Reserve Bank of New Zealand Bill

Members, we come now to Part 2. This is the debate on clauses 8 to 111, and Schedules 1 and 2, and Part 2 of Schedule 3, which provide for the continuation of the Reserve Bank of New Zealand. The question is that Part 2 stand part.

Madam Chair, thank you very much. Part 2 does cover the substantive matters of the bill. The first of those is that it sets out the bank’s objectives, functions, and core powers, the Minister’s role, the board of the bank, its members, and how they come to be there, the role of the governor of the bank, and the Monetary Policy Committee. A significant number of provisions in this part are, as I’ve alluded to in my contribution earlier, substantially similar to provisions in the Crown Entities Act 2004. However, as Mr Bayly and others have pointed out, the bank itself is not a Crown entity under that Act, but it is a model of governance that people are not only familiar with but also, I think, can see the merit in in most cases, but, as noted earlier, there are some exceptions to that.

If I just work through in this call what I see to be the most significant elements of this particular part. Obviously there is clause 8, which has the continuation, but clause 9 does set out those main objectives. As I mentioned in my response to Nicola Willis earlier, the financial stability objective is the one that I think does have pretty widespread agreement, and that is the objective of promoting and protecting the stability of New Zealand’s financial system. As I’ve said a number of times in earlier contributions on this bill, this is the bit that has evolved the most in terms of the bank’s role, but has had the least attention from the point of view of legislative comment and in terms of structure that is designed, rather than that which has evolved, and so that is an important thing to get clear.

The functions of the bank are covered under clause 10, and obviously these will be very familiar to people, including the roles of acting as prudential regulator and supervisor, monitoring the financial system, monitoring the needs of the public for bank notes and coins—a matter I know that Mr Bayly is concerned with in some areas—work with overseas regulators, the provision of relevant information, keeping the law under review, and performing or exercising functions that can be imposed upon it.

There is a matter here where differing views were raised within the debate, that is in clause 11, which is allowing the Minister to direct the bank to perform any additional function that is consistent with the bank’s objectives, following a request from the bank. I know that this is a matter that the Opposition have concerned themselves with. This is an example of what I said to Damien Smith earlier about how we protect the operational independence of the bank and one where it creates that balance within what we do. I think Ministers creating additional functions for the bank willy-nilly would not be good for the bank in achieving its objectives as laid out elsewhere.

We go, then, through the various subparts. Subpart 3 gives the Minister’s role and gives some clarity around that, and includes, as I mentioned earlier, the significant additional role of the issuing of a financial policy remit to guide the financial policy work of the bank. It also—to Damien Smith’s earlier point—gives directions to the bank relating to its minimum level of capital and financial risk management. This is the parameter-setting exercise that I mentioned before, within which the bank operates independently.

Subpart 4 covers the issue of the board—who is a member of the board, and how the board comes to be there. We are talking about a board of not fewer than five and not more than nine members, with the governor as a member, reflecting—as I said earlier—their role as a coordinator between monetary and financial policy. The remaining members of the board are appointed by the Governor-General on the recommendation of the Minister, and I am proscribed as the Minister in how I can appoint people. They have to have the appropriate skills, knowledge, and experience to assist the bank in order to do its job, and there are number of other rules around who can do what, including areas in which the governor cannot apply himself or herself to, where those matters are directly relating to the governor. We cover off the collective duties of the board. These are the matters that are drawn from the Crown Entities Act and put into this legislation here. We then move through the process for appointment, non-appointment, reappointment, and so on, of all of those members, and that includes also the governor. The governor is appointed by the Governor-General on the recommendation of the Minister, and—here’s an important one for the member opposite—following nomination from the board and consultation with other parties in Parliament. So that’s now codifying the importance of Opposition parties having a role in the appointment of the governor, and I’m sure the member will be pleased that we’ve taken that decision to do that.

💬 Hon Member: We will consult with you, Minister!

You will consult with me. Is that right, Mr Bayly? Maybe, maybe not. Obviously we go on through into Part 7, where we look at the various Monetary Policy Committee elements that now need to be drawn into the legislation, now that we’ve had it operating.

So it is a wide-ranging part—I accept that—but it is the most substantive part. It does establish new governance arrangements which, as we’ve covered off in the discussion on Part 1, I think are modern and fit for purpose, and give the bank clear lines of accountability from the board through the governor, with the Minister there, reporting back via the various measures to this House.

Thank you, Madam Chair, and I appreciate the Minister’s broad-ranging description of Part 2—it is the substantive part of the bill, and we’re going to take a random walk through it, not a linear walk through it, because I will start with clause 79(1) and (2) and continue the conversation that we started in Part 1 about the appointment of the governor as a member of the board. Now, the National Party have not tabled an amendment to this clause, but I think it’s worth drilling into the circumstances that led to new clause 79(1) and (2). And I note the Minister in Part 1 talked about the fact that while this wasn’t raised in select committee, there was a significant consultation process prior to the bill, the second of three, being introduced. I stand to be corrected, but as far as I can tell, none of those submissions actually said to the Minister, “We would like the governor on the board.” And when the bill was referred to the select committee, none of the submitters said that then. So we have this unusual situation where on page 11 of the departmental report, in response to the questions of governance and changes to the governance structure, up it pops with oblique references to the review considering a wide range of governance and decision-making models, and then the Reserve Bank Act review team considered a range of different models and decided that this was a good idea. Now, I think the committee deserves a little bit more of a fleshed out explanation about where this came from.

The reason it’s not as a tabled amendment is because I think there are different views about an appropriate governance structure for an organisation like this. And the departmental report does point out, although the Minister has informed the committee, quite rightly, that around the world this is not an uncommon arrangement, but, in my experience, executive directors on boards in a commercial sense, in New Zealand at least, is probably not the predominant governance structure, and in Government, in the public sector, it’s quite rare. Now, the committee was informed by officials that commissions often have the commissioner on the board, but commissions, I think, are different—the Law Commission, the Commerce Commission—and it also acknowledged that, actually, for other Crown entities, it’s very unusual. In fact, I don’t think there are any other Crown entities where the chief executive is a member of the board.

So this is a change; it is a departure. My concern is that that potentially greys what was in 1989 a very clear separation between ministerial oversight, board governance, and the independence of the governor and his or her team to make decisions independent of that traditional line. Even so, there is, I think, a very strong nose in, fingers out principle that underpins governance in New Zealand that has stood the test of time and works well in effective boards.

So while I don’t strongly oppose it, I am concerned at the manner in which this change was made, and I think the Minister could give us an explanation of how this came about, and the basis and the reasons why he believes that it’s appropriate to have the governor as a member of the board, because, prior to this change, actually, the Minister had some influence over the sort of operational aspects of the governor’s role, but it’s important that that be kept separate, as it is right across the public sector. We’ve had examples where the Minister might be grumpy with the chief executive of the Public Service but has no influence, except over the chair of the board. Now you’ve this situation where the governor is on the board, it’s my view that it actually creates perhaps a little more influence than I might be comfortable with, subject to the Minister explaining and convincing me that this is a good idea.

A number of points to cover off in that. The first of those is yes, the member is right. Obviously, it’s not normal in a Crown entity, but I’ve tried to stress all the way through we’re trying to match the central bank elements with the Crown entity model, and the member himself has acknowledged that it’s not unheard of—or certainly not uncommon—in central banking around the world for this to happen.

The second thing to say is that he asked the question around how did this come to be. This was the subject of a live debate between the external expert panel that I created for this review exercise, the Treasury, the bank itself, and me. And the views coalesced over a period of time around that. What convinced me primarily that this was a good idea was that the Reserve Bank has these two very particular roles: the monetary policy role and the financial policy role. And the person best placed to glue that together is the governor, given the governor’s role in those matters, both in the monetary policy committee and the broad sweep of financial policy work that the bank does. So that role to me was important.

What’s changed—and I think the member has hit on, probably, the biggest point here—is that the board as we’ve previously known it in the Reserve Bank context, to speak very frankly, didn’t play that much of an active role in terms of the way we would think of boards of the many different variety of Crown entities and State-owned enterprises and other bodies. They had quite a limited scope and role, and that did—I take the member’s point—make some sense in that very pure 1989 model. However, times have changed, the role of the bank has changed, expanded, and looks quite different than what it did. And especially once we moved to that decision-making model with the monetary policy committee, the board’s role started to change. So I think at that point it did mean that we took a step back and said, “Well, we want a board that can really have oversight on this.” I don’t think it does anything in terms of the Minister—far from it, in fact. I think the Minister’s role stays largely the same, except that the board will have a greater role in some of the more closer monitoring that I as the Minister, or whoever the Minister is, wouldn’t do.

In terms of the role of the governor, there are things that make sure that the position is clearly understood—one of up to nine, so clearly there will be eight other people at the table. Secondly, areas that the governor cannot be involved in, and they’re in the bill—in particular, the monetary policy committee where reviews of its work and so on, the governor steps out for those matters. So I think we get a very good element here of the governor, who is the glue of what the bank does, being involved. We’ve got eight other people there, so there’s no danger of the governor somehow or other overwhelming that or extending their powers too far, and I think it puts in place the board structure that will give us the best overall governance. Again, clearly contestable, because it’s not done everywhere, but our observation, looking around the world, is that this enables central banks to work well, and we’ve obviously got a process for the appointment of both the board and the governor that has a high level of transparency associated with it.

I thank the Minister for that explanation. I would make three quick points in reply. The Minister describes what he called a live debate between, I think, the Minister, Treasury, and other stakeholders in the question of this. I think that underscores the point that Mr Bayly was making at the end of Part 1 of the debate about the importance of actually not waiting for a bill to be introduced and referred to the select committee before he engages with other parties. That would have been an excellent example of where constructive engagement with the Opposition spokespeople on this point might have actually taken a little bit of the heat out of the situation and perhaps have given members of the select committee a better context to the change that, frankly, we didn’t see coming until the end of the select committee process.

The second thing is, and I agree with this, where he said the board didn’t play that much of an active role. I think there’s two things to say about that. One is that these are incredibly complex matters, and, indeed, we need the board to be over the top of them. So I think that underscores the case for Supplementary Order Paper 47 in Mr Bayly’s name around the skills and attributes of the board. I know Mr Bayly will be talking to that later in Part 2, but I think that underscores the case for actually making sure that the board has the requisite skills in order to be able to do more than it has in the past.

Again, the Minister acknowledges that more recently the board’s role has started to change and if we get the right people—I should preface that by saying I don’t want to suggest that any individual who’s been a member of the Reserve Bank Board in the past was not the right person. But as the board’s role starts to change and the oversight by the board has a higher level of acumen for these very complex issues, then the case for the governor being on the board, in my view, is actually somewhat diminished. So it is a bit of a line-ball call and we’ll go with it to the degree that we’re not going to propose a change to that. But I think the stronger the board’s skills in this area are, the greater the oversight they’re able to provide on these very technical issues and the less there is a need for the governor—if the governor is a member of the board and the board doesn’t know what’s being discussed or how complex these issues are, then we’ve got a bigger problem than just the governor being on the board. And that’s why I think Mr Bayly’s amendment that would articulate the requisite skills that that board requires certainly warrants careful consideration.

I want to turn to clause 11 of Part 2. In doing so, I’m hoping that the Minister will have time to reflect on the questions put by Michael Woodhouse and, perhaps, will have the opportunity to address those.

But clause 11 is quite perplexing because it arrived after the select committee deliberation had been taking place. It arrived from officials and was a change to what we had initially considered. What this clause does is it says that the bank may request the Minister to direct the bank to perform any additional function that is consistent with the bank’s objectives. So it’s quite extraordinary because what it says is if the Minister of Finance wishes to ask the Reserve Bank to perform an additional function, the Minister can only do so if the Reserve Bank first asks the Minister to do that, which simply, on the face of it, seems a little bit absurd.

I think members of the select committee could well understand the need, perhaps, for the Minister to have consulted with the Reserve Bank prior to making a direction for an additional function. That could’ve been understood. But to have this requirement that the bank request the Minister, before the Minister directs the bank to perform any additional functions, seems, on the face of it, quite strange and really does seem to subjugate the Minister’s ability to ask the bank to perform any additional function. It is, in effect, a veto. Because unless the Reserve Bank says to the Minister, “Yep, we’re happy to be asked to do that.”, the Minister simply cannot ask for that additional function. In fact, the Minister would have to return to this House and amend the Act itself in order to have that additional function.

So I would be very interested in hearing the Minister’s explanation for this change, and to ask why it is that he wishes his powers to be fettered in this way in relation to this section.

Yeah, I thank the member for the opportunity to have a little bit more of a discussion around clause 11. At its basis, this comes down to the question of operational independence of the bank. As I’ve said on a number of occasions in my contributions tonight and earlier, the balance between operational independence and the Government setting out the framework in which the bank works is a delicate balance. The way in which the bank might go about its work and has historically gone about its work is that it will consult often with the Government on particular things that it wants to do. But where those are within its power, it then has the ability to do it. That has been a fundamental tenet of the way the Reserve Bank Act has operated since 1989. So it was, as the member has noted upon further consideration, a cause of concern that perhaps we would be seen to be undermining the independence of the bank had we done this.

This is a decision-making power which is an existing mechanism in the Crown entity framework. There’s a process that is gone through for issuing directions, and the bill’s got safeguards around how the bank can undertake particular actions if it’s in respect of a particular person or persons, that’s covered under clause 168 as well.

So it is our view that protecting the operational independence of the bank matters. Adding functions to the bank’s role is a substantial thing to do, and we do not believe that it should be done only by the Minister’s fiat.

We get some different views from across the House about where the operational independence line lies. I’m not 100 percent sure where the National Party currently sees that. But for us, adding a whole new function to the work of the bank seemed to us to be something that the Minister should not be able to do on their own. It should be something that the bank and the Minister work together on, and that is the process, that clause 11 it now gives us.

I was hoping now that the Minister was going to respond to Mr Michael Woodhouse’s comments before—

💬 Hon Grant Robertson: No—if there was a question there.

Oh, you don’t think there was a question? Well, I think there was a substantive question, but anyway, I will carry on with that issue, which is talking about the governance arrangements. The interesting thing with the structure, and I alluded to this in Part 1, is the structure we’re ending up with now is, as the Minister said, the board’s role has changed from a model—I forget exactly the words he used, but they were disempowered to some extent; they weren’t a powerful board. But now the current structure is very much one where board members play an integral part, particularly around the financial policy side. And just to be clear what we’re talking about, we’re talking about prudential policies that relate to banks, non-bank deposit takers, and also the separate but very technical issue of the insurance industry.

I was just interested in clause 30, qualifications of members of the board. We’re talking about the most pre-eminent financial institution; I think we’ve established that. What’s been adopted is the Crown entity qualification for appointment to the Reserve Bank. I just think it’s absurd that we’ve adopted a model that sets out the minimum standard and talks about people—these are the people who we’re going to rule out from being a member of the Reserve Bank board: basically, people who are undischarged bankrupts who are subject to the Protection of Personal and Property Rights Act, people who’ve had a personal order made against them, convicted of a crime—holy Toledo, Minister, why would we even contemplate having these sorts of people even being in the game?

💬 Hon Grant Robertson: I don’t know who your friends are, Mr Bayly!

I don’t know why you would allow this to be the minimum requirement to be able to be appointed to the Reserve Bank—

CHAIRPERSON (Hon Jacqui Dean): Order! Keep the Chairperson out of the conversation.

Sorry—that the Minister would allow anyone to be appointed to the Reserve Bank. Why did we go back to the proposal where we have a Crown entity model? Why don’t we turn the thinking around to one where we actually recognise that this is a board that is incredibly instrumental in overseeing a key part of our financial institutions? There’s been no discussion around what should be the required attributes, which is something I think is actually vitally important to the Reserve Bank.

I suppose the first question is: how does the Minister see the board operating and at what level? Does the Minister see the board acting in a non-executive capacity where it sets the direction and leaves it up to the Governor who, as Michael Woodhouse noted, also sits on the board and also is in charge of the executive? So does the Minister see the board working in an executive role or a non-executive role? Because if it’s an executive role, then I think that obviously gives rise to a question about what attributes and qualifications they should have.

Broadly speaking, I mean, clause 24 tells the member what the board’s role is, and it is more of the nature of a governing board, to answer his specific question. So I think he can read clause 24 for his own benefit.

In terms of who should and shouldn’t be appointed to it, I do think that it is important, statutorily, to be clear about those who we are not comfortable having on the board. I recognise the point that the member’s making, but you could actually argue that for any Crown entity or any board. So I think it is important to be able to be clear about who we don’t want.

In terms of who we do want, clause 28 covers those matters. And this is, again, common place to give the scope for the Minister to appoint people with a broad range of skills that allow the board to play its role in the bank meeting its objective. So clause 28(2) says, “The Minister may only recommend a person who, in the Minister’s opinion, has the appropriate knowledge, skills, and experience to assist the Bank to achieve its objectives and perform its functions.” And clause 28(3): “In recommending … the Minister must take into account the desirability of promoting diversity in the membership of the board.” I think that is entirely appropriate to give the Minister the ability to make sure that we get the right balance of people on the board relating to the board’s role and the objectives of the bank.

The Supplementary Order Paper that the member has, in this regard—I think it’s No. 47—we won’t be supporting. I think it is too prescriptive. I think it is far better to give the Minister the ability to find the right balance of people. Quite clearly, if one looks at, again, the cascade of the law, from the purposes, to the objectives, down to where we get to the membership of the board, it is quite clear the kinds of people that we are looking for. And, quite clearly, financial stability, prudential regulation—knowledge of those matters will be one of the aspects that is taken into account, because they are the objectives for which the board is responsible for making sure that the bank performs or meets.

So, I think, again, having that level of flexibility for the Minister is important. But the Minister can only—only—recommend those who will help the bank fulfil its objectives.

Members, the time has come for me to report progress.

Progress to be reported.

House resumed.