English Bill: Reserve Bank of New Zealand Amendment Bill (No 3) — First Reading 
English Bill: Reserve Bank of New Zealand Amendment Bill (No 3) — First Reading 
[Volume:644;Page:13835] 
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.