Non-bank Deposit Takers Bill

The question I would like to ask the Minister in the chair, the Minister for Canterbury Earthquake Recovery, is about the impact of this Non-bank Deposit Takers Bill on credit unions. This bill makes changes to the prudential requirements that are imposed by the Reserve Bank and extends these measures to non-bank deposit takers. These are people who take money on deposit from New Zealanders who are investing to get an interest return, but who are not a bank, because the banks are already covered by the prudential requirements that are managed by the Reserve Bank on behalf of the Government.

My question to the Minister in the chair is whether the extension of the new measures to non-bank deposit takers applies to credit unions, and whether that is wise. We heard from credit unions at the Finance and Expenditure Committee that they are concerned at their overall level of regulation. Credit unions generally take small amounts of deposit from New Zealanders, and they lend it on small amounts of loans, generally in the consumer finance area. They are concerned that the measures of this bill do not overly tie them up in red tape, given that they are not really posing a great risk to the New Zealand financial institutions overall because they are such a small part of the overall financial services sector. They do not want to be tied up in unnecessary regulation that causes them more trouble.

There are a number of things that need to be fixed for credit unions that are not addressed by this bill. If I might, I will just mention them very briefly. One is that rather than have two trustees, they effectively have to have a statutory trustee and then another trustee who holds investments in their name or on their behalf. They cannot hold the investments in the name of the credit union because the credit union is not a legal purpose for banking purposes. That is not fixed by this bill.

They are currently restricted from lending to non-real people, so despite the fact that a lot of people who used to be employed, for example, by the post office are now a tied contractor through a small corporate entity, which might provide services to, say, Chorus, any loan that was made, for example, to such a small company for a vehicle could not be made by a credit union if it was being made to a corporate entity. Those sorts of things also need to be tidied up. I would like to hear from the Minister as to whether he has a view on that.

I think we should acknowledge right from the start that the Non-bank Deposit Takers Bill is a complete waste of time. Effectively, it moves legislation from one area to another, and Parliament’s time could be better spent, especially in urgency when we are supposed to be prioritising legislation that really makes a difference at short notice to our economy and to its settings. We have just debated a bill that has been sitting around for a long time in respect of the level of—what was it? It is slipping from my mind.

💬 Hon David Parker: Covered bonds.

It was the level of covered bonds, sorry. Thank you to my colleague. It was legislation that was important to have in place, eventually. It has taken the Government a long time to get there. We are debating things under urgency that ought to really, I guess, have been tidied up earlier on.

This is a Government, though, that seems to have its eyes off the ball. David Parker has already alluded to many other things that could make our economy more productive and that could change the relative balance between the productive and speculative sectors in order to make a more productive economy. That would help this Government’s fortunes. It does not seem to be interested in the wider interests of the New Zealand economy, preferring instead the deals with the likes of Chorus that we see being cooked up at the moment; Skycity, the casino deal that will build a convention centre off the back of problem gambling; and Rio Tinto. Actually, the taxpayer is getting a pretty poor deal on the deals that are being done. They do not seem to have any advantages for the taxpayer other than getting the Government out of a hole when it has made commitments.

This legislation, as I said, largely replicates legislation already in place. We heard from a submitter from Chapman Tripp who thought that one point worth noting was that the capital adequacy criteria tend to be much more stringent in practice than the advertised minimum capital of 8 percent due to the high risk weighting given to some asset classes—as much as 350 percent—and the market risk - operational risk multiplier. This is something of a variance to the original conception around second-tier financial institutions and may result in a shrinkage to the sector greater than is allocatively efficient. In layman’s terms, that is really about perverse incentives to loan heavily into the mortgage market and away from productive areas. This bill may actually have a perverse outcome; when we want those firms to actually be investing in productive assets, they may be forced to take on capital adequacy measures that hamstring them and make them less competitive in the market place.

I will be interested in the view of the Minister in the chair, Associate Minister of Finance Coleman, and whether he is willing to defend it. He will have known that this bill was coming up, having looked at the Order Paper overnight, and no doubt will have studied the finer points of the legislation and have a view as to why the Government is choosing to disadvantage credit unions, why it is making life very difficult for them, and why it is trying to push more money towards the speculative housing sector when that is such a problem for New Zealanders. Ordinary, average Kiwis cannot get into their first home. This Government seems determined to make that worse. We have the loan-to-value ratio restrictions that have been put through by the Reserve Bank, which are playing out in a strange kind of way, because although first-home buyers cannot get into the market, it is making it a little bit cheaper for property speculators to get in. We see the inequalities widening, and here we have another measure that distorts the economy further. This is, sadly, indicative of a Government that has its eye off the ball. It is not about rebalancing the economy. The Minister in the chair should stand up and provide some technical advice as to why that incentive will not come to pass. I think it will be embarrassing if he is not willing or able to defend that.

The Government ought to be focused on rebalancing the economy, not on passing bills that simply shift legislation from one part of the book to another. It should be more concerned about creating jobs and supporting exporters. These are the things Labour wants to do. We know that our export economy needs to be supported. The high exchange rate is crippling our exporters. We hear that time and time again, but the Government is reluctant to put monetary policy in place that would support that. It is reluctant to undertake pro-growth tax reform—the likes of a capital gains tax, which would see money go towards the productive sector and out of the speculative sector. It is reluctant to support research and development in this country—and on it goes. It will not put in universal KiwiSaver, which would also create capital depth and address the problems that this bill is, in a way, setting out to fix. Those bigger solutions have been looked over in favour of tinkering, and that is a great disappointment.

This legislation needs to strike a balance. It is not quite doing that in the right way, and it is similar to those things we have seen in the past with the Crown Retail Deposit Guarantee Scheme, where the Government took its eye off the ball. We saw in that case a 25 percent increase in South Canterbury Finance’s books, the risk borne by the taxpayer, and then we saw a ten-fold increase in another finance company. This is a Government that really does not have itself across the detail, but it is interested in making sure that taxpayer money is handed over to get the deal and to get things out of the public limelight. We are seeing that with Chorus now. We have seen it with Rio Tinto, where the Government handed over $30 million—30 million pieces of silver, my colleague Clayton Cosgrove says—without a jobs guarantee. The very next day, it is talking about laying staff off. This is a Government that is doing deals to get things off the front pages, like the Skycity Casino deal. It is really not focusing on growing the economy, which is what we really need. We need more jobs—jobs for Kiwis, high-value jobs—and that will be created by having the right economic settings, not by protecting the vested interests that this Government seems so determined to protect.

We hope that the Government sees the light. We hope that in the future it applies the principles that I have outlined, because on this side of the Chamber we are interested in ordinary Kiwis—those extra people who are unemployed. There is a much higher unemployment rate than when National took office. Unemployment has gone up and up, and median wages are down under this Government, in real terms. That is why New Zealanders are feeling the pinch. The cost of living has gone up, but their wages have not. With the tax cuts that the Government put through in 2010, I note that 40 percent of the value went to the top 10 percent of earners, and the bottom 20 percent got just 10 percent of the value. That is disappointing. That is growing the gap between rich and poor. The gap between rich and poor has never been so high in New Zealand as it is under this Government. Inequalities have grown and this Government seems happy to oversee the demise of this country.

I want to pick up where David Parker left off in respect of the smaller end of town, in terms of credit unions. I note that the New Zealand Association of Credit Unions and its members made a number of submissions on the Non-bank Deposit Takers Bill. Basically, their thesis said that credit unions should not be lumped in with finance companies under the same non-bank deposit takers definition, given that “A cooperative business model”—I am quoting from them—“is so inherently different from other financial institutions”.

That does raise a valid point, because if you look at the model of credit unions and friendly societies, they have vastly different objectives based on the various Acts—the Friendly Societies and Credit Unions Act and others—that govern them and that they originate from. They are coupled with their own prudential supervisory requirements via trustees. In the case of credit unions, they are all equal partners, equal shareholders, within that entity, which is vastly different from the case of the financial sector. They have a cooperative model that is based on equal ownership and that is based on the very needs of the individuals in that entity and the communities, interests, and industries in which they operate. They are inherently conservative, if you look at the history of credit unions, in respect of their investments. They are involved in health schemes, skilling schemes, and all sorts of interesting and innovative processes, and they are very entrepreneurial, but they are inherently conservative and they are based on a cooperative model. Their approach to business is not driven by shareholders, if you will, who take risks; their basis for business is based on cooperation and collectivism. And it would be hard to see, and it is still hard to see, why those additional prudential requirements should be visited on them, because, of course, they inherently have a whole series of additional compliance costs.

So I would be interested to know from the Minister in the chair, the Associate Minister of Finance Jonathan Coleman—and if he could answer some questions, that would be helpful to us—why it is that the Government believes that credit unions, for instance, and friendly societies and others that do, indeed, take deposits but operate completely differently, on a far more conservative basis, with a cooperative model and equity in terms of individual members, should be lumped in with this. I do not know whether the Minister in the chair is going to take a call. I note that the chair of the Finance and Expenditure Committee, Paul Goldsmith, is here today. It would be very helpful, if the Minister is not in a position to take a call, if Mr Goldsmith took a call and gave the Government’s rationale for this. The cost of regulation, of course, is going to be borne by firms that did not collapse, that actually did do the right thing—credit unions and others—that were fiscally conservative, and that did manage their funds and their members’ funds and investments appropriately. Of course, they are going to be the ones that, along with others in the financial sector, will bear the brunt of these compliance costs.

We are all, as I said in the last debate, for financial stability. We are all for ensuring that the best prudential requirements are put in place to protect mum and dad investors or any investors. You would have to look—and I challenge the Government to provide some evidence if I am wrong—at the history and performance of credit unions. In many, many respects, in the management of funds that they have, they outstrip many in terms of the conservative nature of their investment portfolios and how they manage funds. That is borne out by many of those they outstrip not being here any more because they collapsed.

Those credit unions provide a pretty unique form of model and form of investment for their members. They are involved in a vast array of pretty unique activities for people who are in this sector, in terms of providing opportunities for their members, and they have a completely different model. It is a cooperative model. It is a very old model. They operate completely differently. So it would be helpful if somebody on that side could, for the record, put on the record the rationale for lumping in credit unions with every other non-bank deposit taker, because I think they do make a valid argument that they can differentiate themselves off from most. If the Government still believes that it is appropriate that they be part of this regime, then the Government needs to stand up in all fairness and articulate in a detailed way why it believes that. It may be helpful to do so, I think, in terms of the level of understanding. And it may—I doubt it but it may—allay some of the fears that credit unions and others in that area have in respect of this bill.

I would be grateful if somebody from the other side would take a call. Again, there is not a lot of politics, if any, really, in this bill. I was on the Finance and Expenditure Committee for most, if not all, I think, of this piece of legislation going through, and I would acknowledge that there was a genuine effort on both sides to make it work. It is appropriate, but these credit unions and friendly societies do have some genuine concerns. They have put some appropriate propositions on the table in their submissions, arguing that they should be differentiated off, and dealt with, differently or dealt with under the Acts that prescribe their activity anyway. I would be grateful if a member from the other side or Mr Goldsmith could provide the Government’s rationale for that. I am sure that that would be helpful for those submitters.

The question was put that the amendments set out on Supplementary Order Paper 394 in the name of the Hon Bill English be agreed to.

Amendments agreed to.

Parts 1 to 4, schedules 1 to 3, and clauses 1 and 2 as amended agreed to.

Bill as amended agreed to.

Bill reported with amendment.

Report adopted.

Third Reading