Smith Lockwood: Reserve Bank of New Zealand Amendment Bill (No 3) — Second Reading 
Smith Lockwood: Reserve Bank of New Zealand Amendment Bill (No 3) — Second Reading 
[Volume:649;Page:17964] 
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.