Reserve Bank of New Zealand Bill

National has a five-minute call, and I call Simon Watts.

I rise on behalf of National and as the member of Parliament for North Shore on the Reserve Bank of New Zealand Bill, second reading. This is a major piece of legislation for one of our most important economic institutions. It is with some regret that National opposes this bill, but I’m going to use this short call to outline our reasons why and provide a pathway forward.

The purpose of this bill is it’s the second of three bills that are going to reform the Reserve Bank of New Zealand Act 1989. The first bill that was introduced in 2018 established what is the monetary policy committee and revised the bank’s monetary policy objectives. This specific bill, the second of three, reforms the bank’s institutional arrangements, particularly around governance structures, overarching statutory functions, objectives, and also touches on some of the roles of the Minister of Finance.

I want to make some observations around the process and, I think, in particular, one around bipartisan approach to such legislation. Reform of this sort should seek cross-party support. National is comfortable with much of this bill but has raised a limited number of important issues that we believe should be reflected in this bill. It is with regret that the Government has chosen not to work on a cross-party basis and these issues remain outstanding. As I said before, the Reserve Bank is New Zealand’s most important economic institution, and the reforms that we are going to put in place need to be enduring. It is not in the country’s interest that central bank legislation changes every time there is a change of Government, and this is why it is with regret that the Government did not take a cross-party consensus approach on this bill.

The first point I want to raise is in regards to the bank’s financial stability objective, that should retain a reference to efficiency. Pursuing financial stability without regard to efficiency, in our view, is a gap, and the dropping of efficiency from the Reserve Bank’s financial stability objective was also poorly supported by policy analysis and was also strongly opposed by a number of stakeholders, including the banking sector. This is an issue about getting the balance right between pursuing financial stability on one hand and ensuring a healthy degree of progress and innovation in the regulated financial sector on the other—both aspects are critical to the strength of New Zealand’s financial system.

The other aspect I want to raise is the move to an executive board, which is a significant departure from the original reforms some 30 years ago. It relies on appointing quality people to the board, but the proposed criteria within this bill focuses more on who cannot be a member vs the qualities required to make this work. The other element is around how the Minister of Finance’s hands should not be tied by the Reserve Bank, particularly where there is a need to introduce or perform additional functions. We believe that both the Minister and the governor should be in a position to propose changes to the functions of the Reserve Bank.

Parliament should be given some oversight role, also, in terms of the changes for the bank’s monetary policy remit and when the bank is given additional functions. The bill also needs stronger provisions for the Minister of Finance to manage some of the fiscal risk that the Crown will see arising from the bank’s activities. The bill’s current provisions for determining the bank’s minimum capital are not sufficient and potentially leave the Crown exposed.

We acknowledge that the Finance and Expenditure Committee did form a majority view on this bill. However, it is for the record that National recorded a differing view. We hope that the Government considers, through the committee of the whole House phase, these recommendations, so that these changes will endure not only for this Parliament but into the future.

It’s a pleasure to rise in support of the Reserve Bank of New Zealand Bill and offer some insights as a member of the Finance and Expenditure Committee, and not have to read off prepared notes, unlike the previous speaker, Simon Watts. For those who don’t think that this is an exciting piece of legislation, it may not be exciting but it is really important. What it does is overhaul the Reserve Bank of New Zealand Act, which is 30 years in the making. The key difference is that it is about collective decision-making rather than individual decision-making. That’s a really important principle at a time when financial systems are so complicated and where more minds on financial matters are better than individual ones. There is significant local and international best practice to support this.

What the bill does is strengthen the Reserve Bank’s institutional arrangements, it enhances its role as a prudential regulator, and it increases its coordination in the regulation of the financial sector. May I remind all those people, those businesses, those sole traders who benefited from the quick-out-the-door wage subsidy that occurred during the COVID lockdown, that was very much the product of a financially stable system, a system that works and a system in which the Reserve Bank has oversight and plays a really critical role. When the finance Minister speaks of a balanced approach to the financial system, especially in Budget 2021, he is speaking about that stability of the system as a whole. What this bill does is look specifically at governance and accountability. The other two elements, around prudential Acts, are going to be subject to other legislation, including two Acts, one of which is a deposit takers bill.

By making the decision-making collective, it sets up a board, which brings a breadth and depth of skills to the decision making, and it will give that board powers very similar to a Crown entity. The accountabilities will also be more aligned to Crown entity boards, and it means that whole-of-Government directions to Crown entities will also apply to the Reserve Bank. Yes, it does remove the word “efficiency”. That word sits better with the deposit takers bill and insurance Act.

This bill focuses on financial stability. Efficiency, in this context—there are a number of different ways of measuring efficiency. It is a technical word. It is a distraction in this bill and sits better in other legislation. The select committee did consider that, and we also considered at great length actually the balance of power between the finance Minister and the Reserve Bank—the independence but also the Government’s intention through its policy statements. To get down to the granular level, we did come up with scenarios, and we asked advisers questions about what would occur in particular situations. Interestingly, many of those situations were around the accountabilities where the Governor of the Reserve Bank may differ in the opinion of the board, or where the Governor of the Reserve Bank would be stood down from one or other of those roles and what compensation he or she would be entitled to.

There was quite a lot of discussion about the conflicts of interest. There was discussion about tensions, and I will just talk about the process for changing the monetary policy committee remit, where it was recommended by the Finance and Expenditure Committee that that should also be changed to remove the requirement that a remit could only be replaced prior to the expiration of the current remit via Order in Council. It’s saying that the finance Minister would only be able to act, really, on the instruction of the Reserve Bank, rather than the other way around, and that was really to preserve the integrity of the independence of the Reserve Bank.

So, in summary, this bill brings collective decision-making to the fore, rather than individual decision-making, which allows for greater skills and also transparency. We dealt with conflicts of interest and are satisfied that those have been resolved. The one recommendation that the select committee has really is that, going forward, we need to really consider the matter of cryptocurrency on the role of the Reserve Bank, given that there will be impacts in the financial system. So we’re really pleased with this piece of legislation. We’re sorry that the other side can’t agree with it. I commend this bill to the House.

Madam Speaker.

ASSISTANT SPEAKER (Hon Jenny Salesa): Just in time. Helen White.

I was standing up, madam. The bill before us is a really interesting piece of legislation because it’s one of three, and it is a structural piece in the legislation which has been modernised from its original inception in 1984. A lot of water has passed under the bridge, and there’s been a lot of development since then, and this is a much more modern structure. I was concerned yesterday by some of the comments in the speeches of the Opposition, which talked about, really, a concern about the idea of collectivity. This is a very sophisticated world we live in, and we have many, many talented people, and actually the idea of a board having responsibilities is a good one. It does mean, as my colleagues have just said, that we are going to get many minds on to the same task, and it’s a cooperative way of working that I know that our current Reserve Bank Governor is quite capable of adopting because he has in the past in previous roles, and I respect him more for it. Actually bringing those minds to the table will be a check and balance in itself. The people that run our Reserve Bank, the governor and the people on the board, are actually extremely talented people who bring a variety of wariness’s from their work outside of this particular role to play in this role, and I am extremely grateful and respectful of that.

This piece of legislation will move the responsibilities from the governor to the board itself, and the governor plays an integral role there. It is also an interesting piece of legislation because it connects the governor with other institutions. So the governor will sit on the board as a chair, and he will also be playing a role in some of the other groups that are involved, and, again, they are going to be involved. So, for example, the Council of Financial Regulators involves actually a number of groups, so it will have the Financial Markets Authority, the Commerce Commission, Treasury, the Reserve Bank, and the Ministry of Business, Innovation and Employment all on it, and they will all be able to work together collaboratively. And one of the things the bill does is it actually provides for cooperation between those entities and it has information-sharing going, so long as it’s subject to the conditions that are imposed by the Reserve Bank.

The second part of this is that it is actually also about accountability of that institution, and we all know that it’s a very important balance. We’ve got a Reserve Bank that’s independent and that’s a very important and valuable thing, but we also need checks and balances. So, as my colleague said, it brings it into line with other Crown entities. And a lot of the actual way it checks and balances this are actually adopted, so they won’t be unfamiliar pathways but they’re here in the bill.

We have a clarity in this bill about the objective, and that’s a very interesting thing to happen. I think it probably is a sign of maturity, because words like “efficiency” are actually words that have been loaded up with politics. And “efficiency” for Mr Bayly is probably not “efficiency” for me. And actually, by getting the board to actually understand that its role is the stability of the New Zealand banking system, it frees it up to work. So it works alongside the finance Minister and under the direction of the finance Minister to some extent, because there is also the publication of a remit, which will actually mean that the board has direction in the right place, but it will make decisions about how to take the objective of any Government and actually make that work for the people in terms of getting that outcome, given its clear objective. So it’s a very interesting and nuanced piece of legislation, and it really does respect the people involved and allow them to do their job well, and I’m extremely proud of that.

One of the instruments that I just talked about was the creation of what’s called a financial policy remit. And that remit will be the thing that actually holds the direction of the finance Minister in it, and so it will set the policy in some ways and then it will be adopted. So how does all this work? Well, the Minister of Finance will appoint the new governance board, and that will have the powers and responsibilities of the Reserve Bank. The chief executive will also be the chairperson. That’s going to ensure that actually there is a lot of capture of information. And he—or she at some point, I hope—will also be sitting on other bodies so that there will be a lot of information that comes back that will be shared.

The process for the Reserve Bank funding will also be something that’s captured by this bill, and the Reserve Bank can recover its costs through levies, both capital and operating expenditure to some extent. And that is all covered off in the bill in terms of process. It will increase oversight in a way that is consistent with a Crown entity. So the Public Audit Act and the Ombudsmen Act will now apply to the Reserve Bank, and we will see oversight of it in that way. And the reporting will again be aligned to other Crown entities. The Minister of Finance might not have time to do that monitoring themselves, but they can delegate to a department—so it may be Treasury.

The functions of the Reserve Bank have also been articulated. So just to be clear, those functions are to act as a central bank, to act as a prudential regulator, and as a prudential supervisor. Those things were probably true, but now they’re very articulate. And so we really are setting things up in a way that’s really making everybody understand that role much more clearly. The Minister of Finance is going to issue this financial policy remit, and that will set out the objectives. The board will consider those remits. In fact, one of the changes we made was to make sure that there was enough capacity to change the remit so that the board could be not locked into what finance Minister one said if you, in fact, had finance Minister two. So they will consider the remit and they will look at these objectives, and then they will decide how they will achieve them. They will doing that independently, and they will be doing it with the strength of a group. So there will be an element, no doubt, of consensus. The Minister of Finance will still be very much doing their role, but they will be doing it in a much stronger way because they will have a collaborative approach themselves because they will have more than one person. I just really consider that one of the greatest strengths of the modern age—that we are doing things in that way. In addition, the Reserve Bank will now manage foreign exchange reserves. That wasn’t regulated in the same way and that is now clear.

So the key changes that were made by the select committee really were that the governor will now act as that kind of conduit between the board and the monetary policy committee. The chairperson—we very much did talk about the kind of conflict issues that were involved, so we were much more nuanced in the way that the chair would be involved or not involved when there were conflicts. So we considered those matters. We have addressed them as best we could. We did actually work collaboratively as a select committee for a large part of the time. While there is an oppositional view, now I would like to just, finally, acknowledge the work that was done in that select committee, and was done largely because I think even the Opposition would agree that there is so much common ground in this legislation. So much of it made sense and common sense, and, while we may disagree on a few of the nuances, I think we all agree that this is an important step for the country. I commend this bill to the House.

Thank you, Madam Speaker. It’s with some regret that I’m standing up to talk on this bill in the second reading, because I think, if we think about the Reserve Bank, it is probably our pre-eminent institution in New Zealand. The previous speakers have talked about the importance of making a reference to Crown entities. I don’t accept that in terms of the Reserve Bank. The Reserve Bank holds a very important, fundamental part of our financial system, and I don’t think trying to correlate and set up institutional arrangements that suit Crown entities is necessarily the right approach.

We have a number of issues with this bill—which is unfortunate—because, as my learned colleague the Hon Michael Woodhouse said in his speech on this bill, when this institution was set up with the current arrangements 30 years ago, there were some very important tenets that underpinned the structure that was in place. First and foremost amongst those was the need for independence and excellence around its operations. This bill is making a substantial change to that. The second thing was how it was going to conduct itself and its objectives, and, again, this bill is making substantial changes to that.

I think people forget that when we set up the institutional arrangements for the Reserve Bank 30 years ago, it was quite revolutionary. In fact, many countries around the world looked at New Zealand and subsequently adopted very similar structural arrangements for their own central banking systems. So here we are: we’re at a situation where this is the second of a substantial refit of the Reserve Bank. We passed the legislation that dealt with the establishment of the monetary policy committee—which, in itself, had some changes—and this is now starting to strike its quite significant structural issues with the Reserve Bank.

The first thing I’d say to you is the importance, when you’re dealing with New Zealand’s pre-eminent organisation—I think it’s absolutely vital—that we should have striven for more agreement around the key reforms that we’re talking about. The last thing we want to see happen is that when there is a change of Government, there is further tweaking to the Reserve Bank. That is not good for New Zealand. That’s why we were very keen to work in a collaborative manner to try and strike that balance. We weren’t able to do that, but I do acknowledge that in this bill there are many good aspects, so I don’t want anyone to think that we oppose the bill—large parts of it. We think that what it’s seeking to achieve is very good, but there are five crucial elements.

The first one is the issue around the structure, and I sort of alluded to that. What has been put in place is an executive board structure that is now having full responsibility for managing both prudential policy—the policies that apply to banks, in effect—and the insurance industry and the non-bank deposit takers. That means that we’ve moved from the model of one person who’s a specialist to now one of a joint board structure. It’s not only like a normal independent board structure full of non-executives; this is now an executive board. The big issue I’ve got is, first of all, in formulating that board, those members need to be of the absolute highest quality and calibre and expertise in the business of prudential and insurance management. I’m not sure that that depth of pool of people available actually is available in New Zealand, and there will be difficulty in trying to find the right people. This is a situation where we need very specialist skills managing and overseeing those very important functions. The role of the governor has been moved more to a CEO-type role; albeit that he or she will sit on the board. But that is a different structure, and I think it’s a fundamental change that people should be aware of.

The second thing that we have concerns with is this removal of the words around seeking to have an efficient financial market. I was not persuaded by Treasury’s representations as to why we should remove the word “efficiency”. As a party, we believe that it’s essential that not only do we maintain financial stability—which is the underlying premise of the Reserve Bank—but it should do so in a way that is efficient for the market. That word has been deleted, and I think it’s a fundamental word and, actually, one that many submitters actually disagreed with seeing removed from the core objective of the Reserve Bank.

The other aspect we have concerns with is the issue around remit setting for the Reserve Bank. We think it’s important that the Minister of Finance—whoever he or she might be in the future—has the possibility of making changes, though hopefully on very rare occasions. It’s only happened once, and the Minister used section 68B recently with regard to housing policy—and I think, in my personal view, used it ill advisedly. The issue with it is that we believe that if there is a situation where it is used—and it should be by exception, rather than the rule—then that should be subject to some parliamentary oversight. That doesn’t mean that the powers of the Minister of Finance should be fettered, but any changes should be subject to parliamentary oversight.

It also relates to the issue of functions, and some of the members have talked about it tonight. The way we’ve ended up in the bill is that a change to the bank’s function can only occur if it’s requested by the bank. So if there’s a disagreement and the Minister of Finance wants to make the bank focus on issues that he or she considers are very important, there is no ability to impose that on the Reserve Bank. Those functions can only be amended through agreement with and recommendation by the Reserve Bank. We, again, don’t think that’s appropriate.

Again, this is something by exception, and the case in point that I’ve been pushing—and I’ve pushed the Reserve Bank on this issue on a number of occasions—is the issue of cryptocurrency. We’ve now got, embedded in this piece of primary legislation, the specific function of the Reserve Bank to monitor cryptocurrency, which is sort of a second rating issue. I think, personally, it should be a much stronger power that’s imposed on the bank. But, if there was a situation where the Reserve Bank chose not to do that—and there has been some reluctance by the bank to take a more active role in cryptocurrency at the moment; that may change over time—then the Minister of Finance has no ability to require that. Again, we think the right should be held both by the Reserve Bank, who may request a change, or by the Minister of Finance, but the trade-off for that, again, should be the ability and the requirement that those issues are reported back to the House and debated. It doesn’t, again, restrict or fetter the right of the Minister or the Reserve Bank to change the powers or functions, but it does at least give Parliament clarity and transparency around some of those changes.

The other issue that we’re concerned about relates to the issue of the Crown’s liabilities. Currently, the bank has the power to do quantitative easing and can purchase up to $100 billion of Government stock, and, at the same time, it has a $28 billion funding-for-lending programme. We think that if you’re trying to design a piece of legislation for the next 30 years—which, hopefully, we don’t have to seek further amendments to—then we should be forward leaning and should be anticipating what might go in the future. The way that the Minister of Finance has control over the obligations that the Reserve Bank might enter into, and that actually go on to the Crown balance sheet, loosely—if I can use the word “simplistic”—we propose similar arrangements that were put in place for the Bank of England by the British Government. There are many more ways that could be done more transparently, and it’s unfortunately one of the other issues that we feel we cannot support.

I rise to speak as the final member on the second reading of the Reserve Bank of New Zealand Bill that has been supported to the second reading by a majority of the Finance and Expenditure Committee. In introducing this bill, I’d like to say that the Reserve Bank of New Zealand Act 1989 has not been comprehensively reviewed in over 30 years. Over that time, the Reserve Bank has changed substantially, and we have new expectations for regulation and monetary policy-making. The financial system and economic context have changed significantly, and the local and international best practice has evolved. The review of the Reserve Bank of New Zealand Act is an opportunity to update and modernise the Reserve Bank’s institutional arrangements.

The purpose of this bill is to “promote the prosperity and well-being of New Zealanders and contribute to a sustainable and productive economy.” There are three things this bill does. The bill strengthens the Reserve Bank’s institutional arrangements, enhances the bank’s role as a prudent regulator, and increases coordination in the regulation in the financial sector.

💬 Hon Michael Woodhouse: What was that about reading speeches, Ingrid?

When I refer to the notes today that I will talk to, Mr Woodhouse, I’ve taken great pleasure in listening to all of you talk and give your own contribution to this bill.

ASSISTANT SPEAKER (Hon Jacqui Dean): But not the Speaker.

It’s so important that when we do this—

ASSISTANT SPEAKER (Hon Jacqui Dean): Order! But not the Speaker.

Madam Speaker, yes. I’m referring to Mr Woodhouse, who has been so very, very concerned about independence. I agree with my colleague Deborah Russell, who talked about this, where Mr Woodhouse was very, very concerned that the independence of the Reserve Bank was going to be compromised. It is for this reason, he says, that the Opposition will not be joining in support of this bill. He is worried about the independence of the Reserve Bank. He feels that we’re going to compromise it. However, I agree with Deborah Russell and suggest that it is not a compromise. In fact, it is a changing of a relationship in a way that is appropriate for the times. In fact, there is still plenty of independence for the Reserve Bank.

Coming back to what I would like to talk more about, which is what this bill does. The bill currently before the House will reform the institutional arrangements of the Reserve Bank, as well as carry over the changes made by the 2018 Reserve Bank of New Zealand (Monetary Policy) Amendment Act. The key changes being made by the bill include adding an overarching financial stability objective to complement the recently updated monetary policy objectives; strengthening decision making through moving from a single decision maker, the governor, to a board model; and ensuring operational independence is balanced with appropriate accountability with a number of changes to update the Reserve Bank’s accountability and reporting frameworks to align with State sector practice. It will provide for a financial policy remit issued by the Minister setting out matters that the Reserve Bank board must have regard to when setting and implementing its strategic approach to financial stability, providing the Council of Financial Regulators with a statutory mandate to support effective and responsive regulation of the financial system by facilitating cooperation and coordination between its members.

Now, as we worked through the submissions on this bill, and also working through as a committee, we became very efficient in how we delivered this. This is a very, very efficient bill. I refer to three points. This bill ensures that the Reserve Bank is fit for current times. This is the legislation that is about how the Reserve Bank operates in order to achieve its objectives in a modern way. The world has moved on. The world has changed. If, in the 1980s, as my colleague Deborah Russell said, this House was legislating in the shadow of rampant inflation and an interfering Prime Minister and Minister of Finance, in this decade we are legislating in the shadow of the global financial crisis. We are operating in a different context. We know, as my colleague Duncan Webb, who is also the chairman of the Finance and Expenditure Committee, said, that something had to be done, and the great economic innovation of the time, of course, was the inflation target, signalling to let the market know that the Government, with the Reserve Bank, was committed to lowering inflation and would take the steps necessary. That alone had a very significant effect. New Zealand, in fact, was the first country in the world to do that.

This is a great bill. It’s an efficient bill and another great piece of reform of our monetary policy system which will put us on a great foundation for years and years to come. It does so by establishing the independence of the Reserve Bank, collective decision-making, and collective responsibility. This is a key aspect of this bill: coordination and cooperation.

Now, the last thing I would like to talk to you about is this word “efficiency”. There’s been a lot of debate about what is efficient, but I must say that really, what has worked in this is the efficiency of the Finance and Expenditure Committee. We have been a team that has worked through many of the issues and challenges that have been debated at length. In fact, there are many parts of this bill that the National Party do agree with, and we’ve heard from Mr Bayly tonight talking about how there are many parts of this that National supports. It’s good to see that there is cooperation when working on our select committee, because that’s how we get good bills passed in Parliament.

As I turn now to what will happen in wrapping up, this bill is a result of an extensive consultation and engagement with stakeholders. The policy work was supported by a joint Treasury and Reserve Bank team, supported by an expert independent advisory panel. It is very important here that we recognise this in developing the bill so people can have confidence in the expert advice that we have been given. This bill is now anticipated to come into force on 1 July 2022. This will allow the new governance board to be established and the reporting requirements to align with the start of the bank’s financial year. The aim is to embed the new arrangements ahead of the implementation of the deposit takers bill, when enacted.

In wrapping up, again, I would like to thank all those submitters who have taken part in this. I would like to thank those on my select committee with me, who have all contributed greatly to this debate and also to putting this together. I think it’s really important, when we have the team working on all sides of the House feeding into this legislation, that we do listen and we do work together. That has been evident in a lot of the work that we do, and this is why we have such a positive engagement around the select committee, chaired under a very, very positive result that gets us the delivery that we are seeing tonight. This is how we make sure we do fantastic, hard work on the Reserve Bank of New Zealand Bill. I am absolutely thrilled to be able to talk about this at its second reading. This is a significant bill, and I am looking forward to going through the next stages with it. This bill will ensure, as I said, it is fit for current times. It has the efficiency that’s needed to deliver the confidence we have, and by establishing the independence with the governor being appointed to the board, I would like to commend this bill to the House. Thank you, Madam Speaker.

The question is,