Reserve Bank of New Zealand (Covered Bonds) Amendment Bill

It is my pleasure to give a contribution in the Committee stage of the Reserve Bank of New Zealand (Covered Bonds) Amendment Bill. Labour will be giving its support to this bill. We do have some reservations, though, in giving that support, but we will traverse that over the course of this debate.

The purpose of this bill—obviously, covered bonds are debt securities issued by a financial entity. But at the moment the legislative framework for covered bonds in New Zealand is somewhat lacking. So opposing this legislation—and this is something that Labour has considered in giving its support—would not prevent the issuance of covered bonds, but it would leave New Zealand without regulation, and we would be concerned by that situation. That is one of the reasons why we are giving the bill support, with reservations.

To cover the purpose of this bill—briefly, given that we are at the beginning of the Committee stage—the key feature of a covered bond is that bondholders both have an unsecured claim over the issuing entity and hold a secured interest over a specific pool of assets, called the cover pool. New Zealand banks have been active in issuing covered bonds over the last 2 years, and this has been carried out under contractual arrangements. However, most jurisdictions—and we often look to jurisdictions like Australia when assessing whether or not we are keeping up with the play in terms of those jurisdictions that are similar to us—with banks active in the covered bonds market, which includes Australia, now have a legislative framework for issuance in place. The lack of a similar legislative framework in New Zealand does put New Zealand issuers at a disadvantage, and that is one of the reasons why, obviously, this bill has been brought in.

The bill establishes a legislative framework for covered bonds, the purpose of which is to improve financial stability by ensuring that New Zealand banks have effective access to the covered bond market as a source of long-term, relatively stable finance, as an alternative source of bank funding. But the main problem that has been identified—which we are obviously trying to remedy with this bill—is a lack of certainty over the effectiveness of legal arrangements to segregate the cover pool assets from the assets of an issuing bank. So that is something that this bill is trying to address. The second problem that this bill seeks to address is ensuring that there is an adequate level of independent monitoring of information provided by issuers on cover pool assets. So the three things that we are likely to debate in this Committee stage are: first, the requirement that covered bonds issued by New Zealand banks be registered, subject to meeting registration requirements; second, the independent monitoring of cover pools by an asset monitor; and, third, provisions to amend the legislation, including the Companies Act 1993, to clarify the treatment of registered cover bonds in the event of issuer insolvency.

I think that anyone would agree that in this current environment and with the state of our financial markets in the past few years, regulation is better than the absence of regulation. Hence, Labour is lending its support to the bill, because to not do that would mean a continuation of the status quo, where we have an ad hoc arrangement, which is contractually based, as I understand it. That leaves us at a disadvantage when we are looking at comparable jurisdictions like Australia, but that does not mean that simply having a regulation in its current form is going to necessarily tick off all the boxes that we would be looking for—all of the acid tests that we would have—for legislation such as this. My colleagues who have been involved in this area a little more closely than I have will, I am sure, traverse some of that in their contributions.

One of the things, though, that we are also likely to cover is that the effect of covered bonds currently is to create a class of lenders to banks who have a higher level of security over banks compared with other lenders. That is unfairness, in that it creates a two-tiered system. Most covered bond holders are foreign institutions. So the question is, where does this leave mum and dad investors, whom we have so frequently heard about—

This issue is one that we debated at length in the Finance and Expenditure Committee, although that was some time ago. I look across and recall Mr Bennett from the other side of the Chamber there participating in this lively discussion in the select committee. Other members here will think back and remember the interesting discussions we had.

If a bank collapses, covered bonds have a higher priority to banks over other lenders, including ordinary mums and dads. There is no doubt that it is desirable to have some legislation in this area. It seems a good idea to have an instrument that is protected from runs on banks and from other unforeseen financial situations in order to attract a certain kind of lending at a premium. Having a covered bond is a mechanism that is used around the world to provide some financial security to banks and to other lenders. We know that $6 billion worth of bonds has been issued over 2 years without any regulatory oversight, so it is clearly an area that needs to be addressed. It is good and it is timely to do so.

Our question on this side of the Chamber is whether the percentage of a bank’s assets that can be placed in this position is too high. It is possible that the 10 percent limit is too high. We looked at other examples overseas and we found that in Australia it was lower—I think around the 8 percent mark, from memory—and in Canada it was as low as 4 percent. So we ask whether the big end of town needed this much protection and whether, in fact, that level could be set lower. Those who were pushing the case seemed determined that it should be higher. On this side of the Chamber, that left us a little bit uncomfortable. So we are really arguing about where the line should be drawn.

We on this side of the Committee are very concerned about small-business owners, about mum and dad New Zealanders who take out a mortgage to start a business, and about those who are putting their shoulder to the wheel, taking the risks, and borrowing money. Having them further down the list of people who are able to access capital in the case of a collapse seems an injustice. So we do not believe that too much of this covered bond lending should be happening, and we would have less of it.

We think of the recent example—not so recent now, but not so long ago—of Mainzeal Property and Construction, and the way in which individual contractors and small-business folk missed out on getting their money and, worse than that, getting their tools back. So Labour is, of course, proposing solutions in that area to make sure that subcontractors—the lifeblood of our economy, those who go to work every day—and their interests are looked after. That, unfortunately, does not seem to be a priority for the National Government. It is more interested in making sure that the interests of big business are protected. I could digress into Chorus, the Skycity Casino deal, and Rio Tinto as other examples of that, but I think it would be better to focus on the particular issue of covered bonds and quite where that line should be drawn.

Labour will be supporting this bill, I have to say, despite our reservations. That is primarily because we think there needs to be a regulatory framework. We are actually arguing, as I said at the beginning, about exactly and precisely where that line should be drawn. The lack of a legislative framework has, we think, put New Zealand issuers at a disadvantage. At least with the regulatory certainty in Australia for those who are seeking to lend, there is some certainty to the people they are lending to. As we know in the world of business, often regulatory certainty is more important than other factors. Businesses like to know the risks that they are dealing with, take their chances, and develop a strategy around those risks.

I think back, for a parallel example, to the emissions trading scheme. I had the privilege of working on that legislation as an official many years ago. When I contacted, for example, the oil companies, I had oil companies saying to me: “We will scream if you put this legislation through. But we will scream quietly if we know what it is and we know the detail of it. However, if the rules are not clear, if the legislation is too harsh, if it comes too soon, and if it comes too fast we will scream loudly.” They were representing their interests, their clients, and their profits. But they are also, like any business, looking to the future and saying: “We can plan if we know what the rules are. We can plan our arrangements. We can work out how we are going to structure our debt. We can plan as to which areas of industry we go into and whether we move toward renewables.” I know that BP had a brand that was about a sustainable future. That has been called into question by more recent events, but BP made choices about where it was going to put its business interests, and that is around regulatory certainty.

Certainly in New Zealand one of the discussions that we have in this Parliament often is around regulatory certainty and the ability to attract capital to our businesses here—not just overseas capital but New Zealand capital. There are some significant New Zealand companies that want regulatory certainty here, or otherwise they will invest their money offshore.

That is why we will be supporting this bill. We do think that that limit is a little too high and panders to the big end of town and that it makes sure that the big institutional lenders, creditors, and so on are protected, rather than looking out for the interests of those who are starting up and those who are literally risking the shirt off their backs. We see the pattern there in the Government’s other behaviour, but we appreciate the need for a regulatory framework.

There are, of course, other areas where we would like to see the Government provide greater regulatory certainty in the interests of the financial well-being of New Zealand long term. Here we are talking about savings and putting savings at risk. In the KiwiSaver arena we would like to see universal KiwiSaver so that there is actually a greater depth of savings in New Zealand, a deeper pool from which businesses can lend. We think of the Australian scheme, which came in shortly before the National Government in the early 1980s canned the scheme we had here. They now have about $1.6 trillion in their retirement savings scheme, and that is available capital. So that is good for small business. In New Zealand if you want to start a small business you are handing round the hat to your family members. In Australia there is a lot of capital, and a lot of it is sticky capital that stays close by, that is available for good ideas, that pursues good ideas, and that ensures growth in that economy.

These are issues of savings. They are issues of how we protect lenders—whether we can attract good credit from overseas—and they are important issues for our country. There are, of course, plenty of others. There is the capital gains tax that we would like to introduce, which we think would send money towards the productive sector again in New Zealand. All of these things actually reduce the risks that we are trying to cut off here. When you have an economy that is prospering and when it has got a balance of trade that is under control—a rebalanced economy—there are fewer risks in it. It is more attractive for investors over time because they see its health.

It was very disappointing to see our economy downgraded under this Government’s last term because essentially it did not have the vision. It was not projecting the right kinds of figures in the period to come that would give the international ratings agencies confidence. I guess that is because this Government has run deficits consistently, where the last Labour Government ran 9 years of surpluses. Michael Cullen was certainly a strong hand on the tiller. Our economy was running strongly, but under this Government it has lacked a certain amount of vision. It has lacked the ability to convince those ratings agencies that we have a long-term plan for our economy, that it is secure, and that it is a good place to invest in the same way that the previous Labour Government has. This Government has a poor record on the economy—the worst economic record of any Government in the last 50 years in New Zealand—whereas the Labour Government, certainly, by introducing Kiwibank, KiwiSaver, and other measures, pushed us towards more secure savings that will benefit small businesses in our economy, which is the type of issue that we are dealing with here.

The legislation itself has three main elements: a requirement that the covered bonds issued in New Zealand by banks be registered subject to meeting registration requirements, which is a technical expectation that enables monitoring and makes sure that this does not get out of hand; independent monitoring of covered pools by an asset monitor; and provision to amend the Companies Act.

Like my colleague, we note that we will support the Reserve Bank of New Zealand (Covered Bonds) Amendment Bill because, in essence, opposing it, of course, will not prevent the issuance of covered bonds. It will merely leave New Zealand without regulation and at a competitive disadvantage, particularly with Australia, as covered bonds already exist there. I have to say, like my colleague Dr Clark and others on this side who have spoken in respect of this bill, that we do have a reservation in respect of the unfairness that is created with a two-tier system whereby in the event of a collapse, of course, the banks get far better coverage, and get to essentially secure their shirt and others do not.

You could make an argument—and there is a bit of precedent for this—in respect of the big end of town being looked after. There are precedents with this Government in terms of looking after the big end of town, whether it be those in the film industry, or whether it be a negotiated disaster with Skycity, where Skycity effectively took the negotiators and the Government to the cleaners, but the big end of town tends to get looked after by this Government. The small folk, those at the other end of the scale, tend to have a different set of rules, a different set of parameters, and a different set of safeguards. As my colleague said, we are mindful, for instance, in respect of Mainzeal Property and Construction Ltd, where the big end of town was first in and those subcontractors and others even struggled to get their tools out of the construction site, let alone the age-old problem of getting paid.

So although we support the bill, we have reservations in respect of it. I wonder, like Dr Clark, whether the limit of 10 percent of a bank’s asset base is, indeed, too high and whether that should not be brought into line with the 8 percent that exists in Australia. Why we would have a different system—why we would have a different tier? I do not think has been adequately explained by the Minister in the chair, the Minister of Internal Affairs. We would look forward to some explanation in respect of that. Why is there a difference? Why did the Government put in a different level and a 10 percent limit as opposed to other jurisdictions like—

💬 Dr David Clark: Very keen to hear what the Minister has to say about that.

Indeed. Dr Clark says that he is very keen. I know the learned Minister in the chair will be all over this legislation. He would have examined it in great detail last night knowing that he was coming into the chair today, but—

💬 Hon Shane Jones: Stu Nash knows the answer. Stu Nash.

Stu Nash does know the answer. I look forward to Stu Nash providing us with that answer when he re-enters the fray in here in a matter of months, as the incumbent has raised the white flag of surrender—“Custer’s last stand”. It is all over, and various vermin are deserting various ocean-going vessels, as it were. So I look forward to Mr Nash giving us a very good dissertation in respect of this. But it is a serious point.

This legislation at its essence gives preference and a preferred status to banks. There are some reasonable rationales behind that. There are also some large risks and unfairnesses behind that, especially when everybody else sits in the second row, as it were, in terms of the hierarchy if there is a collapse. So, that being the case, we will support this bill because covered bonds already exist. As I have said, opposing it would not stop that, but not having an appropriate regulatory framework and safeguards around it would put us at a disadvantage.

I come back to this point. Why is it—and I would like an explanation for this, so the Minister may want to consult the learned officials—a two-tiered threshold? I think people are getting quite weary of the fact that if you are a big multinational corporate—say, Rio Tinto—anything is possible for you. Money rains from the sky and other places in order to help the big boys out. I think Rio Tinto made $4.3 billion last year—those poor souls, who are scratching for every dollar they make. I think it was about $4.3 billion or thereabouts. Yet, the Government went and gave it a big chunk of dough—$30 million, of course. The Government threw money at it as if it was growing on the proverbial trees.

💬 Hon Shane Jones: Tossed it away.

Tossed it away. [Interruption] Yes, I am coming back to it. And the point I am illustrating is in respect of covered bonds where there is a two-tiered preference system, where the big end of town stands ahead of others. Returning to my Rio Tinto point as an illustration of that, what did we get for the $30 million? Maybe Mr Bennett could tell us. We were told that there would be job security for those folks.

The CHAIRPERSON (Lindsay Tisch): Order!

Indeed—job security for those folks never materialised, because the Minister never asked. As the Chair quite rightly suggests, there may well be a linkage to that in this bill. But the point is this: in the case of Rio Tinto and in the case of this bill, preference is given to the big end of town. I would suggest there are probably some more palatable reasons as to why that is the case to some degree in this bill, but certainly not in the case of Rio Tinto, certainly not in the case of the film industry, certainly not in the case of Skycity—

💬 Hon Shane Jones: Chorus.

—and certainly not, as my colleague points out, in the case of Chorus, where there is a simple solution and that solution is not a preference. That solution is an enforcement of a contract in the same way as a contract would be enforced in the private sector. It is real easy. If you negotiate a deal, and the other party is not smart enough to outsmart you in negotiating the deal and you get the better deal that they cannot deliver on, you enforce the contract. You do not run around with a begging bowl, as happened with Rio Tinto, and start throwing dough at it because the other party messed up. That is the point.

So there is a body of evidence now over the last 12 months that National looks after those big corporates, those mates up and down Queen Street, yet when it comes to mums and dads, they will be in the second row in respect of preference with this bill. We know over recent days that mums and dads have taken a bit of hammering out of this crowd, because mums and dads were promised all sorts of things in respect of Mighty River Power and Meridian Energy. They were promised all sorts of things and they never eventuated. So the mums and dads will be sitting in the second row, in the cheap seats—as the big boys, the banks, get the covered bonds and the preference—hoping that their investment positions and their financial positions are maintained.

If you were an observer outside this place, you could get the impression pretty quickly that National is concerned about only those in the skyscrapers, and those behind the mirrored glass up Queen Street and a few other places. It is a bit like the bill we discussed last night, the Financial Reporting Bill, which I will not go into, apart from the theme, which was to practise what you preach, and walk the talk. High standards outside are required of other parties, but there are low standards in this place.

So I say to the Government that we will support this, but I think it is worth it for the record that the Minister gets on record an explanation, a detailed one, for the difference in the limit of the bank’s asset base, which is 10 percent, as opposed to the 6.75 percent limit in Australia. Why the difference? I think it is a simple question. The officials will be able to tell him if he does not know. I think for the record, as we go through this legislation, that that is very important. This legislation will have a benefit for some. Hopefully, it will provide another mechanism for financial stability. But there will be those left wondering why that preference exists and why that difference in the limits exists in respect of Australia.

I say in conclusion that we look forward to the Minister providing some detailed explanations, specifically on that matter. If he chooses not to provide those explanations, can I say to him that that would be quite telling in terms of his stewardship of this legislation.

I take a call on the Reserve Bank of New Zealand (Covered Bonds) Amendment Bill on behalf of New Zealand First. New Zealand First will be supporting this legislation. Covered bonds go back to the 1700s. Denmark was the first country back in the 1700s to issue covered bonds, so they are a very old form of financial security and an old financial tool. More recently, of course, they have been a major tool used by European banking, but in more recent times the likes of the United States Department of the Treasury introduced them in 2008, and the Australian Treasury introduced them in 2010-11.

New Zealand banks were the first in this part of the world to actually start using covered bonds, which was back in 2010, but they did not have the legislative framework to work within, which is the purpose of this bill—to actually give them that legislative framework to cover those bonds. Covered bonds are debt securities that are backed by cash flows from mortgages or public sector loans. A covered bond is a corporate bond with one important enhancement: it has recourse to a pool of assets that secures or covers the bond if the originating financial institution becomes insolvent. In this day and age, in the world that we live in, it is increasingly important that we do have these guarantees put in place to ensure a stable and reliable banking system. In this respect, the Reserve Bank of New Zealand (Covered Bonds) Amendment Bill does help to bring New Zealand into line with many of our major trading partners—in particular, Australia, the United States, and many of our trading partners in Europe and Asia.

We did have some reservations as to why New Zealand was adopting the 10 percent maximum number of covered bonds, as compared with Australia on 8 percent. In this House, in Parliament, and throughout legislation we are regularly referring to the fact that we need to harmonise as much as possible with our major trading partner, Australia. When so much of our banking financial interests are trans-Tasman, it is somewhat puzzling as to why we would not simply adopt the same 8 percent level as Australia and that we would have a higher level. That still has not been adequately explained. Countries such as Canada, as we have heard, are as low as 4 percent. It does beg the question as to why New Zealand would go to a much higher level. At the end of the day, should a bank fail, it means that these covered bond holders have preferential call over other investors in the bank, other depositors in the bank, and, therefore, we would not necessarily want to see the first 10 percent of any failure in New Zealand go offshore to international investors first, perhaps, before mum and dad investors in New Zealand. So I think this still does need to be addressed, and I think it would be wise if the Minister could fully explain the reasons why that decision was made to go with the extra 2 percent.

But, basically, this is another means of tightening up the New Zealand financial system. We saw 61 financial institutions go by the wayside in recent years, through an appalling period of New Zealand’s financial history—the likes of South Canterbury Finance, with $1.6 billion going down the tubes. That was picked up by the New Zealand taxpayer. That sort of thing cannot be allowed to repeat in the history of New Zealand. This bill is a mechanism to provide greater controls in this area, more certainty about investment, and more certainty about a major investment in this country. We are seeking greater investment in New Zealand. This is one means of encouraging more investment in New Zealand by international institutions. Therefore, New Zealand First believes, as it always does, that if there are improvements to our financial system and improvements to our economy, then it can only be a good thing. New Zealand First supports the bill.

Kia ora tātou. Mōrena. I stand to support my colleague here, Dr David Clark. He and I were both, at various points in our parliamentary history, members of the Finance and Expenditure Committee and members of the Commerce Committee.

I just want to focus a little on why the Reserve Bank of New Zealand (Covered Bonds) Amendment Bill is necessary. In particular, I want to remind us that it gives more confidence to the international providers of capital to New Zealand. The international capital providers want to ensure that when an adverse event takes place, they have some recourse regarding their percentage of exposure and they are not completely unsecured but also having said that, that their level of priority is not such that they monster everyone else or that they are left out to dry. This is important because it speaks to the notion of certainty. It speaks to the notion that when a financial entity seeks to raise capital, it is then capable of taking a punt on how the regulatory framework will remain, to the extent that its interests are, if not protected, then certainly able to enjoy a high level of priority.

We are going into treacherous territory, and I hope that this bill does compensate for the gross level of uncertainty that has recently crept in in respect of the speculative statements that are being made that the Commerce Act is likely to be changed. Once you start to change the regulatory framework at the whim or at the instigation of corporate welfare lobbyists, such as those associated with Chorus, it impacts right throughout the system—right throughout the system. Indeed, it can have a systemic effect.

That is why, although we are going to support this bill, it is absolutely essential that people bear in mind that when international financiers look at our economy, they look at the Government. Then they look at the sense of whether or not a contract can be not only enforced but collected upon. Then they look at the institutions that a modern economy puts in place to ensure that all parties or stakeholders in a commercial equation have some level of protection. Let us just think about it. With international providers, there are obvious disciplines around the financial entities—the banks. The fact that they do not pay enough tax is something that will be addressed at the end of next year, when the National members sit over here, and we on this side of the House sit over there. But at the moment that is another matter. The difficulty is how we continue to promote the positive story—although there is some upside with us agreeing to this bill—that regulatory frameworks will not be changed in some sort of capricious manner.

What we must not do is allow the chair of a publicly listed company—now a shining example of the Government’s small business policy, given that Chorus has lost 40 percent of its shareholder wealth, so it probably now qualifies for a small business grant, which is presumably what the Government has in mind in terms of corporate welfare. The deeper problem is that in order to rescue that particular entity, we would then take the profound step of worsening uncertainty in terms of the commercial framework—the Commerce Act and the Commerce Commission. You may be thinking: “Well, Mr Jones, that pertains to what was formerly known as a large company. I think it is insolvent anyway, according to the Prime Minister, but the chair is a friend of mine.” But now that is starting to spread because when directors, international lenders, and international investors see that you can capriciously change the legal framework in terms of the commercial regulatory framework, the cost of capital goes up.

This bill is not going to overcome that problem. The cost of capital will go up. We have seen in here that the banks—and having known one or three clever roosters in the banks myself—can go and use these devices to raise capital at a lower level in the European bond markets. Let us hope they get their dollar assumptions right, having had a bit of experience myself of that in the fishing industry. When the dollar does move against you, it is not for the faint-hearted. The point I am making here is that these are sensible changes, but, unfortunately, there is a larger threat. That threat pertains to the framework that is related to how commercial transactions and investors are dealt with. We will support the bill.

The question was put that the amendments set out on Supplementary Order Paper 186 in the name of the Hon Bill English be agreed to.

Amendments agreed to.

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

Bill reported with amendment.

Report adopted.

Third Reading