Cullen Michael: Reserve Bank of New Zealand Amendment Bill — Second Reading 
Cullen Michael: Reserve Bank of New Zealand Amendment Bill — Second Reading 
[Volume:610;Page:7601] 
Hon Dr MICHAEL CULLEN (Minister of Finance) 
: 
 I move  
That the Reserve Bank of New Zealand Amendment Bill be now read a second time 
. This bill makes some changes to the corporate governance arrangements for the Reserve Bank and to the financial system oversight provisions administered by the bank. Part III of the principal Act deals with the Government’s arrangements for the Reserve Bank. The proposed changes to Part III arise from the review of monetary policy conducted in 2001 and implement the Government’s decisions arising from that review. The most significant change is the removal of the governor as chairperson of the Reserve Bank board and his or her replacement by a non-executive chairperson. The bill provides that the fellow non-executive directors elect the chairperson. That change brings the Reserve Bank into line with standard governance procedures. Other significant changes comprise the removal of the deputy governor from the board and requiring the board to publish an annual report setting out its assessment of the performance of the governor and the bank. The amendments are designed to give prominence and focus to the board’s role and to strengthen the directors’ accountability for the performance of their duties. 
Part IV of the principal Act regulates the use of the words “bank” “banker” and “banking”. That part of the principal Act has the objective of preventing entities that are not registered banks from passing themselves off as such and thereby misleading the public as to their nature and financial standing. The current wording of the restrictions on the use of bank names is too narrow and the scope of the exemption to the restrictions is too wide. The result is that it is relatively easy for entities that are not registered banks to use names that suggest they are banks or to use the restricted words in advertising in a manner that could give the impression they are registered banks. 
Part V of the principal Act deals with the registration of banks the supervision of banks and the management of potential or actual bank failures. The objective of that part of the principal Act is to promote the maintenance of a sound and efficient financial system so as to avoid the significant damage to the financial system that could result from the collapse of a registered bank. A new Part VB inserted by clause 42 of the bill clarifies and makes explicit the Reserve Bank’s oversight interest and responsibility in relation to the payment system in New Zealand. An effective payment system is crucial to the maintenance of a sound financial system and at present the Reserve Bank has no formal responsibility in that area. The bank’s oversight has been conducted informally. 
The bill was reported back from the Finance and Expenditure Committee which considered a number of submissions and recommended some amendments including the addition of a new part to the bill. I want to record my thanks to the committee for the valuable work it has done on the bill—of course assisted in this case by the expert advice of the former Reserve Bank governor! That is an unusual situation on this kind of legislation. 
Lindsay Tisch 
: We need the help. 
Hon Dr MICHAEL CULLEN 
: As long as he remembers that role the member will do very well. 
The submissions received by the committee focused almost entirely on the proposed amendments to Part IV that deal with the use of bank names. The bill as originally drafted provided that financial institutions that are not registered banks could not use trademarks that contained the words “bank” “banking” or “banker”. Credit unions in particular argued they should be allowed to continue to use such trademarks as the services they provide are banking services. The committee was sympathetic to that wish but was also concerned that the proposed provisions allowed less reputable financial institutions to use the restricted words in advertising in a manner that could mislead the public. The committee amended the bill to allow all financial institutions to use the restricted words in advertising whether as a trademark or in a descriptive statement provided the advertising material also contains a reasonably prominent statement that the financial institution is not a registered bank. 
A new Part VC was added to the bill by the Finance and Expenditure Committee at my request to deal with designated payment systems. Payment systems provide a mechanism for the transfer of funds between parties—usually banks and other financial institutions. Currently there is a possibility that settlements through a payment system could be unwound if one of the participants becomes insolvent. The new Part VC will provide legal certainty for payments made through designated payment systems and it will reduce the potential for disruption in those systems. The provisions are designed to cater for a wide variety of different payment systems. The CLS Bank International operates a payment system for the settlement of foreign exchange transactions and once the new legislation is passed the New Zealand dollar will be eligible for inclusion in that bank’s continuous linked settlement system. That will substantially reduce the foreign exchange settlement risk for New Zealand banks. Designation will be voluntary and payment systems may choose to operate without being designated. Applications for designation will be made to the Reserve Bank and designations will be effected by Order in Council on the advice of the Minister acting in accordance with a recommendation from the Reserve Bank. 
The committee also made a number of other amendments to the bill that did not change its substance but were designed to improve drafting clarity. Supplementary Order Paper 99 has been released and circulated to members. The Supplementary Order Paper proposes minor amendments in order to tidy up and clarify matters in the bill. 
It is important I think to note the bill does not alter the fundamental provisions of the Reserve Bank Act. This bill improves the Reserve Bank’s ability to carry out its functions in both the monetary policy and banking supervision areas and formally extends the role of the Reserve Bank into the oversight of the payment system. It is I think only the second significant amendment to the 1989 Act that has been made since its passage; the other dealt with the issue of prudential supervision changes. It is of course possible that with the IMF coming out to review New Zealand’s financial system oversight mechanisms recommendations will arise out of that review that may lead to further legislation down the track. But I emphasise that in terms of the key features of the Reserve Bank which are related to its single focus and its independence from Government control this bill does not entrench upon those matters at all.