Reserve Bank of New Zealand Amendment Bill (No 3) — First Reading 
Reserve Bank of New Zealand Amendment Bill (No 3) — First Reading 
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Reserve Bank of New Zealand Amendment Bill (No 3) 
First 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 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. 
Dr the Hon LOCKWOOD SMITH (National—Rodney) 
: 
 To listen to the Minister of Finance now in the first reading of this Reserve Bank of New Zealand Amendment Bill (No 3) one would think he sounds about as enthusiastic for this legislation as he is for personal income tax cuts for which he has about zero enthusiasm. But the difference is that this legislation will go through whereas with personal income tax cuts who knows? The last time this Minister promised personal income tax cuts of course he changed his mind and he did not deliver them. 
Let me come to the detail of this bill. The Minister has covered most of it and there is little point repeating all of what he said. He went through it so fast that listeners may have missed out on some of the key bits. He mentioned an awful lot about these non-bank deposit takers—he referred to them often. That is what they are but I want to make it clear that here we are referring to the finance companies the building societies the credit unions and businesses like that. 
It is important that we introduce a better regulatory regime for these businesses because I think many New Zealanders in recent times have suffered significant losses following the turmoil in financial markets associated with the problems in the subprime mortgage market in the United States. We have seen finance companies here in New Zealand go under with many lenders if you like—people making deposits with those financial institutions those non-bank deposit takers—losing their money. I think it is in the interests of all New Zealanders that we improve the regulatory regime around these financial institutions. So many of them now I think it is fair to say are actually involved in many activities that the trading banks are involved in. It makes no sense for some of these lending institutions to be carrying out similar kinds of business to trading banks yet not to be regulated in remotely the same way as trading banks. 
I think that the regulatory regime proposed in this legislation makes sense. The Minister went through it very quickly but it includes things like requiring finance companies above a certain size to have a credit rating. Banks are required to have that and so should these institutions as well. Things like regulations around risk management minimum capital requirements capital ratios maximum limits on exposure by these financial institutions and certain liquidity requirements are fundamental prudential regulations. I think all members of this House would say: “Yes now that these institutions are involved in transactions similar to our trading banks they need to have this kind of regulatory framework within which to operate.” 
I make it very clear right from the outset that National will support the first reading of this bill and it being sent to a select committee. There are a couple of things we will probably want to learn a bit more about during that process. The first one I mention is one the Minister did not mention in his first reading address. He went so fast that I may have missed it—if so I ask the Minister to forgive me. Clause 6 of the bill has a curious amendment to the principal Act. Maybe a Government speaker will be able to enlighten us as to the purpose of this amendment. Up until now section 16 of the Reserve Bank of New Zealand Act has enabled the Reserve Bank to deal in foreign exchange. The current provisions enable the Reserve Bank to deal in foreign exchange with any person it thinks fit including the Crown. That makes sense. It makes sense that the Reserve Bank should be able to deal in foreign exchange with whomever it thinks it makes sense to deal in foreign exchange with although it should do so very carefully. 
But what is curious about this amendment in clause 6 is that it provides also for the Reserve Bank—and it actually amends the provision—to deal with any person including the Crown. That is fine; that is the existing provision. But it then adds a further provision providing for the Reserve Bank to deal on behalf of any person including the Crown. Why do we want the Reserve Bank to be able to deal on behalf of any person? That means the legislation is providing for the Reserve Bank to become a significant currency trading agent. I am a person under the law. Presumably if I wanted the Reserve Bank to deal in foreign currency on my behalf this provision would allow that to take place. The Reserve Bank could do that. 
I am curious as to why the Government wants the Reserve Bank not only to be able to deal with any person including the Crown which the current law provides for—and I have no problem in dealing on behalf of the Crown because after all the money the Reserve Bank is playing with is really Crown funding at the end of the day although technically there are probably issues around what is Reserve Bank money and what is Crown money—but also to be able to deal on behalf of any person. I think it would be of interest to learn from any further Government speakers on this first reading as to why that provision has been put in there. 
I also note in clause 7 that the Reserve Bank will now be required to hold higher levels of foreign reserves than in the past. Presumably that relates to this new provision in clause 6 that enables the Reserve Bank to become a greater currency trader than it is at present. Again I think the select committee will want to examine these clauses. I am not sure there are many knowledgable people in New Zealand who argue that the Reserve Bank should get into more currency trading than it has. Sure banks like that of Singapore with massive reserves behind them have been perhaps fairly successful in intervening in currency markets but there are huge risks around that so National will want to learn a bit more about clauses 6 and 7. 
Another clause we will want to learn more about is clause 10. Clause 10 inserts new section 68B which will enable the Minister to give the Reserve Bank directions. It is not immediately clear to us why this should be required in relation to the bank’s regulation of finance companies. One would think that the regulatory framework would be something independent of political interference. It is not immediately clear to us why the Government sees the need to be able to direct the Reserve Bank in respect of Government policy in this regard. 
We will want to learn more about this because the last thing we need is what is meant to be an independent regulatory environment becoming one that the politicians—the Government—can start to meddle with. We know from past experience in this country that when Governments meddle in what are meant to be independent regulatory frameworks they have not produced great outcomes. I am not being partisan; I think our history shows that Governments from both political flavours have meddled in the past to the detriment of this country. We will want to learn more about why the Government wants that power to give directions about Government policy objectives as we have concerns about that. 
Although we want to learn more about certain of those provisions National does support the overall policy intent of what this bill sets out to do. However at the select committee we will want to explore some of those matters that cause us some concern. 
Hon LIANNE DALZIEL (Minister of Commerce) 
: 
 I am very pleased to speak in support of the first reading of the Reserve Bank of New Zealand Amendment Bill (No 3). This is the first bill to make it to the House arising from the review of financial products and providers. This extensive project which has encompassed a task force and nine discussion documents has followed what I would describe as a quality regulatory design process engaging fully with important stakeholders from framing the problem definition to designing the policy response and that is a good process. 
As the Minister who inherited the process I cannot take any credit for where we are now. In fact I would like to remind the House that this review of the financial sector began under the very able leadership of the Hon Paul Swain who not only gave teeth to the Takeovers Panel but also gave it something to chew on as well in the form of a Takeovers Code. Then we had the securities markets regime providing for registered exchanges and the introduction of a co-regulatory regime that sees NZX and the Securities Commission undertaking their respective roles in a way that gives confidence to our capital markets both domestically and internationally. Then we had the changes designed to enhance investor protection improved disclosure provisions for investment advisers and stricter rules on insider trading and market manipulation. These take effect at the end of February next year. 
Then we had the review of financial products and providers. This had its genesis in two pieces of work. As a new Minister of Commerce in 2002 I raised the alert concerning the first work which led to the review of financial intermediaries; and the second directed by Dr Michael Cullen in 2005 was on the regulation and performance of New Zealand’s financial institutions which led to the review of financial products and providers. 
This bill derives from the second of these and from the work that the Minister of Finance directed. When this resulted in nine discussion documents all being released to the market at the same time I thought the market would balk at the amount of work that this required but to give the market credit where credit is due it came to the party. Not only did the major stakeholders provide support in their development of the discussion documents themselves but also they provided detailed submissions enhancing the quality of the decision-making process. I pay tribute to all the industry groups from banks to credit unions from financial advisers to insurance brokers and from finance companies to building societies. Out of their contribution we distilled some important principles that we see in the bill tonight. 
Confidence lies at the heart of everything we are doing to enhance the regulatory framework for our non-bank deposit taking sector. This is the first of the bills applying to that sector and it sets up the framework for registration and prudential supervision to be undertaken by the Reserve Bank. Non-bank deposit takers will continue to be subject to the securities regime and trustees will continue to be front-line supervisors in that regard. A bill to be introduced next year will enhance that supervisory regime. 
Dr Cullen has already outlined to the House the key provisions of the bill. All I want to say is that the Government’s decisions did not arise from the finance company collapses. However the need for this legislation is highlighted by them. People could be forgiven for thinking there is no existing regulatory framework to protect the interests of investors in finance companies if all the information they are relying on came from the media. It is very important to recognise that it is the existing framework that we are strengthening. We are not starting from scratch. 
The approach the Government has followed has been welcomed by the broad range of sectors that make up our financial sector. I am sure that the bill will attract submissions from those who may dispute the cost-benefit analysis of certain aspects of the prudential requirements imposed by the bank on a wide range of financial institutions ranging from finance companies to building societies and credit unions. Ministers considered these issues very carefully and felt that the balance fell on the side of exemptions being allowed only to the very small deposit takers from the credit rating provisions. I am sure that the select committee will listen very carefully to all of the submissions in that regard. 
Finally for those who say “Bring in these provisions now. Make credit ratings compulsory right now.” I just make the point that there is absolutely nothing stopping any finance company from getting a credit rating should it choose to do so. If investors want that level of assurance from their finance companies then they should demand that they do so. This is actually an area where the competitive market does work. 
The Government has adopted a very good process in bringing this bill to the House. I am very pleased that other parties are supporting this bill as part of the review of financial products and providers and I commend the bill to the House. 
Hon BILL ENGLISH (Deputy Leader—National) 
: 
 As the previous speaker said we will be supporting the bill. In sending this kind of bill off to a select committee we should be straight-up about why it is here and what we can expect it to achieve. Clearly we are in an environment where there is stress around the non-bank deposit takers many of whom of course will not do any better as a result of the passage of this bill because of the losses they have already incurred. I have every sympathy with them but it is probably important for those people who in the future will be considering the investment of their life savings—and I share with the Minister the hope that there will be more of that—to know that this bill will not necessarily secure investments in the future against the risks that are in a market. 
I venture to suggest that there was a time when we stood in this House and passed other law related to security for investors to transparency and so on which had the effect that I am sure this law will have which is that some people with some investments will have more security because there will be more transparency but we cannot contain people’s urge to get better returns. To get better returns they have to take bigger risks. 
This legislation will shift the boundary of relatively secure and transparent investments but it certainly will not do away with risk in the market. It happens that risks around finance companies have eventuated and in fact just about all of them—such as finance companies’ lack of capital lack of transparency related-party lending and published financial information that was either wrong did not make sense or could not be understood—will still occur. So Parliament needs to bear in mind that applying this framework to non-bank deposit takers has some merit but we ought to be careful that we do not mislead investors that there are such things as high-return risk-free investments. They simply do not exist. 
This will reduce the risks and therefore probably the returns associated with non-bank deposit takers. Of course there is a whole range amongst this group. There is the venerable institution of the Southland Building Society which is expanding even to the Deputy Speaker’s part of the country and opening branches in Auckland. No one could accuse the Southland Building Society of taking risks or of having a strategy focused excessively on growth but it will be captured by this alongside the finance companies that have failed so spectacularly in recent times. So let us not pretend we are taking away risk in the market; we are shifting the boundary and doing it in a way that I think everyone agrees is a step forward but let us not pretend it is much more than that. 
The second point about this is that although these mechanisms help with security of investment they do not guarantee it. Just because people put their money into an entity that has a credit rating it does not mean that it is safe from loss. We have venerable institutions such as UBS a worldwide top-ranking bank—whose future now appears to be in the hands of one of the Gulf state Governments which has injected $10 billion into it in the last couple of days—on the basis of products that probably had good credit-ratings. In fact some of them have had AA ratings which should be regarded as quite a secure investment. 
It is ironic that the time when we are putting this bill through—given that credit ratings are probably the core measure in it to reassure investors—is exactly the time when credit-rating agencies are coming under the kind of scrutiny that applied to auditing firms after the Enron collapse. I hope that the select committee will have the opportunity to get some expert opinion on it. I do not want to imply that credit ratings are a bad thing; simply they are no more reliable than the entities that give them and those entities come under their own pressures and face their own incentives. It is no particular guarantee. 
The third point I want to make is to back up the comments made by my colleague Dr Lockwood Smith and that is to do with the ability of the Minister to give a direction to the bank. As far as I know—the Minister might be able to correct me—the legislation has not permitted that kind of thing in the past. Has it? 
Hon Dr Michael Cullen 
: No because this is much more around the prudential supervision. 
Hon BILL ENGLISH 
: Yes it is around the prudential supervision. Of course we need to understand just what the Government might have in mind as the kind of direction the Minister could give. That is in the context of a concern that raised itself about 12 months ago I think here in New Zealand around the role of the Reserve Bank. It is my understanding that it is relatively unusual—not unprecedented but relatively unusual—to have the prudential supervision and the operation of monetary policy in the same entity as the Reserve Bank does. 
In a small country it is probably what is done and what one would expect but it means that there need to be very clear understandings about how the two might interact. Those understandings—at least in my own mind small as it may be—were blurred somewhat when the Governor of the Reserve Bank I think earlier this year or late last year gave the impression at least that he was able to connect the two. That impression may have been created by the amount of commentary telling him he should which was the idea that he should use the asset ratios that are designed for prudential purposes as an additional tool for making monetary policy more effective. 
I do not think he did in the end and if it was hinted at then I do not think it would have made much difference in any case. But I think it should be quite clear that the two functions are separate and that the prudential supervision regime is there for the purposes of the security of the financial system—that is its unqualified objective. The conduct of monetary policy should be different. 
So if a question were raised about the ability of the Minister to give direction it would be as to whether with the completely understandable pressures that come on a Minister such as the Minister of Finance he or she might be tempted to use that power in some way that would assist political objectives rather than economic objectives. I would hope that in the select committee we will hear a compelling case for that particular amendment. If it is not compelling then it may not be worth taking the risk of creating any kind of confusion. 
After reading through the regulatory impact statement I think the Government has actually made a few wise choices there. The statement sets out a number of alternative options—for instance to do with minimum capital. It looks to me that it has chosen the right option there. The other one is restrictions on lending to related parties. It would be easy to be panicked by the behaviour of some of the finance companies into having a strict and inflexible regime around restriction on lending to related parties. From what I can see the Government has chosen the option that is probably the most flexible and gives people the chance to make their own choices and face their own risks. I hope those aspects of the bill which appear to have the agreement of most of the people who have been consulted will stay intact. 
I suppose the final point is that this is probably about the best that Parliament can do to deal with the distress of all those people who have lost money in finance company collapses. There never has been an easy option as the Minister of Finance has pointed out to help people recover their money after they took their own risks. But this is a genuine attempt by Parliament to ensure that in the future there is more transparency and some greater degree of security particularly for people who regard these institutions as more secure. Now they happen to be wrong but this bill will give some body and content to the sense that if someone is advertising in the market as a financial institution and is taking deposits then that person has met some minimum requirements that did not exist before. We will support the bill. 
R DOUG WOOLERTON (NZ First) 
: 
 New Zealand First members support the Reserve Bank of New Zealand Amendment Bill (No 3) and do so because we think the bill is long overdue. We understand absolutely that the risk in investing can never be removed totally but we have been far too lax in this regard. It is timely that at least some attempt is made to bring some surety to investing and that there are shall we say some messages from the Government of what is and is not reasonable risk. 
It is all very well for financially literate people—as many in this House are—to say that one should not be investing in those sorts of investments but people who are out there working hard in other occupations are not always aware of the risks. If they were going to be moneylenders they would involve themselves. If they were going to be bankers they would involve themselves. But they are not and unfortunately it is often the innocents who are busy doing their daily work and who expect their advisers and the people who help them with their investments to be halfway honest who too often take advice without checking it or even going further than one adviser when it comes to taking advice on investments. 
This bill attempts in some way to redress that situation. New Zealand First absolutely applauds the bill and says it is long overdue. Now it is long overdue for us to go home Mr Deputy Speaker so I will stop right there. 
TIM GROSER (National) 
: 
 I am much inspired by the final comment of Mr Woolerton. I will try to keep this mercifully brief with just a few observations. In supporting— 
R Doug Woolerton 
: I was trying to set a precedent. 
TIM GROSER 
: Exactly and we are happy to follow that I can assure the member—on occasions at least. When it comes to anything to do with the Reserve Bank the thought that I—and no doubt many people—have in mind is just what a vital institution a well-functioning independent reserve or central bank is. 
I recall the legendary Australian Secretary to the Treasury John Stone whom I knew in a certain sense when I lived in Canberra in the late 1970s. He was the author of the “Stone Age” in terms of Australian economic literature and made the point that many a prince many a country and many an empire has fallen because they believe that sound money and sound financial institutions are the matter of interest only to dry-as-dust financial people. Thinking about the many pressures that might bring down Robert Mugabe I suspect that hyperinflation is a better bet than external political pressure. 
We have a very good financial system but it is not perfect. We always have to cope with the tendency towards financial disintermediation. If one sets in place any regulatory framework one puts in place at the same time unintentionally a set of incentives to create new institutions and to find new ways around the regulatory framework. 
I fully accept the Minister’s statement that the political origins of this bill predate the latest crisis amongst our finance companies consequent upon the collapse of the subprime markets around the world. It is just a never-ending fight that goes on once every 5 or 10 years between regulators people and the marketplace. We are dealing with that all the time. 
Mr English was absolutely right to say that one can never eliminate risk. Any attempt to do so actually just transfers the risk to the taxpayer. That is what the literature about moral hazard is essentially all about. I remember reading years ago about one of the senior Bank for International Settlements figures. When asked by a banker who was in serious trouble to define just how far the bank would go towards bailing him out he replied: “I will discuss that with your successor.” There is a limit to which any regulatory framework can deal with risk. Risk is an essential part of the framework. 
We will support this bill going to the select committee. We have a number of questions. I am intrigued to understand a little more of what I call the “peashooter” provisions. That is a reference to  
The Economist’s 
 description of the first intervention in foreign exchange markets in 20 years by the Reserve Bank. I do not think it is a major issue but I want to understand better along with my colleagues precisely where the lines are in terms of ministerial direction for the reasons I think Mr English was suggesting. 
In due course the Reserve Bank will sell those holdings if it has not done so in complete form already. It will tell us that it has made a marvellous profit. I suggest that that would not necessarily prove that it was a good intervention any more than if Dr Cullen took along $100 to Sky City on Friday night and made $120. That would not prove that he should be there as a professional gambler. These are some of the questions we have in our mind that we would like to explore at the select committee. 
In terms of the new disciplines foreshadowed for non-bank deposit takers again I see no particular purpose in repeating the main provisions of the bill. They have been discussed by a number of speakers. We start from the basis that we have a sound system. That system has now been subjected essentially to two international crises. One of these occurred in late 1997 and spread into 1998. It was rather erroneously called the Asian economic crisis. I say “erroneously” because although it started with the Thai baht the contagion process reached Russia and Brazil before finally stellar work by Rubin and other major players in the international finance system managed to hold the thing in place. 
New Zealand performed pretty well although it did have major implications at the time for first our exchange rate and second the final frankly overdue junking of the—I have forgotten the technical term of the targeting system used at the time. 
Hon Dr Michael Cullen 
: MCI. 
TIM GROSER 
: Yes that is right; the monetary conditions index. We got our exchange rate depreciation through the back door because the international financial markets basically misread New Zealand’s dependence on Asian markets. 
Hon Dr Michael Cullen 
: MCI. 
TIM GROSER 
: That is correct. 
We will obviously still have risk in the system no matter what happens to this bill when it has been processed professionally through the select committee. The tragedy is that it is not just in respect of electoral finance that the law of common sense does not apply. There is a rather nasty phrase that we all know: “There is nothing faster parted than a fool from his or her money.” It is a very cynical phrase but unfortunately we cannot legislate for common sense. All we can do—and this is the purpose of the bill quite clearly—is set up a framework for better prudential controls of this currently poorly regulated sector though it is of course regulated to a certain extent; provide better information and better public disclosure; and hold the directors and management to account. I am happy to participate in a positive way and the National Party will be supporting this legislation at its first reading. 
HONE HARAWIRA (Maori Party—Te Tai Tokerau) 
: 
 Tena koe Mr Deputy Speaker. Kia ora tatou e te Whare. In July this year the Waitakere Wellbeing Summit held a hui at the Kelston Community Centre to consider a simple question: do all families in Waitakere have enough to live on? It found that 19 percent of people living in Waitakere—some 27000 people—are living on low incomes. But even amongst the poor it noted disparities. Although it found that some 15 percent of Pakeha were categorised as low-income earners for Maori that figure rose dramatically to 25 percent and it rose even higher to 27 percent for Pasifika and surprisingly to 32 percent for Asians. The focus of the hui was to think of ways to help families who are in a state of multiple disadvantage and who therefore are at the greatest risk of extreme hardship. 
Well we know all about the impacts of the current financial situation on citizens here in Aotearoa. I remind the House today that the level of household debt in the last 7 years has rocketed by a massive 73.6 percent. Consumer debt is growing larger by the day the consumer price index has increased by 1.8 percent house prices have not just gone through the roof but settled above the cloud layer and prices for basic foodstuffs have shot up. 
The costs of getting finance are ever increasing and to no one’s great surprise dodgy finance companies which are playing fast and loose with everybody else’s money are going belly up as well. Over the last 18 months in fact 12 such companies have collapsed thus creating crisis and chaos for more than 50000 investors and costing $1.3 billion in debenture deposits. To come back to that hui in Waitakere I note that one of the recommendations was to regulate lending institutions and lending rates particularly in the non-bank financial institution sector—retail money lenders and loan sharks. There is that word again; it is a favourite of my whanaunga Dover Samuels. 
This bill is supposed to introduce changes so that deposit takers including non-bank deposit takers like finance companies building societies and credit unions will have to take greater care of the finances of their investors by getting a credit rating from an approved rating agency. I cannot help but see the irony in the latest finance company to bite the dust Capital + Merchant Finance which went bust under the slogan “Invest with care”—not that the 7000 investors who are owed about $190 million have much to laugh about. Certainly these 7000 investors thought they were investing with care by putting their hard-earned cash into the country’s 13th largest finance company which had a high profile through its sponsoring of Television One’s news until it all went haywire last week along with the Christmas plans of 7000 households. 
The Maori Party supports the movement that this bill makes to establish regulations for deposit takers. We support the maintenance of minimum capital levels and capital ratios limiting exposure and maintaining risk management approaches in line with good corporate governance standards. 
The McDouall Stuart 2007 report on the New Zealand finance company sector  
Flow and Ebb 
 set out a clear context for the volatility that has affected finance companies over the last 18 months. When we consider that this is a sector with more than $10 billion of investor money we see that it makes sense for Parliament to try to minimise financial collapse. Of course when we consider that this sector has more than $10 billion of investor money we see that it also makes sense for Parliament to express concern about the impact of such volatility on whanau on the economy and on general well-being and to do all that it can to ensure that care is taken in providing for the future. 
There is a lot of talk around the easy cash market about the impacts of financial collapse on mum and dad investors so I thought I would tease out that mum and dad concept a bit more. It occurred to me that one of the greatest investments any parents can make for their descendants is in reviewing their financial emotional genealogical and physical circumstances when it comes time for them to get married. 
Back in the old days partnerships forged through marriage were regarded with enormous significance. Peace and the settling of grievances the strengthening of whakapaka political solutions and land rights were all factors that might be considered by elders in pledging their descendants to another hapu or even another iwi. Whanau would look into the other party’s background hold negotiations and debate with the whanau of the other party so that when the deal was finalised everyone would be aware of the legacy being created by the union. 
In much the same way a whanau considering making financial investments should also carry out the same kind of thorough investigation and analysis in order to guarantee the future health of their investment. But to do that investors need to have better information from which to make strong decisions. 
Too many investors Maori included invest their savings in finance companies without realising the risk they are exposed to due to the fact that the finance companies do not always have the proper rules and standards in place to safeguard their investors properly. The common misconception is that standards are in place and that proper monitoring has occurred but that is not so. As a result people many on low to modest incomes have lost their hard-earned savings. We can blame individuals for not doing their homework but often we find that some people are simply being pushed to live beyond their means. 
It is also a matter of knowing whether the claims made by financial advisers actually stack up like companies saying that they are underwritten when they are not; that they are guaranteed by Lloyd’s of London when they are not; or that investors will get their principal back even if the company collapses which of course they do not. The real test is not so much about whether investments are safe. All investments carry a measure of risk and the greater the promise the greater the risk. The test is whether the investing public can believe that the rules of the game are fair. 
This is where recent research from Massey University warns us that legislation like this is needed quick smart. Dr Chris Malone from Massey’s college of business says that a failure to quell investors’ fears and help remaining financial institutions survive could lead to negative impacts on other sectors and that restoring investor confidence is critical to cutting the circuit of panic. 
So the Maori Party welcomes this proposal for a sound and efficient financial system and for putting measures in place to avoid significant damage to that system in the event of financial company failure. Just as our tupuna did all the homework necessary to ensure a good marriage so too should we carry over those same principles to ensure that our own Reserve Bank can effectively protect the New Zealand financial system. The Maori Party will support this bill at its first reading. Kia ora Mr Deputy Speaker. Thank you very much. 
RODNEY HIDE (Leader—ACT) 
: 
 The ACT party rises to support the Reserve Bank of New Zealand Amendment Bill (No 3) going to the select committee. We listened most carefully to Mr Groser’s remarks and concur with him that there is a difficulty when people invest money. Particularly where they are getting high returns they have to be accepting of the risk. I think the Government fully understands that. The regulation around securities is no easy matter because it is very easy to find risk being shifted from the entrepreneurs on to the taxpayer. The select committee will need to study this legislation most carefully. But ACT certainly supports the bill being referred for consideration. Thank you Mr Deputy Speaker. 
Bill read a first time.  
Bill referred to the Finance and Expenditure Committee.