion. For example an exemption must only be granted if compliance with the bill would be unduly onerous or burdensome. In addition to granting exemptions the bill gives the Reserve Bank other discretions such as imposing terms of conditions on exemptions and recommending to the Minister of Finance that prudential regulations be made. The select committee has suggested that the principles that must be taken into account by the Reserve Bank be clearly laid out in the bill. 
One important principle is that of consistent treatment between deposit takers. These measures will provide more guidance to the Reserve Bank in its new role and a greater degree of certainty for entities affected by its decisions. The prudential regime for the non-bank sector has a range of technical components for which the Reserve Bank has the power to recommend regulations. They include credit rating details capital requirements liquidity requirements and related party lending. Because these areas are technical and detailed in nature and could evolve over time they are best imposed through regulation. Other components of the regime such as risk management and governance requirements are less technical and should be set out up front in the legislation. The select committee has therefore recommended that within these two areas specific measures be included in the bill as direct obligations on deposit takers. 
The bill creates new offences by non-bank deposit takers trustees and directors of deposit takers. The legislation gives the Reserve Bank powers to investigate and enforce the regulatory requirements under the new Part 5D. The select committee recommended providing statutory defences for deposit takers if the contravention was due to the actions or default of another person and when a deposit taker took reasonable precautions and exercised due diligence to avoid a contravention. These defences are conventional in commercial law statutes and provide a better balance to the bill. 
Given that much of the effect of the bill can only be determined once regulations are in place the select committee suggested that the regime be required to be reviewed within 5 years of commencement but with the results of the review to be reported to Parliament. This will provide members of Parliament with the opportunity to assess the regime and potentially revisit some of its features. Finally the select committee recommended a number of amendments that clarify the intent of the governance and accountability provisions in the bill including clarification as to the ability of the Minister to request policy advice from the Reserve Bank and to the requirement for the Reserve Bank to produce regulatory impact assessments of its policies. 
I would like to take this opportunity to signal my intention to introduce a Supplementary Order Paper to deal with two technical issues. One is the commencement provision for the minimum capital requirement and the other is ensuring that the Reserve Bank can request information about deposit takers from the trustees who are supervising them. This will assist the Reserve Bank in assessing both the financial system and the performance of trustees. Members I think will understand in the light of recent events that these are quite important issues at the present time. Once again I would like to thank the select committee members for the work they have undertaken on this bill. The bill has been significantly enhanced through the select committee process. It will give more confidence to the New Zealand financial sector at a crucial time throughout the developed world where the financial sector is under stress. 
Dr the Hon LOCKWOOD SMITH (National—Rodney) 
: 
 I am happy to speak to the second reading of the Reserve Bank of New Zealand Amendment Bill (No 3) because the National Opposition would say it is timely that legislation such as this is passed by the House. It is very sad to note that in recent times many ordinary Kiwis many New Zealanders who have struggled to save some of their income some of their wages and salaries over their working lives have sadly lost money in the collapse of certain financial institutions. Of course many of those financial institutions are covered by this bill. In this bill we refer to them as non-bank deposit takers and that is what most of our finance companies are. They are not banks but they certainly are deposit takers. 
It is very difficult to get perfection in this kind of legislation but I think one thing that is very important is to try to get better information out there for the public on which they can make judgments about the kind of institution that it might be appropriate for them to invest their savings in. But they need help with that and that is why this bill is so important. 
The Finance and Expenditure Committee put a lot of work into the bill and any member of the House who has read the commentary on the bill will see that the select committee has recommended a number of changes. This is new legislation. OK we have experience of the Reserve Bank regulating the banking sector but in many ways the banking sector is easier to regulate because it is more defined. We have certain trading banks and they are defined by certain characteristics. Once we start to talk about non-bank deposit takers we are talking about finance companies credit unions and so it goes on and they are rather more difficult to define. 
The first thing the select committee had to explore in some detail is how do we define non-bank deposit takers? Who should be included? Who should not be included? We can get down to some institutions to use a generic word that it really makes no sense to include in this kind of regulation. So the select committee believed it was sensible to amend the bill to add a substance test in order to exclude from these provisions persons whose business is not substantially deposit taking. People like used-car dealers can offer financing to people who purchase cars from them but clearly although they might be in the business of financing they are not deposit takers as such. So it was quite important that we clarified the definition of deposit takers used in this legislation. I think the select committee has done a reasonable job of clarifying that definition and of making sure that the Reserve Bank has the opportunity in carrying out the regulatory requirements of this legislation to exclude certain institutions from these arrangements. 
The bill as amended by the select committee now sets out some factors or principles that should guide the Reserve Bank in making decisions about any deposit takers that might be excluded from the provisions of the legislation. The select committee suggested some sensible amendments in relation to some of those matters. For example the bill as introduced required the Reserve Bank to consult when a non-bank deposit taker was to be excluded from these provisions. Obviously that is not necessary because where the Reserve Bank proposed to exclude a certain institution that institution would not object to that. I think the select committee has made that reasonably sensible. 
But then there was another range of issues that the select committee had to address. What the legislation proposes of course is that non-bank deposit takers have to get credit ratings. Not many of them have a rating at the moment. We must also appreciate that just having a credit rating does not mean they are safe places to invest one’s money. I think Hanover Finance had a BB+ credit rating did it not? Although that is not a full investment-grade credit rating to many people it seemed like a pretty good credit rating. Yet many people who put their money in there have suffered. So it is important as this Parliament passes this legislation which we all agree is an important step forward to protect New Zealand investors from being encouraged to put their life-savings into pretty shonky investment or deposit takers that New Zealanders understand that this is not a guarantee against institutions failing to perform because a credit rating on its own does not mean a guarantee against failure. We hope that the prudential supervision role that the legislation sets out for the Reserve Bank again will minimise risks but nothing makes that an absolute guarantee that New Zealand investors will not face any risk at all. 
In requiring institutions to get a credit rating I think it was really important—the Minister of Finance has already referred to this—that we recommended that the bill be amended to provide a transition period for that. At the moment of course part of the process is that the Reserve Bank has to approve the credit rating agencies and that is not completed yet. The Reserve Bank has to complete that process before the non-bank deposit takers can get their credit ratings from the agencies. So the 18-month transition period is sensible and if members look at some of the detail of the amendments they will see that where a non-bank deposit taker has not been able to get its credit rating within that 18-month transition period there is a provision for the Reserve Bank to enable the entity to carry on business while it gets its credit rating if in fact there have been difficulties around the Reserve Bank providing approved credit rating agencies and so forth. So I think the legislation provides a sensible transition to the new regulatory regime. If we look at some of the issues that the select committee worked on we will see there has been quite a sensible response to the challenges. 
Then we go on to the issues of governance and again the select committee has recommended some amendments there to make sure that institutions have at least two independent directors and that the chair of the institution is not an employee—a number of provisions to try to make sure that there is more sound and transparent governance of those institutions. If we then go through the kinds of issues we addressed we move on to things like risk management. The institutions have to have a risk management programme and again the select committee has recommended some amendments there that seem reasonably sensible in terms of the development of risk management programmes. There is again a transition period before both the governance and risk assessment requirements come into effect. 
If we take all those issues together—and let me just summarise because I do not want to take up too much of the House’s time—the National Opposition supports these moves. We are saddened by the losses suffered by ordinary Kiwis in recent months as a result of the collapse of some finance institutions. We think the amendments proposed by the select committee make this legislation more workable and I think in its current form it is fairly sensible. We look forward to seeing the Supplementary Order Papers the Minister has foreshadowed. 
CHARLES CHAUVEL (Labour) 
: 
 I am pleased to follow the member who has just resumed his seat Dr the Hon Lockwood Smith and I endorse the sentiments that he has expressed starting with the losses that ordinary New Zealanders have suffered over the last few months because of the difficulties in the finance sector. He is right in commending this legislation to the House along with the other measures that are currently being considered by the Finance and Expenditure Committee namely the financial providers and the financial advisers legislation which together form a suite of statutory protections for investors in what has frankly hitherto been an under-regulated sector particularly when we compare the level of consumer protection that exists here with that in our nearest commercially sophisticated neighbour Australia. 
The Reserve Bank of New Zealand Amendment Bill (No 3) comes in response to a review from Treasury—that was its original genesis—and the Ministry of Economic Development and the Reserve Bank of New Zealand which looked in 2005 at the regulation and performance of New Zealand financial institutions and a more recent review of financial products and providers. As I say this bill comes in response to that review. It will bring the regulation of non-bank deposit takers into line with international benchmarks. It will require those non-bank deposit takers to comply with minimum prudential requirements which will be set by the Reserve Bank of New Zealand and it is appropriate that broadly the same regime should be brought into effect as to bank and non-bank deposit takers. As far as the consumer is concerned there is little difference and it is appropriate that similar protections should exist across all sectors where there is the activity of taking deposits. 
As Dr Lockwood Smith said there is an issue around the definition of non-bank deposit takers. We have sought to address that in the Finance and Expenditure Committee’s report. We have included finance companies building societies and credit unions that issue debt securities and provide financial services. I hope that the definition will be sufficient to achieve the consumer protection ends of the legislation. 
As has also been mentioned the bill proposes that non-bank deposit takers should be required to have a current credit rating from a rating agency approved by the Reserve Bank. Of course that is not a panacea; it is not a be-all and end-all. What is required alongside that requirement are not only the other measures that are contained in the legislation which I will mention in a moment but also a general raising of the level of financial literacy on the part of New Zealanders. One of the things I think the select committee hopes is that with the advent of an institution like KiwiSaver where people have to look at what is happening with their retirement savings people will take a more active interest in what is happening with the money they have in the bank or invested for their superannuation and that over time working with Government initiatives in this area we can really lift the level of New Zealanders’ financial literacy in the same way that has occurred in Australia since compulsory superannuation came about there. 
The bill also empowers the making of regulations that require trust deeds to include a capital ratio that the non-bank deposit taker will be required to maintain a maximum limit on exposures to third parties and requirements as to liquidity and these amounts are to be set out in the trust deed. Those are the complementary measures I mentioned that along with the financial rating requirement ought to provide a suite of protection measures in this bill for consumers and really provide meaningful protection in the non-bank deposit taking sector. The bill also includes amendments to governance arrangements and they will increase transparency and accountability—again really shining the light into this sector and making sure it is cleanly governed and cleanly run for the benefit of consumers. 
It has been mentioned that the Finance and Expenditure Committee has recommended a number of changes to the legislation and I intend to speak in more detail to those changes during the Committee stage. I thank the Minister for his acknowledgment of the work done by the select committee. I think that all members of the select committee put a lot of work into ensuring that the bill that was returned to the House was the best possible bill that could come back. I think that the legislation to follow—the providers and advisers legislation—is a necessary complement to this bill to ensure that as far as the consumer of financial services is concerned there are appropriate protections. I thank the specialist adviser to the committee. He provided I think all committee members would agree very useful and sensible advice in terms of the amendments recommended to the House. I also thank the select committee staff for their invaluable assistance. It is good to hear that this legislation by the sound of it will have widespread support across the House. That is appropriate because it is a very good bill. 
TIM GROSER (National) 
: 
 National is supporting the Reserve Bank of New Zealand Amendment Bill (No 3). It is an overtly technical bill but I believe that that should not obscure the fact that it relates to something fundamentally important. 
I suspect that if we were to ask members across various different parties in the House what they thought were essential attributes for a stable society we would come up with a fairly common core of issues around the rule of law property rights democratic process freedom of press and so on and so forth. But actually the preservation of a sound financial system is absolutely central to any successful and stable society. One can see that most clearly in the absence of that condition. When I was living in Indonesia I saw many reasons why the Suharto regime might have eventually fallen but like everybody else no way did I predict that it would become a consequence of a fall in the Thai baht. So one can see the impact of financial contagion in any society that has weak financial institutions. I certainly recall when I first went to live in Jakarta it was pointed out to me that there were 250 banks with an average asset valuation of the size of a typical Westpac branch in New Zealand. So financial contagion can lead to dramatic political change and of course in some respects some very negative and oppressive regimes have been brokered in history through unsound financial systems. 
What we are debating here is very technical but fundamentally important to our own society in the long term. When we think about the two principal functions of the Reserve Bank of New Zealand—price stability as defined by Parliament and the preservation of a sound financial system—we find that this bill which is pushing out that second responsibility into the non-bank deposit taker sector makes a very serious and significant contribution to what is a very important part of any stable society. We are in a sense very fortunate in this country that we have a generally sound financial system but of course it is precisely in this sector that we have discovered recently—and in many tragic cases rather too late in terms of this legislation—what the implications are for New Zealanders who have not had that stability. 
It is worth reflecting on the fact that about 95 percent of the assets of the financial sector are in the traditional banking sector while about only 5 percent are in the finance company sector. People make a number of comments about Australian ownership of the banks but it is of little comfort to people if they lose money in a locally controlled bank. The Australian banking sector dominates the traditional banking sector but what we know is that those banks are amongst the soundest in the world out of the thousands of banks that exist. That is the bedrock point I think behind this legislation and what is quite clear is that we have gone from a situation historically in the 1960s and 1970s of excessive regulation of the banking sector through to an under-regulated non-bank deposit taking sector. I think there is some tendency sometimes in New Zealand society for us to move from one extreme to another and this is possibly another example of that. 
It is intriguing that this bill predates the meltdown in the finance sector and as other speakers have commented it is grossly unfortunate for those people who were caught up in the collapse of many of our finance companies that this is rather too late to assist them. I have always felt that the phrase “caveat emptor” in some cases although an essential principle that we have to respect is sometimes as cold as charity. Asking even reasonably economically literate New Zealanders to try to make an assessment about the financial prudence of companies in which they are investing their money is a bridge too far I think for many New Zealanders. So quite clearly we have been short of an adequate regulatory framework in the non-bank deposit taking sector and although it is a little unfortunate that we did not move more quickly in this respect at least we are now putting in place some additional and much-needed regulatory framework. 
I suppose that as we seek to introduce a sounder regulatory framework in this sector we inevitably create an incentive structure for some other sector then to emerge precisely to escape the new regulations. This is the process of financial disintermediation. I remember that when I was a young New Zealander—some rather long time ago—because of the excessive regulations around the banking sector in terms of mortgage finance people like me who were young New Zealanders at the time used to go into solicitors’ funds to try to get mortgage finance precisely because they had grown up as a source of mortgage finance because the banking sector was so heavily regulated. So it is a sort of cat and mouse game that the authorities play with the markets here. We are now moving—a little late probably—to put in a proper regulatory framework in this sector. By doing so we automatically create an incentive for some other growth in some non-regulated part of the sector and no doubt a future Parliament will have to come back to fix this up—that is the way it works. 
The essential characteristics of this bill have been pretty well described by other speakers. We know we have a regulatory framework that currently exists only for the first tier of the banking sector and we are now seeking to apply a similar regime to the second tier. Quite clearly this will include finance companies—the source of so much grief recently—but I see some very sensible changes have been introduced in the select committee process to stop the unintended capture of certain other institutions such as hire companies that accept deposits as part of their security process. I see that there is a sensible threshold limit of $10 million in assets below which this legislation will not apply and there are minimum prudential requirements around capital adequacy ratios and governance regimes and requirements that are being put into place. 
As other speakers have said although I think the whole concept of giving the non-bank deposit takers a credit rating is a sensible move forward it is very important that New Zealanders do not see this as a panacea and there have been several good examples given by previous speakers. 
The disclosure of key financial information is another important aspect of the bill and it will be pleasing to see that the Reserve Bank now has a statutory responsibility to report to the House regularly on its activities. 
All in all we support the bill. As I said it is unfortunate that it has come too late to help New Zealanders who have had savings destroyed in the meltdown of the finance companies but at least it will perhaps save some grief in the future. 
R DOUG WOOLERTON (NZ First) 
: 
 In the 2 minutes remaining I want to say that New Zealand First likewise supports the Reserve Bank of New Zealand Amendment Bill (No 3). My colleagues have talked about the bill. I want to say that it is unfortunate that the meltdown of the finance companies has come at a time when we in New Zealand across the board are trying to encourage people to look at shares and deposits rather than property. It reminds me of an article I read some time ago that made a joke out of statements of that kind. It said: “We wish New Zealanders would invest more in things other than property.” and asked why New Zealanders did that. The answer was that it was because property very rarely turns itself into a Porsche 911 overnight. That pretty much sums up what this bill is about. It is trying to give more information to people who are trying to broaden their investments. It is a tragedy that those people who have done that have in recent times in some cases lost almost all of their life-savings. 
Debate interrupted.