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 third time. I want to begin by thanking the members of the Finance and Expenditure Committee and officials who have engaged with the industry, the wider financial sector, and other interested parties. The purposes of the bill are to promote the maintenance of a sound and efficient financial system and to avoid significant damage to the financial system that could result from the failure of a non-bank deposit taker. The bill will not create a zero failure regime, but by completing the implementation of the regulatory regime for non-bank deposit takers, which mainly comprise finance companies, building societies, and credit unions, this bill will achieve those purposes.

The bill creates a stand-alone framework for the prudential regulation of non-bank deposit takers. It incorporates the prudential requirements already imposed under Part 5D of the Reserve Bank of New Zealand Act 1989 and introduces new measures, including the licensing of non-bank deposit takers, suitability assessments for directors and senior managers, restrictions on changes of ownership, and new powers for the Reserve Bank to detect and manage instances of distress or failure of non-bank deposit takers.

Licensing is at the heart of the bill, with the establishment of a licensing regime and a requirement for all non-bank deposit takers 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, and the opportunity this gives for the Reserve Bank to identify those who are clearly not suitable to hold positions of responsibility within the industry. Licences may also be issued subject to conditions. The bill sets out the types of matters that may be covered by conditions, and the consultation procedure to be followed if the Reserve Bank wishes to add new conditions or amend or revoke existing conditions of licence. There is also an express obligation for non-bank deposit takers to comply with the conditions of their licence, so that a failure to comply with a licence condition becomes a failure to comply with the Act. Breaching such a condition will be grounds for cancelling a licence.

Following licensing, the non-bank deposit taker must then comply with the prudential requirements that are already in place under Part 5D. Any substantial changes in ownership over a prescribed threshold must have the consent of the Reserve Bank. The powers of the Reserve Bank to address breaches of prudential requirements have also been strengthened to be more in line with the Reserve Bank’s powers under the banking and insurance regimes. In particular, the bill provides the bank with the power to direct non-bank deposit takers and their associated persons in particular circumstances. Amongst other things, the Reserve Bank can direct that a non-bank deposit taker takes specified action to address any financial or other difficulties it may be subject to.

Under the bill, the Reserve Bank is also able to remove and appoint directors where the non-bank deposit taker is in financial difficulty or failing to comply with statutory requirements. Under the bill, trustees remain the front-line supervisors of non-bank deposit takers’ compliance with prudential requirements, such as those relating to capital and related party exposures. To help ensure that the Reserve Bank can intervene where necessary, when a non-bank deposit taker is involved in an actual or potential breach of its obligations under the prudential regime, the bill provides the Reserve Bank with the power to direct trustees to take certain specified actions in these situations.

During the Committee of the whole House stage, additional amendments were included in the bill by Supplementary Order Papers 99 and 394. These amendments were largely technical in nature and, in many cases, were necessitated by the recent enactment, or coming into force, of other legislation, most notably the Financial Markets Conduct Act. Along with the changes recommended by the Finance and Expenditure Committee, these changes have helped to ensure that the bill is well designed and will operate efficiently.

To sum up, the bill will increase confidence in the New Zealand deposit-taking sector and enhance the Reserve Bank’s ability to promote the maintenance of a sound and efficient financial system. It represents an important milestone by putting in place the final components of the prudential measures applicable to the non-bank deposit taker sector. From its first reading in Parliament in August 2011, this bill has received broad cross-party support and the general support of industry. Again, I want to thank the Finance and Expenditure Committee, those who made submissions, and officials for their work on this bill. I commend the bill to the House.

I rise to take a call on behalf of the Labour Party to support the Non-bank Deposit Takers Bill. Can I thank the Associate Minister of Finance, Jonathan Coleman, for his contribution and acknowledge the work done at the Finance and Expenditure Committee and by officials. I add my thanks and respect for the work done by the officials. I believe that this is a good bill. It is important that the non-bank deposit takers be appropriately regulated. It is one of the lessons that we have had following the global financial crisis—that there is a need to properly regulate the financial sector so as to protect members of the public from inappropriate risk. You cannot eliminate all risk but you can properly regulate to stop some risks from being hidden.

The bill defines “non-bank deposit taker” as being an entity that “offers debt securities to the public of New Zealand;” and then on-lends them. That second part of the test is necessary because if, for example, you are another company that offers just debt securities to the public—if you are a company that is not in the business of on-lending and the retail provision of money—then you ought not to be subject to the same regulatory regime.

One of the improvements that has been made is providing a good definition of what “related party” means. That is important when trustees have day-to-day oversight of debt securities—that is, when someone invests in a debt security, in a deposit, there is generally a trust deed that governs the terms upon which their deposit is to be held. The terms are generally overseen by a trustee, which is often something like Trustees Executors or AMP—one of those trustee security companies oversees it. Their duties include making sure that the trust deed provisions that are intended to govern how the money is held, and what sorts of assets it can be invested in, are conformed with by the entity that is taking the money from the public. Too often, of course, in recent years they were actually taking the money from the public and not giving it back. One of the reasons why that came to pass was that there was inadequate regulation of related party transactions, where those that were in control of some of these non-bank deposit takers were effectively using the money to lend to risky ventures that they or a related party had an interest in and that went belly-up. The directors of the issuer of the debt securities did not have their own names on the guarantees and they managed to lose the money of the depositors and not face personal liability in respect of some of the losses that occurred to depositors. So tightening up regulation around related parties is a desirable thing to do so that there is less ability to do that in the future, and so that it is less easy for people to pursue their private interests to defeat the interests of the people who have lent money through debt securities to non-bank deposit takers. I will not take any further time of the House, other than to endorse the Associate Minister’s comments. Thank you.

I am very pleased to speak in favour of the Non-bank Deposit Takers Bill. It is a very important piece of legislation in terms of restoring mum and dad investor confidence in our capital markets after the global financial crisis. I am glad to see that there is widespread support for this bill across the House.

I do want to draw attention to just one or two changes made by the Finance and Expenditure Committee—in particular, around the Reserve Bank’s powers to remove and appoint the directors of these non-bank deposit holders. I think this is an important additional power to the Reserve Bank, and it should be used carefully. When the Reserve Bank has made a decision about the suitability of the directors or senior officers, those persons now do have a right to appeal that decision. This was also amended to allow appeals by those who had proposed to be directors or senior officers, but who were prevented from doing so by a Reserve Bank decision on their suitability. I think that is an important rule-of-law aspect to this whole equation—making sure that we have the right people in the right places but also giving them the opportunity to defend themselves. So just drawing on that, I would like to support this bill in its third reading. I commend it to the House. Thank you.

I have got to say that whilst I share the sentiments of Mr Goldsmith’s speech, it was disappointing in one particular way. Members on this side have raised a number of key questions. I do not think the Minister of Finance took a call at all throughout the debate on the Non-bank Deposit Takers Bill. One of the concerns that both Mr Parker and I raised were issues around credit unions and compliance costs around credit unions. No Minister decided to take a call at all on the differentiating factors and different strictures around credit unions, the legislative framework, and how they operate in a completely different way—a different model; a cooperative model. These are pretty venerable institutions. I am sure we all have people in our respective patches and constituencies who are members of these institutions who have invested wisely. Also, I should say that these credit unions do a lot for their communities.

What we simply asked for on this side was some rationale and some assurance around why these credit unions and friendly societies would be placed within this legislation. I do not think that is too much to ask of highly paid Ministers with highly professional and knowledgable officials behind them. But it got to the point where the Minister could not even sort of turn round and ask his officials for the answer and give us some assurance, and nor could the now chair of the Finance and Expenditure Committee, Paul Goldsmith—rather than stand up, run through a few cursory items, sit down, and raise the white flag. So it is disappointing, because I know that some of the submissions from the New Zealand Association of Credit Unions, on behalf of its members and others, raised some very valid points and would have appreciated, I think, as we go forward and process this legislation, some sort of assurance or rationale for the record. But no one, including Mr Hayes, who I think is a member of the Finance and Expenditure Committee still, Ms Barry, Mr Goldsmith, or others—but, more especially, the ultimate responsibility is with the Minister in the chair—was prepared to even give lip service to that request and just provide some background for the record in the Committee stage or the third reading. I have got to say that that is disappointing.

Mr Goldsmith is right. There is widespread support across the House for this bill. But if we are at a stage where when we raise valid questions, without politics, to simply try to secure some level of confidence for various entities in the community, and the Ministers simply sit there, at 10 past 11, and just read their papers and do not even bother to seek the information, even if they are not the Minister with portfolio responsibility, then you have got to say that that is a bit rough. It is not too rough on us, because we are not the ones with our backsides on the line; the credit unions and friendly societies are. Their members will be looking at changes that are made. Their members will actually be saying: “What does this mean for us? Are we going to have to change? What will these prudential requirements mean for us in terms of our investment structure, in terms of our appointments, in terms of how we manage funds and take deposits?”. As my colleague Clare Curran says, obviously the Government over there does not really care about that end of town, even though that end of town—credit unions and friendly societies—are a bit bigger and they have more substantial funds under management than many other entities in our community.

So I would have thought that in the spirit of bipartisanship, or non-partisanship, that this bill has engendered, Ministers or members of the select committee would get up and simply put on the record the rationale for this. It would have been helpful. Maybe it is going to happen when I sit down and a Government speaker takes the next call. That would be helpful. I make this genuine plea to the next Government speaker: could they provide that advice on the record? Mr Hayes, Ms Barry, or—well, Mr Goldsmith has already spoken. Could somebody who is on the select committee take some advice from the Minister’s officials? I am sure Mr Hayes will, because he is a reasonably responsible joker. Could he actually, in his speech, if he is allowed to, get up and give that rationale as to why these credit unions are going to be lumped into this? It is a pretty simple request. There is no politics in it. We will accept the nature of it and take the information. We are all supporting it—I do not think there is anybody in this House who is not supporting this bill—but it would be a courtesy to those credit unions, which will be the ones—

💬 Dr David Clark: To the listeners at home.

—and to the listeners—that have to implement this legislation.

I think it was the credit unions that rightly said in one of their submissions, or perhaps to the media, that it will be the entities that did not collapse, as I said in the Committee stage, that pay for this, not the bad guys who did collapse. It will be survivors—including the credit unions, which acted appropriately and were fiscally conservative, and guard with a great deal of pride their members’ investments and money—who are going to have to bite the bullet on this. Even if it is appropriate, and it may well be, I think they are owed a duty of care from this Parliament and this Government to ascertain why they are lumped in. They raised some very, very solid points—different model, different membership structure, different investment structure, cooperative model, different priorities, and fiscally conservative with the investments. They are all the things that you would have to say that some in the big end of town are actually lacking, especially those who came a gutser through their own lack of financial foresight.

So I will conclude by simply making the request again for about the third time that some narrative be put down in a third reading speech from the Government to answer the points raised legitimately and professionally by credit unions. We will support this bill, but I think that as we are doing this—I know some want to get home over the side—it is appropriate that proper information is put on the record of this House so that entities know what is going to happen and what they are up against, and why they are caught by the sort of catch-all bill that this is. So I look forward to the next Finance and Expenditure Committee member taking a call.

I rise on behalf of the Green Party to speak to the Non-bank Deposit Takers Bill and to echo many of the sentiments expressed by Clayton Cosgrove, who I thought made some really good points. The thing that people probably do not realise about this pretty obscurely named bill, the Non-bank Deposit Takers Bill, is that essentially it covers three entities: finance companies, credit unions, and building societies. People will be very familiar with the finance companies. The finance companies are, of course, the companies that collapsed and cost taxpayers many hundreds of millions of dollars as they had to be bailed out. I will get back to that, particularly South Canterbury Finance, where the bailout was mismanaged by the current Government.

Finance companies are a very different kettle of fish to the credit unions and building societies, but they are all being regulated together under this one piece of law, the Non-bank Deposit Takers Bill, or Act as it will become. That is a problem. It is a problem because credit unions and building societies have a very different risk profile to finance companies. In the Reserve Bank’s report that was delivered very recently about the review of the non-bank deposit taking sector there was some discussion of those differences. I think that this is a real missed opportunity to make sure that the regulation of the credit unions and the building societies accurately reflects the risk and performance of those two kinds of institutions, which is fundamentally different to the finance companies.

If one casts one’s mind back through the earlier part of this century and the emergence of the finance companies and the huge risks that the finance companies presented, one sees that during all of that period all of our regulatory agencies completely failed. So you would have to say that the Reserve Bank, Treasury, and the trustee structure that was set up to provide oversight fundamentally and completely failed the people of New Zealand in providing adequate prudential supervision of the finance companies. The proof of that is the fact that the finance companies overwhelmingly—almost all of them—went belly up. They went bankrupt. At the end of the day, it was the depositors in those companies and the taxpayer who ended up having to pay the cost of the fact that the finance companies went bankrupt.

So it seems to me that we need to differentiate between those institutions, the finance companies and their regulation, and the credit unions and building societies, which did not go belly up. But it became one of the mantras of the neo-liberal model of the 1980s and 1990s that one has light-handed regulation of things like finance companies. Unfortunately, the Clark-Cullen Government was completely captive to the neo-liberal ideology as it applied to the regulation of the finance sector. It applied the same kind of laissez-faire regulation of the finance sector that has been the ideology from New Zealand since the early 1980s, and that is why we ended up, as taxpayers and depositors, losing so much money, because of the laissez-faire regulation that the Clark-Cullen Government continued through the early part of this century, which meant that the taxpayer ended up having to pay the bill.

This Government, paradoxically a conservative Government, came in at a time after the global financial crisis and has had to institute the regulation of these sectors, but it is very much closing the gate after the horse has bolted. Most of the finance companies have already gone, and so most of the institutions that are now being regulated by this bill, which is a response to the failure of the finance companies, are not finance companies. This is the paradox of the bill that we have before us. This bill is a response to the failure of the finance companies but this bill actually overwhelmingly regulates credit unions and building societies. So that is the paradoxical situation we find. So the incoming conservative Government had a complete overreaction and a poor response to the situation that we are in. We should actually have the regulation of credit unions and building societies done differently to finance companies because credit unions and building societies do not have the same level of risk associated with them. The proof of that is the fact that during the global financial crisis the finance companies went belly up but the credit unions and building societies did not. So instead of saying that we will have a differentiated regime, we have just lumped them all in together into non-bank deposit takers.

There is no question that we need to improve the regulation of the finance companies in particular, so that is why we are voting for this piece of legislation. It is the right thing to do, even if it is after the horse has bolted. Hopefully, it will prevent a similar thing happening again. What it means is that there is a sea change in a kind of philosophy of regulation in New Zealand, and a recognition that the failure—the complete and absolute failure—of the neo-liberal model of laissez-faire regulation has been recognised. I doubt very much that that is completely recognised by Treasury and the Reserve Bank, particularly Treasury, but certainly to some degree it has been and that is a good thing. But lumping the credit unions and building societies in under exactly the same kind of regulatory regime, I think, is a bit of a mistake, and we need to differentiate. So, in the implementation of this law, given that it is going to go ahead, it is very important that the Reserve Bank differentiates between the credit unions and the building societies on one side and the finance companies, such as they remain, on the other.

Unfortunately there is not a great recognition that that will happen. We had the Reserve Bank in front of the Finance and Expenditure Committee a few days ago, when I raised these issues and there was some acknowledgment of the issues but I do not think a great acknowledgment. There was also the issue of trustees, which I think we really have to address. For people who do not know, these non-bank deposit takers—finance companies, credit unions, and building societies—have trustees who are meant to provide supervision. What we know about the trustee model is that it is a complete failure—a total and absolute failure. The proof of the failure of the trustee model is that depositors lost millions and millions and millions of dollars and taxpayers lost millions of dollars because they had to bail the thing out. So given that the trustee model has proven to be a complete failure, why are we continuing with it as if it works when we know that it does not? It has been proven that it does not work. The trustee model does not work in terms of providing prudential supervision of these companies. The proof of that is what actually happened. But we carry on and pretend the trustee model works. It does not work.

Why do we not actually introduce regulatory regimes that have a better chance of working? For example, in the review of non-bank deposit takers, there was talk about treating credit unions and building societies more like banks and regulating them directly more like banks because a lot of their behaviour is bank-like. Why would we not regulate them more directly, more like banks, and in the process get rid of the trustees, who are useless because they do not protect these companies from acting poorly, as we saw with the finance companies? By getting rid of the trustees at the same time, we also reduce the red tape and the regulatory burden on the credit unions—a regulatory burden that the banks, their competitors, do not face. So if you are a credit union, you have got to have this elaborate structure above you of trustees and so forth. It all has to be supported. If you are a bank, you do not. Yet we lumber the credit unions with this elaborate regulatory burden that they totally do not need. Why do we not regulate them much like we regulate banks? Let the credit unions compete with the banks on a fair, even playing field. Reduce the regulatory burden on the credit unions so that they can compete for deposits with the banks.

I think that in the implementation of this regime it would be great to see the Reserve Bank recognise the reality of the difference between the finance companies and the credit unions and building societies. That is one of the fundamental problems of this legislation. We are supporting it because I think we need it, but I think it is important, as we go forward, that in the implementation of the law we recognise the difference. I think that in the future we are going to have to change the legislative framework around credit unions in particular, to recognise the actual risks associated with credit unions. I also think we need to acknowledge that the trustee model completely failed. It did not work as a way of actually preventing widespread failure of the finance companies. It was a failed model. None the less, we will be supporting the legislation but we look forward to future improvements of the regulatory framework in this sector. Thank you.

I take a brief call on behalf of New Zealand First on the Non-bank Deposit Takers Bill. For those out there listening to this or watching this, I will give just a reminder as to what the bill actually does. The bill seeks to implement the final components of a new regulatory regime for non-bank deposit takers. These are deposit takers in the finance industry that are not banks. This incorporates the prudential requirements already imposed under Part 5D of the Reserve Bank of New Zealand Act 1989, and introduces new measures covering the licensing of non-bank deposit takers, suitability, assessments for directors and senior officers, restrictions on changes of ownership, and new powers for the Reserve Bank to detect and manage instances of distress or failure of those non-bank deposit takers.

Essentially, what this bill does is tighten up the areas outside of the main banking stream and brings in a lot more controls via the Reserve Bank, so that we will not have a repeat of some of the, perhaps, cowboy activities that have occurred in the past in some of our financial institutions—or what you could call fringe financial institutions.

In looking at Part 2 of the bill, clause 13, “Determining applications for licence”, states: “The Bank must not grant a licence to an applicant unless—(a) the Bank is satisfied that the applicant, if licensed, would be able to comply, on an ongoing basis, with this Act, the regulations, and the proposed conditions … (b) the Bank has received a suitability notice for each director and senior officer, or proposed director and senior officer, of the … Bank …”. That is most important because what it basically says is that, at last, full applications to the Reserve Bank will be required for these various entities. They will also have to justify who the directors are and who is controlling these entities.

In terms of the appointment of the directors, if a licensed non-bank deposit taker is a company, building society, or overseas company, “(a) the governing body of the [non-bank deposit taker] must include at least 2 independent directors; and (b) the chairperson of the governing body of the [non-bank deposit taker] must not be an employee of either the licensed [non-bank deposit taker] or a related party.” An independent director cannot be an employee of either the non-bank deposit taker or a related party. An independent director cannot have more than 10 percent of the voting securities of the non-bank deposit taker or related parties, and are therefore, in a sense, truly independent and able to provide independent advice to that entity. In the past, these lines have been a bit blurred, perhaps, where employees have acted in this role. Senior management has acted in this role in some cases. Often, as we have seen in the case of South Canterbury Finance and other such institutions, there have been instances where governance and management and other things have overlapped.

It is also interesting in terms of credit ratings that a licensed non-bank deposit taker must have a current rating of its creditworthiness or, as required by the regulations in clause 23, the creditworthiness of its borrowing group. Again, that will be of great comfort to investors—the mums and dads of New Zealand who are, perhaps, putting money into such financial institutions. The non-bank deposit takers must have a current financial rating and creditworthiness to substantiate what they are doing in terms of taking the deposits.

This is a further bill today following on from the Reserve Bank of New Zealand (Covered Bonds) Amendment Bill, which we had just before, and following on from other financial ones last evening. It is a tranche of various bills aimed at tightening up the financial markets in New Zealand. This is another one that New Zealand First supports, because we believe that there were some glaring anomalies in our financial legislation that were allowing less than satisfactory business transactions to take place and, indeed, putting New Zealanders at risk in the case of their investments. This is another way of tightening that up and giving more surety to the financial markets, making New Zealand a much safer place in which to invest money, and making it a far tidier situation for the New Zealand economy. New Zealand First will support the bill.

The point I have made consistently through this debate on the Non-bank Deposit Takers Bill is that it is a wasteful use of Parliament’s time to be shifting legislation from one place to the other. It does not make the changes perfectly that it ought to make. We have heard about the difficulties for the credit unions that are put into this bill. We know that today we have debated covered bonds in the Reserve Bank of New Zealand (Covered Bonds) Amendment Bill, 2 years after they were implemented overseas. We know that the Crown Retail Deposit Guarantee Scheme may have cost the taxpayer up to $500 million because of the Government’s mismanagement. The Government is not focused on the big issues, and it seems to be slow in getting this kind of legislation in place.

We will support the bill because, broadly, it is OK. It could be better. We wish the Government would get on with supporting our export sector, with worrying about the exchange rate, with introducing pro-growth tax reform, with bringing through increased savings with universal KiwiSaver, and with looking out for ordinary Kiwis’ interests with the type of policy that we are putting forward with NZ Power, and the kinds of policies like KiwiBuild, which we are putting in to make sure that ordinary Kiwis can hope to own their own homes. We want a Government that is taking the interests of New Zealanders forward.

This Government is sitting on its laurels. I am increasingly told by people whose doors I knock on in the weekends that this is a Government out of touch. New Zealand is going backwards under National. It does not seem to have a plan for the economy. It is disappointing that we are here debating fixes to problems that would be solved through a stronger economy. We would have more jobs if this Government was focused on the real issues, if it was focused on the big changes that are needed in our economy and not just tinkering.

I will take a short call on the Non-bank Deposit Takers Bill. I spoke on the first reading of this bill back in 2011. I did not sit on the select committee that heard the submissions, the Finance and Expenditure Committee, but I did speak in the first reading and it has taken a long time for it to get to this point. When you look back to the genesis of this bill, it actually comes out of work done by the previous Labour Government in 2005 and 2006. How many years ago was that? It was 7 years ago. It took 7 years to get this bill to this stage in the House. It came out of the Review of Financial Products and Providers. This was the second bill as part of that work, which was required to implement the registered non-bank deposit taker regime and included licensing, and fit and proper requirements.

We support this bill, obviously. I think you have heard from this side of the House that there has been quite a bit of concern around some of the measures, particularly around credit unions, which have not been addressed and answered by the Minister of Finance or by any of the National Party members who sat on that committee, which makes you wonder whether they were actually paying attention, whether this piece of legislation was just slipping through, and whether the Minister in charge of this bill, who I think was actually Bill English, was asleep at the wheel and not really paying attention to the concerns.

On the issue around credit unions, which has been raised by my colleagues Clayton Cosgrove and David Clark, I just want to go back to officials’ advice around their concerns. The credit unions believe that this regime should apply only to finance companies, and that cooperatives should be carved out, because they are different. The advice that was given—and it was very brief advice, which really did not go into any detail and should have provided a lot more of an explanation—was that it would provide a legal loophole in the regime whereby simply adopting a particular form would mean falling outside the regulatory regime. I contend that that was not sufficient, and that has not been properly explained by the Minister during the passage of this bill.

I would also like to draw the attention of the House to a bill we discussed last night, the Financial Reporting Bill, where there had been a lot more intelligent discussion around some of the measures in that. That bill singled out members of friendly societies, it singled out not-for-profit entities, and it looked at how the regime around financial reporting would or would not apply to each of those entities. In the bill that we are discussing today, that has not happened. I think that is a big mistake. However, we do support this bill. It comes out of work that was done by the previous Labour Government and I commend it to the House.

Bill read a third time.