Non-bank Deposit Takers Bill

on behalf of the Minister of Finance: I move, That the Non-bank Deposit Takers Bill 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. This bill completes the implementation of the regulatory regime for non-bank deposit takers, which mostly comprise finance companies, building societies, and credit unions.

By way of background, the need for the prudential regulation of this sector was identified in the review of financial products and providers that was conducted back in 2005-06, as members will recall. Suffice to say, the collapse of a number of finance companies gave added impetus and importance to these reforms. The decision was made at the time of the review of financial products and providers to implement the prudential regime in two stages. The first stage was in effect by 1 December 2010, following the passage of Part 5D of the Reserve Bank of New Zealand Act, which covers credit ratings, governance, risk management, capital, related party exposures, liquidity, and the making of regulations under that part of the Act. This bill is the second stage and is intended to be effected by 1 June 2013. In addition to the substantive changes it makes, which I will outline in a minute, it transfers the provisions of Part 5D of the Reserve Bank of New Zealand Act—which is the first part I talked about—into this bill, so that there will be a stand-alone framework for the prudential regulation of non-bank deposit takers.

The core legal definition of a non-bank deposit taker currently is a person who offers debt securities to the public in New Zealand, and carries on the business of borrowing and lending or providing financial services. This definition is unchanged from what it was before. However, the situation of building societies and credit unions has, in fact, been altered. Previously, they were automatically non-bank deposit takers by virtue of being registered in New Zealand as a building society or a credit union. This was irrespective of whether they actually carried out any business here in New Zealand. In practice we have seen a number of building societies register here, only to carry on business offshore. There is a risk that these businesses become registered in New Zealand only to promote themselves as operating under the guise of a well-regulated and reputable jurisdiction, when, in fact, such entities would not be operating as such. So these entities will no longer be classified as non-bank deposit takers under the new law, which removes the automatic status that operates under existing legislation.

Licensing is at the heart of the bill, with the establishment of a licensing regime for non-bank deposit takers and a requirement for all of these to be licensed by the Reserve Bank. An important part of this is the suitability requirements for directors and senior officers of non-bank deposit takers. The regime will provide an opportunity for the Reserve Bank to evaluate the probity and integrity of the people operating in the industry, and to weed out those who are clearly not suitable. In particular, persons who trigger certain specified concerns will need to have their suitability reviewed by the Reserve Bank. In that event, the Reserve Bank would indicate that it has no objection to the person’s appointment as a director or senior officer, or would respond by not issuing a non-bank deposit taker licence or by objecting to the appointment. The matters giving rise to a review by the Reserve Bank will include such things as prior criminal offending—which seems pretty sensible—having been the subject of professional or regulatory action, and the existence of conflicts of interest.

Otherwise, the Reserve Bank must satisfy itself that an applicant for a licence has the ability to meet all of the other prudential requirements under the legislation. It must also have regard to certain matters including the ownership structure, the method of incorporation of the applicant, and the applicant’s compliance with anti - money-laundering obligations. The remaining aspects of the licensing regime include the Reserve Bank being able to impose conditions at the time of an application for licence, which I think is quite significant, and being able to vary those conditions subsequently. There is also a power to cancel a licence when, for example, the licensee has been licensed on the basis of false or misleading information.

The bill does a number of other things. It introduces controls on changes to ownership of licensed non-bank deposit takers. Ownership will, of course, be a matter of interest to the Reserve Bank at the time of licensing—in particular, for establishing who has actual control. This is something that investors will regard as important in light of what has happened to the sector and the failures that have occurred in the hands of certain individuals, whereby shareholders and depositors have been unaware of the full consequence of shareholding changes. Equally, it is important that the risk profile of a non-bank deposit taker is not dramatically altered during the term of a deposit. This, again, was a failure under the previous regime, whereby people invested in these non-bank deposit takers only to discover that the very nature of the business changed during the term of their investment. Hence, the Reserve Bank’s prior consent to significant changes of control will be required, and this is the ability to control 20 percent or more of the voting securities or to appoint 25 percent of the governing body.

The opportunity is being taken to bolster the Reserve Bank’s powers of intervention to bring them more into line with banking and insurance regimes. These powers will have relevance in terms of detecting and responding to problems of distress and failure. They will contribute to the integrity of the proposed licensing regime, and the whole prudential regime, by strengthening the array of tools at the Reserve Bank’s disposal and the incentive to behave on the part of regulated entities. These were weaknesses that we have seen in the finance company crisis that we have had in this nation in the past few years.

The various new powers include the following: firstly, to require the supply of information from an associated person of a non-bank deposit taker, which is on the basis that we have seen many such takers have a number of associate persons whose conduct and activities have had a material impact on the non-bank deposit taker and its creditors; secondly, to require any information provided by a non-bank deposit taker or an associated person to be reviewed and audited; thirdly, to enable the Reserve Bank to give directions to a non-bank deposit taker, an associated person, or a trustee—directions are a standard prudential tool that the Reserve Bank already has in relation to banks and insurers, and it is logical to extend this provision to this part of the scope of its prudential supervision—and, fourthly, to remove or appoint directors of non-bank deposit takers. The powers are confirmed on the Reserve Bank to also obtain information for wider prudential purposes—in particular, to monitor the soundness of the sector and the appropriateness of the regulatory settings.

💬 Hon Trevor Mallard: Is this a filibuster?

Well, actually, this is very important, because it will address a number of the problems that we have all had to deal with in our electorates as a result of the previous poor regime.

Decisions by the Reserve Bank to remove a director and a senior officer as a result of a direction may be appealed to the High Court, and there is a further right of appeal to the Court of Appeal on questions of law. The bill makes a number of minor or technical amendments to the existing provisions of Part 5D, and the regulations already made under Part 5D will continue in force, even though they are being incorporated in this legislation.

In conclusion, the Non-bank Deposit Takers Bill will enhance the Reserve Bank’s ability to promote the maintenance of a sound and efficient financial system, and it represents a milestone in putting in place the final components of the prudential measures applicable to the non-bank deposit taking sector. It certainly provides an added level of prudential supervision and assurance to the many depositors who have found the previous scheme sadly wanting, to their great cost.

I am delighted to tell the Minister that the Labour Opposition will support the first reading of the Non-bank Deposit Takers Bill. We are absolutely delighted to see it introduced into the House. The decisions that underlie the introduction of this bill were taken under a Labour Government a number of years ago and were designed as part of a package of measures, one of which was passed under the previous Government, and this bill now adds the final stage to the implementation of the Review of Financial Products and Providers as it relates to non-bank deposit takers.

Having been the Minister responsible for the commerce portfolio in the last Labour Government, I have always been fascinated with the way in which the media commentated on the flow of events as they occurred. The Review of Financial Products and Providers, which the Minister referred to, was a series of nine discussion documents that were put out to the market at the same time in 2006. It was a substantial amount of information to put out at once and expect all of those engaged in the different components of our financial products and providers market to be able to contribute to the design of what we are seeing part of here today. What amazed me was that just after the original nine documents were put out into the market place, the first three of the finance companies that were to fail actually failed. That was in 2006. Those three companies failed, and as Minister of Commerce I thought that we would see the domino effect flowing on from that. I must admit to several sleepless nights at the time, thinking that was the beginning of the end, but it actually stopped at that point. However, I had completely forgotten the reality that people who had invested in finance companies had done so for a fixed period of time as part of the promised return on their investment, most of which was grossly underpriced, which I will come to in a minute. The bottom line was that for a lot of people they were just holding their money in finance companies until the very moment they could pull out their money and get it into safe territory as quickly as possible.

When the Government received the Cabinet paper that I presented to it in 2007 as Minister of Commerce, with a series of recommendations about how we might proceed with the Review of Financial Products and Providers, Cabinet agreed to all of those decisions in mid-June. Then, at the beginning of July, Bridgecorp fell. Bridgecorp was the beginning of the series of dominoes that became something that will never leave my mind, because all of those companies that failed took money from the hands of ordinary New Zealanders who had no idea of the level of risk they were taking with their hard-earned money. For a lot of them it was more than money that they had saved up for a rainy day, it was money that they had set aside to support their retirement in a fashion to which they wanted to aspire. It was just tragic. There is nothing that will ever make up for me how I felt as a Minister of Commerce completely powerless to do anything about something that had been set in train a long time before the Review of Financial Products and Providers had reported.

Unfortunately when matters shift from the specialist business pages of our newspapers through to the front-page headlines, things get lost in translation. I think a lot of investors could be forgiven for believing that there was no regulatory framework in place at all before the finance companies fell. They could also be forgiven for believing that the Government acted only because the finance companies fell. In actual fact a lot of hard work had gone into the fact that we inherited a regulatory wasteland when we became the Government in 1999 and we had to do a lot of work to get things up to speed. I accept that it did take too long, and that the price that ordinary New Zealanders paid for that—the price that unsophisticated investors paid—was too high. I totally accept that. I also think that the media probably did the public a disservice by implying that no attention was being paid to this important matter before the finance companies fell. In fact, we had made the decisions on the Review of Financial Products and Providers several weeks before Bridgecorp fell.

The purpose of the Review of Financial Products and Providers and the process that we adopted were all aimed at strengthening the regulatory environment in order to promote confidence, and therefore to increase participation in sound and efficient financial markets. I think that what the Government has done here is leverage off the work that we commenced and ensure that it is able to deliver on those ambitions, as it were.

I have used what occurred to remind people—and I want to remind them again—that Governments cannot regulate to eliminate risk. Risk is what drives our financial markets, but it has to be risk that is real and it has to have a degree of reality for those who will be investing their hard-earned money. What happened in the earlier part of this century was that we had finance companies that deliberately mispriced the risk and used well-known figures to stand in front of their product and basically say to unsophisticated investors: “You are essentially putting your money in something that is the equivalent of a bank deposit.” In fact, because the rate of return was very similar to a bank rate of return, it actually underplayed the degree of risk that people were facing. It is really important that people realise that the problem we suffered from a few years ago with the collapse of the finance companies cannot be sheeted home to a former Government that did not regulate at all, or to the Government that started the regulatory process. But I do think that the lack of a strong regulatory framework was part of the problem. I do not think we should ever get away from the fact that there were people who knew perfectly well what they were doing, who took advantage of the naivety of those who were prepared to put their money into something that would give them a little bit more of a return than a bank deposit. I do not think we should ever lose sight of the fact that there were other people out there in the market place, insufficiently regulated, who took advantage of that situation and people lost a lot of money.

This Labour Opposition will very much support this legislation. It strengthens the arm of the Reserve Bank, and I congratulate the Government on the quality of the regulatory impact statement that accompanies this particular bill. It makes a nice change to be able to read a regulatory impact statement of such high quality—probably because it has come from Treasury rather than from some of the other departments that have been responsible for such statements. The reality is that it has defined the status quo. It has defined the problem and looked at a variety of options. One of the options is to look at the banking regime, one is to look at the insurance regime, and another is to look at a hybrid regime. Other options look at whether we recalibrate the banking regime. What they have come up with is a very sensible solution that I think we will have no problem supporting as it proceeds through this House. We will certainly support the bill’s referral to a select committee and we look forward to its report back to the House.

That was a very interesting speech from the previous Minister of Commerce, Lianne Dalziel, about the history and some of the more private, I guess, natures of Government in terms of what went on at that time in the history of the Labour Government, which would have had some idea of the issue. But, as the previous Minister said, there may not have been a full comprehension of the effects or an understanding of how to deal with the situation at that time. So I thank that member for her contribution.

A lot of New Zealanders did lose a lot of money, and they were ordinary New Zealanders who had put a lot of their life-savings into those deposits. To hear the history of what the previous Government was looking at was very interesting, I am sure, for those individuals and families as they take stock of what has happened to their personal financial situations.

The Non-bank Deposit Takers Bill is the last in a series of bills to deal with the very issue that both the Minister and the previous speaker mentioned. It aims to create an environment where we have to a certain extent more rules and regulations on the nature of non-bank deposits. It does also mean that all risk will be taken away from investors. As the previous speaker said, the risk-return element will always be part of any investment decision. But the rules and regulations that we can use to tighten up that area of the finance market is something that is long overdue.

When we look at this bill, we see that it has a number of impacts in regard to the financial sector, and especially towards non-bank deposit takers. First of all, it completes that regulation process and it gives the Reserve Bank the power to remove directors and issue directions in certain circumstances. It can require non-bank deposit taker directors to notify the Reserve Bank if a director or senior officer triggers new prescribed suitability criteria. The Reserve Bank will have the power to remove those individuals, which is quite an important power in the sense that there would be a notification, there is suitability criteria, and there is the power to deal with that situation should it be required.

The Non-bank Deposit Takers Bill is expected to become effective in June 2013, which is 1 year after a transition period to enable non-bank deposit takers to meet the new licensing rules. There is certainly enough scope in there, one would expect, for those in the financial sector to meet the obligations and to be in a situation where they can adjust to the new regulations.

The bill also introduces penalties for failing to comply with regulatory requirements. Offences will be graded according to their severity, up to a maximum fine of $2 million for an entity, and for an individual a fine up to $200,000 and/or 18 months’ imprisonment. Those are quite substantial fines and penalties, but this is a situation where we are dealing with individuals’ savings, so in some cases where large sums of money are involved, those fines and penalties may be seen as justifiably large.

The actual detail in the bill is something I am sure we will go through further in this House, as the bill will go through the select committee process and then through the Committee of the whole House. But I will go through some of the key things again. The ability to remove directors is a major part of the bill. The ability to issue directions to non-bank deposit takers, associated persons, and trustees is another very important part of it. Requiring the suitability of directors to be vetted by the Reserve Bank is also important. The Reserve Bank has the power to delicense non-bank deposit takers in certain circumstances, and the bill requires the consent of the Reserve Bank to be obtained for changes in ownership of non-bank deposit takers in certain circumstances.

So it is bill that will have a number of implications. It is there as a response to an issue that many New Zealanders have faced in recent years, and we look forward to this House debating and passing this bill in a spirit that will enable all New Zealanders to have a little bit more security going forward.

I will not take a long call on the Non-bank Deposit Takers Bill, for the main reason that I am very keen to see this bill rushed through the House and turned into law.

I suppose one of the things that underpin any financial system is investor confidence. As Lianne Dalziel talked about earlier, there is risk in every investment—of that there is no doubt—and reward is often a function of risk. However, there is one type of risk that New Zealand investors should not be party to, and that is the risk of negligence or incompetence by the directors who are there to maintain the integrity of these investments.

We all know that the integrity of a lot of the directors of the finance companies that fell over was called into question, to the point where some of those characters have been dragged through the courts. I hope that a lot of those characters will be made examples of and that they will be sent down, because they ripped about $6 billion out of the pockets of New Zealanders who trusted them, who saved hard, and who put money away for a whole raft of reasons, of which every one was good. As Lianne said, perhaps those investors did not price risk as well as they could have, and they certainly did not know—and could never have known—about the risk of incompetence and negligence.

I will give the House a quote. In the first reading debate on the Reserve Bank of New Zealand Amendment Bill (No 3), Dr Michael Cullen noted: “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.” I suppose the point of reading out that quote is to remind the House that it has been 3 years since Dr Cullen made that speech. I wonder whether—and this is a question; I am not casting aspersions—the Government has taken its eye off the ball and has been a little bit negligent. “Negligent” is probably too hard.

My personal view is that this sort of bill should probably have come before the House 18 to 24 months ago. In fact, this bill probably should have been on the first Order Paper put out by the current Government. The reason I say that, going back to my initial point, is that confidence is what determines the robustness of financial markets. Without this sort of legislation, ordinary New Zealanders do not necessarily have confidence in this sector, which absolutely collapsed around their ears. The Non-bank Deposit Takers Bill is the sort of bill that restores the confidence in markets, and—goodness me—if we need anything in this country at the moment it is investor confidence.

I ask what the Government has been doing with regard to this. I know Simon Power has put through a lot of bills. We have also seen a lot of bills come through the House over the last 2½ years that are important to certain sectors—of that there is no doubt—but this bill is important to the whole country. As Lianne Dalziel outlined, this whole process started about 5 or 6 years ago. Maybe it should have started earlier; it does not matter. But it could have been finished within the first 6 months of this Government taking office.

I will talk very briefly about two of the most important provisions. The first provision is that this bill will give the Reserve Bank the power to vet and remove directors of non-bank deposit holders in certain circumstances. As I mentioned, there are too many shady characters out there, and we have to do whatever we can to make sure that these guys never hijack a sector like they did with the finance sector.

The other most important element in this bill—well, I think it is the most important element—is that it requires non-bank deposit takers to be licensed by the Reserve Bank, subject to analysis by the Reserve Bank of the applicant’s ability to meet the prudential requirements and other legislation. This basically gives the Reserve Bank the power to grant a licence, but also the power to delicense non-bank deposit takers who do not meet acceptable standards.

As I sum up I come back to the first point I made and the most important point, which is that the finance sector in our country absolutely needs confidence restored in it. This Parliament can do that, and it is my personal belief that this should have been done earlier. It was not, but let us get this bill through. Thank you very much.

Kia ora koutou. I am pleased to take a brief call primarily to advise the House that the Greens are very happy to support the Non-bank Deposit Takers Bill going through to the Finance and Expenditure Committee. Arguably, the bill is overdue, as was commented on by the previous speaker—but better late than never. It is fair to say that in the New Zealand economy the finance sector at one time was probably over-regulated. There was far too much regulation, which was constraining and was something of a damp blanket on business, enterprise, and innovation. But, clearly, when deregulation came—when the change occurred—it came too quickly and for the wrong reasons, and the pendulum swung far too far in the direction of deregulation. Many decent and honest New Zealanders paid the price quite recently, with the collapse of finance companies.

Clearly, this bill sets out to put some oversight and some prudential regulation on the non-bank deposit takers, and that has to be a good thing. It is also good that not only are we talking about regulating the institutions, of course, but also there will be some individual responsibility applied to this. For me personally, some of the most galling commentary post the collapse of the finance companies was the proposition from lots of people that it was all some terrible accident; some terrible mistakes had been made, and what a shame that was. In fact, we know very well that a significant part of the collapse was due to good old-fashioned greed, to people taking advantage, and to sharp practice and outright dishonest, fraudulent practice. It is good to see that the courts are slowly catching up with some of the folk responsible for it. Sadly, some of them will no doubt escape legal process, but nevertheless this new legislation will empower the Reserve Bank to accredit directors, and, if necessary, to remove them to get people out of the sector who really ought not to be there. I am not for a moment suggesting that there are not a great number of people of considerable integrity in the sector, but we need to aspire to that as a minimum standard and get rid of the cowboys, essentially. We need to regain the confidence of people who have money to invest, and to give people a safe haven for their funds and for their investments. People need to be able to put money into those organisations knowing that there is a level of risk that they understand clearly, that everything is transparent, and that they have a reasonable expectation that the reward will be appropriate to the risk they are taking.

It is fair to say that the Greens’ only initial misgiving around this bill was the inevitable danger with legislation—that a sledgehammer would be used to crack a nut. There was some concern about the potential for compliance costs not being appropriate for the size and scale of some smaller institutions and organisations, not least for the credit unions, which have a very long and honourable history in terms of managing people’s money in this country. I think that concern has been recognised. It is shared by other parties, so although it is something we will be keeping an eye on through the course of the select committee process, we do not see any major concerns within it. We are particularly reassured that the Association of Credit Unions, for example, which is a key player in that sector of the market, if you like, is reasonably supportive of this bill.

To reiterate, we welcome this bill, we would like to see it pass in a timely fashion, and we will support it through the House. Kia ora.

Tēnā koe. I am really pleased to stand on behalf of the Māori Party to take a brief call on the Non-bank Deposit Takers Bill. This bill is all about applying scrutiny to the non-bank deposit taker sector within the context of the review of financial providers.

A non-bank deposit taker is a rather clumsy mouthful, so I had to look up what it actually means. It is any person engaged in the business of borrowing and lending money or providing financial services. I do not know about the rest of the parents in the House, but this sounds very much like what I do at home anyway. Perhaps it is easier to explain what a non-bank deposit taker is by the negative—that is, what it is not. It is not a bank, a building society, or a credit union. This is the key issue that I bring to this first reading of the bill: the fact that it does not expressly include building societies and credit unions. The bill states that only credit unions and building societies that issue, or that have issued, debt securities to the public in New Zealand will be classed as non-bank deposit takers.

Under Part 5D of the previous legislation, the Reserve Bank of New Zealand Act 1989, credit unions and building societies were classed as deposit takers, even if they had never issued debt securities to the public in New Zealand. Credit unions have played a big role in the lives of many whānau. They have given vital support to keep families afloat, and to make it easier for people to pay day-to-day bills and stay out of debt. I think the other key fact about credit unions that appeals to Māori is that they are member-owned organisations, so they place priority on what is important to members.

One credit union that I am particularly familiar with is New Zealand Credit Union South. It has to be said that its focus is as comprehensive as one would expect from any service operating out of Te Wai Pounamu and needing to encompass such a huge geographical space. Its focus extends far and wide to areas like the first-home buyers’ grant, car accident insurance claims, child support, statutory holiday pay, and anything else that one can think of. I acknowledge, in particular, the way that New Zealand Credit Union South responded after the disastrous events of 22 February in Ōtautahi. It, in cooperation with the Colin Smith Memorial Fund, established the Christchurch Earthquake Relief Fund, with the support of the New Zealand Association of Credit Unions. The funds were to be distributed to any credit union members affected by the February 2011 Christchurch earthquake. A recent statement by the chief executive of New Zealand Credit Union South says it all: “We realised our only purpose was helping individuals and families in our communities to become financially stronger—full stop.”

I bring this up as an example, because the issue of finding financial support in a way that supports whānau is crucial to whānau well-being. I am also conscious of a report that the Māori Affairs Committee received in 2009 on fringe lending and Māori, which I think offers some fascinating reasons for why we need to ensure any review of financial providers is comprehensive in its scope. In that report it is suggested that Peak Learning, a service contracted by Work and Income to deliver management support to beneficiaries, had commented that most of its referrals were Māori. The clients cited shame, embarrassment, shyness, and a fear of rejection from banks and credit unions as the main reasons they used beneficiary-friendly lenders.

The Māori Party will support this bill at its first reading, because we support the broad goal of establishing and maintaining a sound and efficient financial system. We will be keen to hear what the punters think at the select committee process about the range of institutions that are currently out there that supplement the mainstream banking system and that should be considered in this bill. Kia ora.

It is a privilege to talk on the first reading of the Non-bank Deposit Takers Bill. It is sponsored by the Government and will go to the Finance and Expenditure Committee. As mentioned by earlier speakers, this bill is a continuation of the movement towards central regulation of the wider finance and investment sector, and it is one that we wholeheartedly support.

There are a couple of interesting analogies that I will quickly touch on. One is the comparison between this bill and the Insurance (Prudential Supervision) Act, which came before this House last year and has now been in place for about 12 months. That was shown to be very, very useful, particularly in the recent earthquakes that hit Christchurch, and in relation to the underlying prudential security of the insurance companies in Christchurch. Prior to that bill being put in place, there was no prudential security for the insurance sector. This bill is a bit like that but for finance companies.

There have been some holes in the finance company prudential regime, and this bill will be the last plank to resolve those. One of the measures that I quite potentially like relates to increasing the information disclosure powers that the Reserve Bank has in respect of non-bank deposit takers, particularly on the directors and officers of those entities. There is a really interesting little hook here in relation to requiring consent from the Reserve Bank to purchase equity in underlying entities. The Reserve Bank will have to give consent for more than 20 percent of the equity to change hands. That is very similar to what applies under the Takeovers Code to a code company, to a normal entity that is a non-bank deposit taking business. I think that is a good step forward. It strengthens things. If one is a non-bank deposit taker, one is treated very similarly to the way one is treated under a Takeovers Code - type entity, and that is a sensible step forward, given that many finance companies rely on the investments of mums and dads out there, who, generally speaking, need a bit of help from the Government. They need the Government to put in place a prudential regime because there have been a number of instances of people who have committed fraud in some cases. That has been outrageous, and we need to strengthen that sector.

This week, in particular, we have seen some of the results of financial turmoil around the world. We have had riots in London, which are still occurring today. The financial markets have been very volatile and have been going both up and down. In those situations, with regard to the issue of finance companies that are second and third tier - type lenders and non-bank deposit takers, people need the comfort in knowing that the entities that they are giving their money to have a regime that puts in place some security for the funds that they are lending, particularly given that most of those entities lend to fringe commercial operators. We have seen that in terms of commercial property development. There has been a number of very high-profile cases of property development failure, particularly in the South Island. Around Queenstown some very big white elephants were funded, and in Auckland, as well, where property developers had money lent to them in many cases from finance companies, and the funds were lost because of a lack of transparency and the lack of knowledge that lenders to those businesses and the borrowers had. This bill will allow more information to go back to the Reserve Bank in order to give it back to those punters, so that they are clearer that their funds are actually being invested in the way that they intended them to be.

The bill does not put in place a regime that is as strict as some would like it to be, and we will have an interesting debate on that in the select committee, I am sure. Some people will want to tighten up the prudential regime even further, and that will be an interesting situation to see when we receive the submissions. I suspect that others will think that this is too tight a regime in a sector that has historically had a lot of laissez-faire - type rules around it. But we have seen that we do need to do something, and this bill is the right step forward.

Finally, a number of other prudential security bills are coming through, particularly on security reform and things like that. There is a financial summit on tomorrow, which has been mentioned previously. It will be interesting to see what comes out of that and to see whether any other forms of legislation or rules may be required. We all support those who want to go to that summit and put forward any further ideas on financial sector reform, so that we can protect those funds and the mums and dads out there. Thank you.

Like all members of this House, I am pleased to support the Non-bank Deposit Takers Bill. It is another leg in the reform process to end some of the rorts that have gone on across the financial services sector over the last few years. It has been a very sorry toll for many New Zealanders—an $8.6 billion toll—which has seen a lot of people lose their life-savings because of the lack of regulation around some of the people operating in the less-regulated part, if you like, of the financial market.

It is a roll-call of shame when we consider companies like Blue Chip and Lombard Finance. Hanover Finance is one that particularly resonated for me, because I always had some distaste about the way it advertised on our State-owned television channel. “Hanover Finance—the name you can trust” traded, I thought, upon the reputation of Television New Zealand, and of course that turned out to be absolutely the opposite of what the case was. It was not a company one could trust. There was no real regulation of it. It was taking the deposits of mum and dad investors and simply siphoning them into the speculative investments and ventures of the two principals of that company, Mark Hotchin and Eric Watson, two men who I believe stand condemned for what they have done to many thousands of New Zealanders. Therefore, I am very pleased to see this bill, which is another step in the right direction and is hopefully another nail in the coffin of those who fleeced many thousands of New Zealanders of their life-savings.

We can consider that there is sometimes debate in this House over the costs of regulation. Looking through the excellent regulatory impact statement that was prepared for the House tonight, I noted that it states that “the cost of licensing all the expected applicants [under this bill] will be approximately $160,000.” That is $160,000 to regulate a portion of an industry. Those non-bank deposit takers make up a large portion of those who have taken $8.6 billion from sometimes naive New Zealanders, and also from New Zealanders who put their faith and trust into flash advertisements—style over substance—and who have paid a very, very high price for doing that. It is good to see that we as a Parliament agree that those charlatans and rogues deserve to be subject to regulation.

That is what this bill is about: licensing those non-bank deposit takers, requiring their directors and senior officers to be vetted by the Reserve Bank, empowering the Reserve Bank to delicense the non-bank deposit takers in prescribed situations, requiring the consent of the Reserve Bank where there are changes in the ownership of these organisations, bolstering the powers of the Reserve Bank to obtain information about these non-bank deposit takers—or “NBDTs”, as the acronym goes—and empowering the Reserve Bank to remove directors of non-bank deposit takers in the appropriate circumstances. It is great to see the Reserve Bank getting these powers. Like most members, if not all members, of this House, I commend this bill to the House.

Like one or two of the members of this House, I spent a small portion of my pre-parliamentary career in banking. In fact, I joined a trading bank, as they were then known, after leaving school. I spent about 5 years in reasonably low-level roles, but I ended up at the end of that time in the role of retail—

💬 Hon Trevor Mallard: He makes very good tea.

Well, I started as the banking junior. I stamped the cheques, folded the bank statements, and made tea for the manager of the branch, so it is—

💬 Aaron Gilmore: Look how far you’ve come.

That is right—from those humble beginnings. I ended up in the role of retail lending in the Lower Hutt branch of the National Bank in the 1980s, lending mostly to small to medium sized enterprises and arranging mortgages for homeowners. As members may recall, the interest rates in the period of about 1986-87 got up to 20.5 percent, so it was pretty important to get the lending decisions right.

I was trained in what would now be described as the old-school financial disciplines, which I recall as the canons of lending. The acronyms are various, but we referred to them as the five Cs, which were cause, cost, collateral, character, and capacity: what did the people want the loan for, how much would it cost, how much are they putting in, were they good people to lend to, and what was their capacity to repay. If the applicant fell outside some fairly tight financial constraints, then the lending application would have to be referred to head office.

My, how times have changed, and they have changed in a couple of ways. Firstly, the approach of lenders has moved away from that cautious approach to very much a sort of a sales approach, with reports now of bank staff being awarded bonuses for the quantum of the lending that they do. That is in marked contrast to the old banking joke “Were it not for the fact that you needed the loan quite so badly, we might be able to give it to you.”

I think the second change is in the complexity of some of the lending products that are offered. They are not the sort of straightforward lending to borrowers for bricks and mortar, subject to a mortgage. We have seen a lot of speculative products on developments that are still on the drawing board being purchased, often by naive investors, in anticipation of a rental income or a capital gain—a capital gain, I might add, that under the current tax framework would be taxable. That came as a bit of a surprise to investors in Central Otago when the Inland Revenue Department descended on that area and started issuing assessments.

I mention all of that because although this bill is called the Non-bank Deposit Takers Bill, it is really not about the taking of deposits, at all, but about what then happens to them in the on-lending. We are replete, and many members have already spoken about the many—

💬 Hon Trevor Mallard: We’re convinced.

Very good. Well, that never stopped the member over there from carrying on his speech, however unconvincing or convincing he might have been. But there are many tragic examples—

💬 Hon Trevor Mallard: I’m slain through the heart.

That is withering. That is withering. He is absolutely a cutting wit. I have never been called inept, I have to say—certainly not in this place—but the member can wear it like a badge of honour, I am sure.

💬 Clare Curran: I’m sure it’ll come.

Thank you for the vote of confidence and a Nostradamus-like prediction. But it is a serious issue, is it not, because a lot of people were very badly burnt. Mr Nash talked about more than $8 billion of deposits being lost by people whom I consider to be naive investors. Although Ms Dalziel talked about what she believes is the lack of a regulatory framework, I am not quite sure I agree with that, because there have been very sound regulatory frameworks in place.

It has to be said that there is a lot of human nature in this equation. I was advised by a financial adviser that the majority of investments in the finance companies that failed were not made through financial advisers but by people clipping the coupons out of newspapers and posting away their cheques. Although we put in place all these frameworks to regulate financial advisers, which is a very appropriate response to the situation we find ourselves in, I think the lack of financial knowledge and financial literacy in this country is very, very low and needs to be improved. So I really strongly support the bill. I look forward to people submitting on it in the Finance and Expenditure Committee. I do think we need to improve our general financial literacy and our risk approach to borrowing and lending, so I support the bill.

Labour supports the Non-bank Deposit Takers Bill. It is, as my colleagues have said before me, about the confidence in and the robustness of the financial markets. It is important to put the bill into context, but it is important also to get it enacted, which is why a short speech is a good speech. I will make just a couple of points.

During the collapse of the numerous finance companies and the financial crisis, there was considerable uncertainty and fear about the finance sector and the wider economy. The then Labour Government passed a number of pieces of legislation that helped to bring certainty. It is important to keep on reiterating that, because that was the context of this bill, and it is a pity it has taken so long for it to get to this House.

In 2005 and 2006 the Labour Government carried out a Review of Financial Products and Providers, and that review found that it was necessary to reform the regulatory regime for non-bank deposit takers. The then finance Minister, Michael Cullen, oversaw the introduction of the Reserve Bank of New Zealand Amendment Act in 2008, which introduced requirements in relation to credit ratings, governance, risk management, capital-related exposures, and liquidity. But since this Government has been in office, investors in New Zealand have been left vulnerable, because National has not regarded it as an important issue. It is an important issue. International markets are in turmoil. People need to have confidence in the companies they invest in, and confidence that the appropriate regulator has the power to protect them from negligent or plain dishonest individuals.

If this bill had been introduced and passed as per the previous Labour Government’s time line, then Kiwi investors would have been protected. It would have encouraged investment in non-property assets, and it would have spurred on economic growth. The previous Labour Government had a long-term plan that would have protected investors and grown the economy, and Labour still has that plan through our considerable economic strategy and our capital gains tax policy.

Carol Beaumont’s Credit Reforms (Responsible Lending) Bill, which I am sure has been spoken about in the House tonight, was an attempted member’s bill that would have clamped down on loan sharks and protected vulnerable investors from outrageous interest rate charges. Our savings and monetary policies—which, obviously, will be announced—would have gone a long way to making a difference in this area, but that bill has been blocked, as we have seen in the House today.

Labour does support this bill. We will be listening closely to all of the submissions to the Finance and Expenditure Committee. We want to hear from the finance sector directly, so that any final reforms are actually practical and will positively affect the industry. That is why we are supporting this bill going to the Finance and Expenditure Committee.

It is pretty disappointing to hear some of the extraordinary rewrites of history that are going on in one or two of the contributions on the Non-bank Deposit Takers Bill, but I do not want to get too bogged down by some of the more dubious contributions of the newer members who have been speaking tonight, because, in fact, this debate has until now been mostly characterised by thoughtful contributions, and it is really good to detect—

💬 Simon Bridges: But I haven’t spoken.

But you do not make thoughtful contributions, so if you could just keep quiet for the next few minutes, that would be really helpful.

The ASSISTANT SPEAKER (H V Ross Robertson): Order!

I beg your pardon, Mr Assistant Speaker Robertson. I thank my friend. As I say, it has been good to hear that there is cross-party support for this important measure, because of course, as we all know, it will obviously be warmly welcomed the length and breadth of the country, although sadly it comes too late for the literally tens of thousands of New Zealanders who collectively lost a large fortune as one finance company after another failed in the middle of the last decade.

The bill is the important culmination of several years of work to tighten up supervision of the non-bank deposit taking sector. So I thought it was a bit disappointing and disingenuous of Stuart Nash to suggest that the bill should have been on the Order Paper straight after National came to office less than 3 years ago. He knows that the legislative system requires several stages. For Mr Nash’s timetable to be achieved, all the work would need to have been done and all the details would need to have been in place as the outgoing Government left office. So it really is extraordinary to hear the pot calling the kettle black in suggesting that somehow National is at fault for the fact that the bill was not all ready to go at the end of 2008. As I say, those comments are just a bit disappointing.

For the record, I particularly hope Ms Curran will take notice of this, as I want to reassure her that the current Government has been firmly focused on restoring investor confidence in our capital markets after the global financial crisis and the collapse of finance companies, and there is a huge amount of work that has been done and has been achieved. There is no question that serious changes were needed to rebuild investor confidence, which took such a hammering as a result of the finance company sector collapses.

We have been absolutely determined to ensure that investors have the confidence to invest, and that capital markets are able to broaden and deepen their base and appeal and to be free to innovate where appropriate. We continue to look for ways to do this through the policies we will be campaigning on in the coming election. People need to realise that in New Zealand we have to broaden the areas of industry and so forth that New Zealanders can invest in safely. That will help our economic growth, but also it will keep them on a safe pattern of investment.

We moved very quickly to start the process of reform. Within 3 months of becoming the Government, I say to Ms Curran, we introduced the Securities Disclosure and Financial Advisers Amendment Bill, which was aimed at making it easier for businesses to raise capital while ensuring the timely and accurate disclosure of information to prospective investors. Five months later it was the law of the land. That was not sitting on our hands; that was getting on with the job. By the end of 2009 Cabinet had signed off proposals requiring debt issuers, including finance companies dealing with moratoria, to give investors tailored disclosure documents and requiring companies already in moratorium to report their progress to investors.

Then the final Capital Market Development Taskforce report, which was led by Rob Cameron, was released. That report helped provide the Government with a framework for our work on financial sector regulation. That work included implementing the financial adviser regime, which had been passed in 2008.

The point that I am making is that these are just a few of many steps that we have taken, and they have been important, they are making a difference, and they show a Government absolutely determined to get on with the job and take the important steps that were necessary.

As an electorate MP, one of the more distressing experiences I have had—and I am sure that probably all members of this House could relate similar tales—has been to hear the very sad stories of hard-working, law-abiding New Zealanders, many of them nearing retirement age, who have suffered in this way. We are determined to put things right.

Bill read a first time.

Bill referred to the Finance and Expenditure Committee.