Crown Retail Deposit Guarantee Scheme Bill

I raise a point of order, Mr Chairperson. We have now come to the title and commencement clauses of this bill. I think it is pretty fair to say we were disappointed by the shutting-down of the debate on Part 2 after such a short time, on a bill that we have seen only today and that did not go to a select committee, when other Opposition speakers wanted to take a call on it. You have been in the Chair all evening, Mr Chairperson, and you have sat through debate on Part 1 and Part 2, so you have heard a lot of the debate. Because you have heard Part 1, which influenced the debate on Part 2, I wonder what factors you are looking for here. This debate will be the only scrutiny this bill will get, and the bill is an important economic instrument. The Opposition wants to have an understanding of where you are coming from.

The CHAIRPERSON (Eric Roy): When a bill has not gone to a select committee, there is a convention that the debate on clauses 1 and 2 can be slightly extended. Given that, as Chair, I have to make some decisions about relevancy, new material, repetition, and all of that, in the same way as before. But I say again that when a bill has not been to a select committee, there is a convention that the debate on the title and commencement date can be somewhat extended. But the debate must still be relevant to the bill.

Debate on the commencement and title—by convention, as you have said, Mr Chairperson—is an opportunity for a relatively broad-ranging discussion of the key themes of the Crown Retail Deposit Guarantee Scheme Bill.

I will start with the commencement clause. The commencement date of the bill is 31 December 2011, which is the date the existing guarantee scheme continues until. That carries on from the earlier date of 12 October 2010. We have said that the decision to extend this commencement date to cover a period similar to the Australian legislation is appropriate because it avoids the risk of the flow of funds to Australian institutions. We have also said we think that the amount of time spent scrutinising the bill has been inappropriate. There has been no select committee consideration, and the time in the House has been under urgency. That time will be half a day, and it will be all New Zealanders will hear.

Many thousands of New Zealanders will be worried about their funds. As my colleague Lianne Dalziel has said, people want to know whether their fund is covered. They might want the opportunity to look it up on the Treasury website. Of course, they will not find the answer, because this bill is only framework legislation. It does not even vest the whole policy; that has to be promulgated by the Minister through the Gazette and regulations. The public does not have an opportunity to see how this scheme affects them. We know that for many investors, particularly those who have been burnt in the finance company collapses, this can be a matter of huge personal consequence. So the commencement date matters, and it matters because there really was time—and I think the Minister of Finance alluded to this when he took a call at the end of the debate on Part 1—if we had been pushed, to have a contracted select committee process. It is a disservice to the public that that process was not allowed, and I invite the Minister to take a further call. Perhaps he would be willing to change his mind at this point and allow a further process of some kind, perhaps some further consultation with the public, before he promulgates his regulations under the Gazette. That might be a compromise.

With respect, Mr Chairperson, I say that if the rest of the Part 2 debate had been allowed, we would have touched on the fact that the Minister has not taken any calls since Part 1. He has not taken a single call to defend the two key issues: why we are leaving the banks out; and, when the non-banks are in, why we are setting the threshold at BB. BB is an uncomfortable middle ground in some ways, is it not? For many, particularly smaller, finance companies, the cost and difficulty of process of going to a rating agency and getting a rating would be prohibitive. Some will not make the BB cut. I am not saying that the Minister is wrong to have signalled BB, but how would the public know? The Minister has not deigned to take a call and defend that key issue. The public deserves to know from the Minister why the rating is BB. Why not BB+, BB-, or BBB? It is sub-investment grade, but it is only just below. I ask the Minister whether that is the rationale. The public would like to know, because people will be worried about their own schemes and where they fall on the rating scale.

💬 Hon Darren Hughes: He’s good at schemes!

He is good at schemes, as my colleague has said.

Another thing the public will want to know is why the maximum threshold was set at $500,000 per institution deposit or $250,000 per non-bank institution deposit. Why bring it down from $1 million, which was the previous institution limit? Why contract that? To be fair to the Minister, I say that there may be an argument about weaning the public and the finance sector off the guarantees, but, again, it would be proper for the Minister to take a call to explain the logic. This is his policy. He signalled it a week ago, but he has not been subject to parliamentary debate on the very heart of this issue. It is appropriate that he takes a call, because this bill is the framework bill that gives the Minister the power from Parliament to the executive to promulgate those or any other regulations to manifest his policy.

💬 Hon Darren Hughes: It’s important enough for urgency!

If it is important enough for urgency, it is important enough for the Minister to say to the public of New Zealand why the figure is $500,000 and not $1 million, why the rating is BB and not BBB, and why he is doing it this way with no select committee process and not giving the public an opportunity to talk.

The Minister is not hugely known for wanting participatory public processes. There was an earlier comment that he was desperate to shut down the parliamentary banking inquiry. The poor old National members on the Finance and Expenditure Committee had proposed an item of business to hear from the finance and banking sector around the more narrow issue of the pass-through of official cash rate cuts into retail short-term rates. They put up the motion and then, if hearsay is to be believed, a week later, under pressure from the Minister, they voted against their own motion, leaving the public to wonder what on earth was going on and what could be the motivation for that backflip. The public believes that somehow the Minister roared like a lion in Parliament about protecting the public from voracious banks. But then, after a couple of phone calls from the chairman, he rolled over and forced his own MPs to stymie the banking inquiry. His office has been flat out on the phone. We have not been able to get a phone line into the Minister’s office for the last 3 weeks. The staff were on the phone the whole time trying to stop banks and finance institutions from turning up at the inquiry. Well, tough luck. They missed out: there were 50 submissions and a dozen very substantive briefings.

What did we learn? We learnt, first, that banks have been, after all is said and done, inappropriately failing to pass through cuts to the official cash rate. It is hard to put an exact number on it but it is between 0.5 percent and 1 percent of somebody else’s money. Mr Boscawen will take note because he is very strong on those issues, and good on him. It is 0.5 percent to 1 percent of someone else’s money with no reasonable explanation in the data, despite some acknowledged increases in costs—but not enough to count.

Even more important—and this is where it comes back to the coverage of this bill—we are unearthing terrible difficulties with the impact of the official cash rate on the monetary system, because every time it is raised, hot money is sucked in, which expands credit and lifts demand, and has the exact opposite impact of what we wanted it to do, which was to cool off the housing bubble. It leaves us with an underlying problem that the Minister, we hope, will address in some way when his Tax Working Group reports, and that problem is what we do about preventing the next housing bubble. The commencement and title of this bill are about debt securities, and in Part 2 we heard that the total volume of debt securities is now 140 percent of New Zealand’s GDP, rising at 10 percent per annum, with 90 percent of it funnelled through the banks into the property sector. That is where the money that this bill will cover goes. The point is, is it good for anybody? Is it good for our manufacturers? No. Is it good for our exporters? No. Is it good for the real economy? No. New Zealand will not pay its way in the world by speculating real estate. It cannot be done. We have a trade deficit, and we have a current account deficit of which two-thirds to three-quarters is the bleed from the banking sector of offshore repatriation of profits. How big are the profits? They are bigger than the profits the entire NZX50 makes. That is how big the problem is. That is the context within which this bill fits: a financial system that is fundamentally misaligned to the needs of New Zealand.

What is the Government doing to address it? Why does the Minister not take a call? If he will not address this bill, he should tell us what his plans are to address that misalignment. New Zealand’s future depends on getting capital to people who make things, build things, sell things, and export things so that we can earn our way in the world.

💬 Paul Quinn: It’s a pity you didn’t understand that for 9 years. Where were you when we needed you?

Now the Government benches are getting excited because we are getting a bit close to the truth.

Budget 2009 was an idea-free zone. What was the Minister doing for 9 long years in Opposition, if he came into Government without a clue what to do and had no new ideas in his first Budget? Not one. Oh, sorry, I missed one: to suspend superannuation payments for a decade. That was it. His solution to the recession was to ruin superannuation. Nobody in New Zealand believes that this Government can maintain entitlements without pre-funding superannuation. It has wrecked it for a decade.

A member points to the bill. If we had had more time on Part 2, we would not be having such a broad-ranging debate on the title, would we?

Mr Chairman—

💬 Craig Foss: Turn that tie down, member!

I am glad that members opposite, particularly Mr Foss, enjoy my tie, and long may that enjoyment last. This bill is about promoting financial stability and confidence in the banking system. As the chairman of the Finance and Expenditure Committee in the last year or so of the last Parliament, I was very proud to have contributed to that aim, along with one or two members opposite, in serving on that committee. I take a moment to remind members that Labour had actually established a work stream in this area to support some really active, quality regulation networks, to establish an environment that supported business growth and innovation, and ensure that New Zealand was a good place to invest and do business.

In particular, I recall three pieces of legislation that we saw through the Finance and Expenditure Committee, and those were the Financial Service Providers (Registration and Dispute Resolution) Act 2008, the Financial Advisers Act 2008, and the Reserve Bank Amendment Act 2008. The main requirements arising from that legislation, as many who are present in the Chamber tonight will know, were the registration of all financial service providers; to provide a means of identifying and monitoring financial service providers; to introduce prudential supervision by the Reserve Bank of non-bank deposit takers; to introduce regulation by the Securities Commission of financial advisers; to encourage professionalism and public confidence in the sector; and to provide for comprehensive consumer dispute resolution and redress mechanisms. They were important measures.

My colleague and friend David Cunliffe has just spoken about the banking inquiry, which was another measure that was spearheaded by Labour to really try to build some confidence in the system. I think it is fair to say that that inquiry demonstrates that Labour really is listening to New Zealanders’ concerns about the banking system in a fundamental way.

💬 Paul Quinn: Is this what you learnt on the bus trip?

That is why that inquiry was launched, along with the support of the Greens and the Progressive party, so that we could take a good look, I say to Mr Quinn, at what was really going on in our banking system onshore. The inquiry was one that, as Mr Cunliffe said, the Beehive was absolutely desperate to stop. It required National MPs, including Mr Foss over there, to vote against their own motion at the Finance and Expenditure Committee. It tried to shut down participation at that inquiry. I would like to join with Mr Cunliffe and ask the Minister of Finance to take a call and assure the Committee that neither he nor his staff or supporters made any calls to try to shut down that inquiry. But we will not hear from him. We know that. We have heard only one call on Part 1 so far. Never mind that this legislation is not being referred to a select committee and being put through the sort of scrutiny it should have. Just like in the banking inquiry, National has shown that when the chips are down it will always side with the interests of the big banks over the needs of hard-working Kiwis and working families, as well as small businesses that are starved of capital and made to pay ridiculous amounts of interest for that capital.

The inquiry received around 50 submissions, and a dozen substantive oral presentations of hearings, including those from Kiwibank and business groups like Federated Farmers, the Employers and Manufacturers Association, and the Manufacturers and Exporters Association. National’s attempt to suppress that inquiry absolutely failed. The key issues that emerged in that inquiry, and will not be addressed at all by this legislation, included strong evidence that consumers, businesses, and farmers have been overcharged by interest on short-term loans. There is a cross-subsidy between medium and long-term mortgages contributing to a new housing cycle that will be disastrous for this economy, and there are huge issues around the growing national debt.

Now 140 percent of GDP resulting largely from property loans channelled through the banking system was evidence that the Finance and Expenditure Committee also heard in its inquiry into the monetary system last year, and this Parliament still does not do anything about it in this legislation, or otherwise. It will be good to see the team from that banking inquiry doing follow-up research to report in late October. I think a high-quality report will no doubt be produced following some international peer review. That is the sort of quality process we will see from that review.

I will just comment on a couple of questions that have been raised. One has been the issue of reducing the coverage per depositor. Like a number of the other measures, this needs to be seen in the context of the Government making it clear that the changes in the deposit guarantee scheme signal clearly a reversion to normal market conditions at some time in the future. It is entirely reasonable that alongside increasing the pricing of the guarantee, the Government has moved to reduce the cap on the deposits that it covers. As the regulatory impact statement points out, this has the effect of reducing the Crown contingent liability and, of course, reducing somewhat the fiscal cost of a future default event. It also has the effect that some of the smaller institutions that may be dependent on a few large deposits will have their circumstances altered. That is why we have reduced the coverage—because the deposit guarantee scheme is transiting towards normal market conditions.

Someone raised the issue of the BB ratings and the cost to small institutions of getting those ratings. That is not a function of the guarantee. The fact that non-bank deposit taking institutions will need to get a credit rating is a product of the new regulations that are coming through consequent on legislation that was actually passed last year. So the guarantee itself does not cause these institutions to get a credit rating; they have to do that in the next 6 months, anyway. In October next year the extended guarantee will pick up and use those credit ratings for the purposes that Parliament intended them for—that is, to signal to investors with more clarity the trade-off between risk and return in relation to putting deposits or other investments into these institutions.

I want to focus on the fact that the statement that the Minister of Finance made in announcing the extension to the retail deposit guarantee included a list of all the changes that will take effect after 12 October 2010: the fees to be paid will be changed to reflect the institution’s risk profile, eligible bank deposits will be covered up to a maximum of $500,000 per depositor per institution, eligible non-bank deposits will be covered up to a maximum of $250,000 per depositor per institution, and deposit-taking institutions with a credit rating of BB or higher can apply to participate in the extended scheme. Then it stated that collective investment schemes will not be eligible for the new scheme.

I have looked through the regulatory impact statement and I cannot find a detailed analysis of why the decision was made that collective schemes will not be eligible for the new scheme. Under the existing scheme, collective investment schemes such as portfolio investment entities, unit trusts, and superannuation schemes are able to claim on the guarantee, provided that they invest exclusively in New Zealand Government securities, or debt securities issued by institutions covered by the Crown guarantee; they do not increase their investments in guaranteed institutions that are not registered banks beyond the level that existed as at 12 October 2008; and their rules ensure that any money paid under the guarantee will be distributed only to retail members. I thought those were a relatively tight set of criteria.

I did not download the number of schemes that have been approved, but on 25 August, when the extension was first announced, I had a look at the website and I seem to recall that a number of portfolio investment entities had been accepted and were guaranteed under the existing scheme. I would really like to understand the thinking behind the decision to leave out collective investment schemes altogether. There is not even the opt-in option any more but simply a decision that they will not be eligible. What was the thinking behind that decision? I am relatively sure that some of those schemes are currently under the guarantee. I think those institutions themselves would be somewhat concerned that there is not the detailed analysis that there is of some of the other examples that I have already used in my contribution to the debate.

It is quite a serious issue, because, as some of my colleagues have raised, the real risk is having too great an influence on investment decisions and distorting the market, as it were, in this whole area. I have been making the comment for a number of years now that we cannot get rid of risk, and that there will always be risk in this financial area, because otherwise there is no return. Then we introduced the retail deposit guarantee scheme, which somewhat diminished the argument I was always making. But the scheme is only a temporary measure and it is for an extreme situation. So it does raise for me the question of why it was decided that collective investment schemes would be left out. Has there been consultation with the operators of the different schemes? And what has been the response? I have looked through all of the issues raised in annex 3 and there does not appear to be any specific reference to collective investment schemes. I may be wrong. If the Minister would like to take a call on that, it would be very useful.

The member raised a reasonable issue. Retaining the collective investment schemes, as the regulatory impact statement points out, would not cause particular issues. There are reasons to exclude them. The investments in collective investment schemes are not actually deposits, and only a limited range of collective investment schemes are covered under the existing scheme. Like the other decisions that have been made in the detail of the scheme, in each case where there is some judgment to be made, the Government has made a judgment in favour of moving towards tighter and more limited coverage.

Debate interrupted.

Sitting suspended from 10 p.m. to 9 a.m. (Wednesday)