Financial Markets (Conduct of Institutions) Amendment Bill

Members, the House is in committee on the Financial Markets (Conduct of Institutions) Amendment Bill. We come first to Part 1.

Thank you, Mr Chair. I’m pleased to open proceedings on the Financial Markets (Conduct of Institutions) Amendment Bill. The bill represents a fundamental evolution of the regulation of the retail, banking, and insurance sectors. It introduces a conduct licensing regime for financial institutions such as banks, insurers, and non-bank deposit takers, to ensure they treat customers fairly. This bill is the final piece of the Government’s response to misconduct issues in the banking and insurance sectors. Before we get into the details, I do want to thank the Finance and Expenditure Committee for its consideration of the bill. I also want to thank all who made written and oral submissions through the select committee process and beyond.

Several reviews were held in 2017 and 2018 which examined the conduct of New Zealand’s financial institutions. These included reviews by the International Monetary Fund, the Financial Markets Authority (FMA), the Ministry of Business, Innovation and Employment, and the Reserve Bank. These reviews identified significant weaknesses in the conduct and culture of institutions in New Zealand’s financial sector. If these risks were left unaddressed, it would result in significant harm to consumers, and, therefore, also damage confidence in New Zealand’s financial services.

Our recent experience with COVID has further highlighted why this regime is needed. COVID has resulted in enormous pressures being felt by financial services, businesses, and by consumers. While I acknowledge the steps the sector has taken to support consumers through difficult times, these measures that they’ve taken are entirely voluntary for that period of time, and they rely on goodwill. Many of these positive measures are likely to expire, while consumers’ ongoing needs will continue. That shows the importance of financial institutions having the capacity and incentive to always address the changing interests and needs of consumers, particularly those who find themselves in vulnerable circumstances.

The bill I’m presenting today will create a regime that governs the conduct of key financial institutions to address the risks and gaps that we have identified through those reviews. The ultimate intention of this new regime is for financial institutions to better serve the interests of consumers, improving trust and confidence in the financial sector. With all of that comes an improvement in consumers’ wellbeing—financial wellbeing, first and foremost, in this regime, but that has a knock-on impact, of course.

This regime will apply to banks, insurers, and non-bank deposit takers. There has been much discussion about the scope of the regime. The scope has been deliberately set to capture those areas where there is the clearest and greatest evidence of harm. The evidence gathered through previous reviews found that this risk lay with banks, life insurers, and general insurers. On the one hand, I’ve received feedback that the scope of the bill is too narrow and that it should be expanded to include all financial service providers. I acknowledge that some financial service providers, like finance companies, will be subject to a different level of regulation. However, these entities and the products that they offer are already subject to regulation, such as the responsible lending obligations under the Credit Contracts and Consumer Finance Act, and product-specific obligations under the Financial Markets Conduct Act. The scope of the regime can be extended in future, though, if it’s deemed to be needed to achieve the purposes of the Act—if we identify any gaps that need to be addressed.

So on the one hand I’ve received that feedback that the scope of the bill is too narrow; on the other hand I’ve also received feedback that the scope of the bill is too broad, and that non-bank deposit takers—such as credit unions—should be excluded from the regime. However, it is my view, and the Government’s view, that non-bank deposit takers offer a wide range of bank-like services to consumers and face similar governance and conduct risks. Therefore, my view is that they should remain subject to the bill. Their inclusion in the regime is also consistent with the Government’s June 2019 decision to bring prudential regulation of banks and non-bank deposit takers within a single deposit taker regime.

So the bill—what does it do? It establishes a new regulatory regime for the conduct of financial institutions. That regime will give consumers confidence that the financial institutions meet appropriate standards of conduct by requiring financial institutions to be licensed by the Financial Markets Authority. The bill also gives the FMA—the Financial Markets Authority—a range of tools to supervise, monitor, and enforce the new conduct regime. Strong civil pecuniary penalties can be imposed if a financial institution or intermediary contravenes an obligation in the bill, bringing New Zealand, with that, in line with overseas jurisdictions.

Fairness is essential in building trust in the financial sector, which is why the bill seeks to ensure consumers are treated fairly by their financial institutions. The bill introduces a fair conduct principle. It also requires financial institutions to establish, implement, and maintain an effective fair conduct programme. This means financial institutions must turn the fair conduct principle into concrete policies, processes, systems, and controls, to make sure that they are considering consumers’ interests as a part of their regular business, and make sure that they are treating them fairly.

Now I want to say something about sales incentives and the Government’s Supplementary Order Paper before I close. Sales incentives can create conflicts between the interests of those who are selling or advising on products and services, and the interests of consumers. Those conflicts can cause sellers or advisers to prioritise their own interests over the interests of their customers in the pursuit of a reward. I understand that incentives are an important part of remuneration structures for salespeople and financial advisors. However, it’s also important that financial institutions turn their minds to the potential risks when designing or managing these incentives. The bill requires, therefore, financial institutions to have effective systems and controls in place to mitigate or avoid consumer harm from sales incentives.

So to the Government Supplementary Order Paper: following feedback from public consultation on two discussion documents, I am tabling a Supplementary Order Paper—an SOP, as they are commonly known in this House. The amendments in the SOP will make sure the bill works across different types of financial institutions and business models. So as far as intermediaries are concerned, the bill—as drafted—included prescriptive requirements on financial institutions to closely train and manage or supervise intermediaries. Industry have raised what I consider to be reasonable concerns that these requirements are too detailed, capture too many intermediaries, and may overlap with the new regulatory regime for financial advice. So to ensure the bill works across different types of financial institutions and business models, I propose the bill take a more principles-based approach, rather than prescribing requirements in detail. This will ensure the new regime enables financial institutions to design processes which best fit their own business models while still upholding a high standard of conduct.

The SOP also makes other amendments to the bill to ensure the Lloyd’s insurance market, for example, is treated similarly to other insurance providers, and to ensure that financial institutions take into account the potential for consumers to be in vulnerable circumstances.

Finally, before I close, the bill provides for regulations to be made to support the regime. A big gap, currently, is the lack of regulation regarding sales incentives based on volume, or value targets such as overseas trips, as a reward for selling a certain amount of insurance policies. These kinds of incentives create a strong conflict of interest, particularly as a person nears their sales target. Accordingly, the bill enables the making of regulations to prohibit the offering and use of these incentives. These will be developed after the bill has passed. Otherwise, I do not propose to make further supporting regulations at this time. The FMA will work with industry to ensure that the expectations on financial institutions are clear, including by issuing guidance where appropriate. Further regulations can always be made in the future if it becomes apparent that more prescription is needed to achieve the desired outcomes of the regime.

So in closing, the bill completes the Government’s response to misconduct issues in the banking and insurance sectors, and sets in place an important regime to ensure consumers are treated fairly when they deal with financial institutions. Once the bill’s passed, the FMA will work with financial institutions to ensure they’re prepared for the new regime and for licensing applications to open in mid-2023. The intention is that the regime commence in early 2025. I’m very much looking forward to the discussion at the committee stage of this debate, but hope that those opening comments may provide some guidance as to why we’ve taken the steps with the SOP and why we have continued to operate with the scope such as it is.

Members, the time has come for me to leave the Chair for the dinner break. The House will resume at 7 p.m.

Sitting suspended from 6.01 p.m. to 7 p.m.

Members, the House is resumed. We are in committee.

Point of order. Mr Chair, I seek leave that this bill be taken as one part.

The question is that the bill be taken in part. Is there any objection? There is objection. [Interruption] Order! Who’s seeking the call? So no one’s taking a call? I call Andrew Bayly.

Thank you, Mr Chair. Oh, I was waiting for Minister Clark to complete his speech—he was just talking before the break, of course.

The first thing I think ought to be clear is that National still opposes this bill. I will acknowledge that there have been some improvements to it, and I also acknowledge Supplementary Order Paper 173 by the Minister, which has been tabled in the House. But the reality is, this is a bill that’s still looking for a problem to solve. We do not believe that this bill is necessary, because the regulator of financial institutions—and this bill covers, basically, banks and credit cards and non-deposit takers—just foists on the industry, who are already highly regulated, another set of codes or responsible lending criteria. What’s interesting, if we look at the landscape that the Minister’s overseeing, we’ve got these regulated financial institutions—and that’s the technical term that covers those groups—most of those institutions are already regulated heavily by the Reserve Bank. And, of course, the Reserve Bank is, for all its faults, a good regulator of financial institutions.

💬 Stuart Smith: Guided by Tāne Mahuta.

So—guided by Tāne Mahuta, that’s right. So that’s the first piece of oversight. Then we’ve had that dreadful piece of legislation called the Credit Contracts and Consumer Finance Act (CCCFA), which imposed further requirements on responsible lending codes—

💬 Hon Dr David Clark: Yet you voted for it.

And—no, we did not. And what we saw in it, unfortunately, is the Minister had got hoodwinked by his officials, because that CCCFA legislation provides a framework for a responsible code that has, as its overseeing bodies, the Commerce Commission and the Ministry of Business, Innovation and Employment (MBIE). And, of course, the Minister got hoodwinked, because rather than do what the intent of the bill was, which was to focus on high-cost lenders, what he did is he extended the code of responsible lending from 64 pages to 105, and put in a whole lot of stuff about how a bank is supposed to lend to its customers, including—on, I think, page 28—a requirement to review 90 days of transactional history. Now, the Act already provided for a differential approach between our licensed financial institutions, like a bank, and other types, like high-cost lenders. But, unfortunately, our Minister had got hoodwinked or he didn’t know enough about it, didn’t ask enough searing, searching questions, and passed through regulation which didn’t come back through this House—

💬 Hon Dr David Clark: Point of order, Mr Chair. I wonder whether the member could actually address the bill in his first contribution. He seems to be off on quite a different tangent—

CHAIRPERSON (Ian McKelvie): Order! I’ll be the judge of that, thank you.

So passed a code of responsible lending that went from, basically, 60 pages to 105 pages, and imposed all these regulations administered by Commerce Commission and MBIE. Now we’ve got what is called the conduct of financial institutions, and guess what it’s about! It’s about imposing another code on responsible lending. And who’s this going to be administered by? Well, actually, the primary organisation is going to be the Financial Markets Authority (FMA). So if you are one of those banks or non-deposit takers, you’re subject to the Reserve Bank, the Commerce Commission, MBIE, and then if you’re going under another code, you’re now going to have the FMA.

What is the Minister doing? The first thing we will have to do when we get back into power is deal with how we get one set of responsible code of lending, so we don’t end up with multiple codes and we don’t end up with multiple jurisdictions. Because the first question with this bill, Minister, is how do you deal? How’s a bank, for instance, going to have to deal with the issue of having two competing codes? And, by the way, if you want to make sure unemployment is low, just make the banks and other types of financial institutions go out and hire a whole stack of people to deal with the additional compliance that this bill imposes on them. That is what is wrong with this bill. It is a bill looking for a problem, and it doesn’t need competing regulatory authorities looking over and administering responsible codes of lending.

I did forensically listen to the member Andrew Bayly’s contribution, and I identified a question in there, which I’m going to address, and that was, really, where does this bill sit in the landscape of regulation. As I said—and so I’ll repeat it for the member, because he may have missed it in my initial contribution—by introducing a conduct-licensing regime for financial institutions such as banks, insurers, and non-bank deposit takers, we are ensuring that we treat customers fairly.

This bill is the final piece of the Government’s response to misconduct issues in the banking and insurance sector. So, effectively, this piece of legislation sits across the top—an umbrella-type regime, if you like—across things like the Financial Services Legislation Amendment Act, the Credit Contracts and Consumer Finance Act, the Fair Trading Act, and the Consumer Guarantees Act, those pieces of legislation that are responsible for specific parts or regulating particular products or services. This is the regime that sits across the top and ensures that there are principles, and if there is compliance with those other regimes, that can be brought as evidence of compliance with this regime, so there is not the duplication.

If I go to the member’s other question where he suggested that perhaps there was—because there was a second question buried in there. It was buried as a statement. He asserted that this was a piece of legislation in search of a problem, and I want to just challenge that, because this legislation and those other bits that address particular products and services came about after a series of reviews, including, in 2018, one by the Financial Markets Authority and one by the Reserve Bank of New Zealand.

Through those reviews, they identified actual evidence of misconduct and harms identified through the reviews, and I’ll list a few for the committee: there was a bank that charged customers for credit card repayment insurance for which the customer received no benefits in return, for example, due to customers being ineligible for the product at the point they were sold it, or because they were sold and charged for multiple identical policies when they would only ever be able to claim for one. The second example: a bank continued to charge deceased clients premiums for credit card repayment insurance and life insurance. Another: an insurer continued charging customers for payment protection insurance after loans had been fully repaid and, therefore, the product provided no benefit for the customers. Another example: poor administration of products leading to overcharging—e.g., increased premiums to account for inflation, but at a rate higher than inflation, as evidenced in the Consumers Price Index. And another: instances of consumers paying premiums over a long period of time for insurance they did not know they had.

Now, what those reviews identified in all of those instances of behaviour was negligence, effectively: a culture in banks and life insurers where those institutions lacked a focus on customer outcomes and had serious weaknesses in their internal systems and controls—and that’s the findings of those reviews. That creates real risk of widespread harm for consumers if left unchecked. So what we’re doing here is making sure that those harms are not presented to consumers.

If the member simply doesn’t care and thinks it’s fine for people to charge for life insurance when they’re dead—if he thinks that’s OK, he’s definitely on a different side of this argument. But I would think he would want to see consumers protected. He would want to see banks and insurers acting in the interests of their customers, and that is what this legislation is designed to do.

I could give examples, and I may do, if the member wants more, from the Australian royal commission, which found even more egregious examples. They had a royal commission which dug even deeper into the parents of the same banks and found some quite horrific examples of banking and insurance practice. That’s the genesis of this piece of legislation. Those very specific pieces of legislation that deal with particular products or services the member mentions are a part of that picture. But the Financial Markets (Conduct of Institutions) Amendment Bill we’re debating here today sits over the top of those other bills and makes sure that we have the right principles across them and that everything is joined up, and compliance with those other bills can be used as evidence of compliance with this legislation. It’s intended to avoid duplication. Thank you, Mr Chair.

Thank you. Well, there’s the reason, eh? How many transactions do you think banks alone process every year in New Zealand? What do you reckon, Mr McClay? Four billion? Well, I’ll tell you what. There will be billions and billions of transactions that take place, and, actually, unlike the Minister, I was actually on the Finance and Expenditure Committee when the Financial Markets Authority (FMA) and the Reserve Bank’s Adrian Orr, presented to the Finance and Expenditure Committee about the review of findings, and I think the Minister has very carefully taken snippets of billions of transactions that take place in New Zealand. He’s quoted about four or five examples. The one thing he missed, from what he was saying there, is that the Reserve Bank and the FMA were clear to say they found no systemic issues of wrongdoing in New Zealand. They found isolated examples of cases, unlike in Australia, where they certainly found lots of cases. But the New Zealand review showed that there was no systemic issue. So to quote those and to say that is the excuse for how we’re going to impose millions of dollars of additional compliance on top of all these financial institutions I think is a very poor excuse.

The question is: why wouldn’t you have made sure that you actually got the Credit Contract and Consumer Finance Act legislation right rather than try and go and create a whole new plethora of legislation requirements under this and all the attendant costs? Because I think, at the end of the day, what we’re going to end up with is competing jurisdictions that these institutions are going to have to be accountable to: FMA, and then, on the other side, the Ministry of Business, Innovation and Employment, and the Commerce Commission, and out to the side the Reserve Bank. Who has priority? Who do I respond to? How do I make sure this code is not competing with another code, and how do I know that the FMA is not going to reinterpret the code to suit their ends? That is the inherent conflict of what this legislation is about.

So let’s deal with a little bit of detail on the bill. So new subpart 446M, “Minimum requirements for fair conduct programmes”—there’s a whole lot of clauses here under what the minimum requirement is. It is amazing: (a), (ab), (ac), (ad), (bb), (bc), (bd)—and there’s subclauses under each of these—(bc), (be), (bf), (d), (e), (f), (1A), (1B). They just keep going, right? Woah. So, in the second one—this is (ab)—this is a new insertion, the minimum requirements for a fair conduct programme, that says “designing, and [maintaining] the provision of, the financial institution’s relevant services and associated products, including regularly reviewing”. Well, my first question is: how often is that going to be? Does the FMA tell them that or does the bank or the non-deposit taker? But it’s not all non-bank deposit takers; they’re actually big organisations.

“(i) the relevant services or associated products that are provided to consumers on an ongoing basis to determine whether they are likely to continue to meet the requirements and objectives of those consumers (when viewed as a group);”. Wow. I’m the new recruit to one of the non-deposit takers and I’ve been asked to do the compliance on that. What in the dickens does that mean, Minister? Because I can take a view from the non-bank deposit taker’s view. I could take it from the view of a consumer. I can take it from the view of the FMA—that’s the regulatory oversight. How do I justify that? Do I have to lay out all the different positions and then come to a view?

The next point, a subpoint on that same thing, which we were referring regularly—I don’t know what that means—“(ii) whether enhancements or improvements in the financial institution’s relevant services or associated products should be made available to those consumers (when viewed as a group);”. This is just the first one. Let’s start with this, Minister.

Mr Chair, thank you very much. I’m trying my very best to find the reason for this legislation other than a Minister who is busy, who wants to look busier, in a Government that actually is not doing that very much at all. Sadly, I can’t be kind because this does feel like, as the last speaker said, a solution looking for a problem. It’s easy, Minister, when you’ve got lots of officials paid for by the taxpayer, to say, “I’ve got this legislation. I’m coming under abject pressure from Andrew Bayly, and what I need you to do is to go and find for me a few reasons why actually this is a good idea.”

I’ve got to ask the Minister—and I think in the new process we have in the committee, we’re allowed to ask questions and occasionally they’ll answer without us using up all of our time. My question is: Minister, on how many occasions in New Zealand in the last decade have banks sold life insurance to people who are dead, and wouldn’t you then be able to claim upon that life insurance? In fact, my great-great-grandfather is no longer with us. Can you find me a bank, Minister, that I can go in and take an insurance policy on his life? I’ll happily pay it now and therefore be able to claim it. Because actually, unless it is endemic in the system, along with all of the other examples you gave, then, merely, there is a cost to this.

Yep, banks make lots of money and others do, but the last time we were before this House, Minister, when you said “We are here to do what’s right for the poor old consumer, because there are lenders out there who take advantage of them; let’s pass this piece of legislation, the Credit Contracts and Consumer Finance Act”—well then, all of a sudden we’re reading in our newspapers over Christmas that banks are asking you about whether you’re having fish and chips or what you spent money on, and not lending. That wasn’t the intention of that legislation. I know it wasn’t the Minister’s intention for banks to decide that because of the way the regulator would interpret his legislation, they had to delve into the deepest part of people’s lives. If you happen to watch a movie on Sky TV and pay extra for it, or, as some Labour MPs do in Opposition, watch movies in hotel rooms, well, ultimately the point here is that it shouldn’t get in the way of your enjoyment of a house.

So, Minister, will you give us an assurance that there won’t be extra costs imposed through bureaucracy on businesses, on banks, that are always passed on to the consumer? And why are we dealing with this legislation today? Because it’s not obvious that there are as many problems endemically, as he says. And why don’t we have a quick fix before us so that banks realise that they don’t have to look at whether people are having fish and chips, watching movies, or doing other things to enjoy themselves, so that actually they can get loans and buy houses?

Thank you, Mr Chair. The member again asserted that this is some kind of bill in search of a reason, and I think it shows how out of touch the National Party really are. They don’t mind thinking that it’s fine that a bank’s charging customers for credit card repayment insurance for which the customer receives no benefits. They don’t think it’s fine for a bank to continue to charge deceased clients premiums for credit card repayment insurance and life insurance. They don’t think it’s fine, and so on, and so we can go through this list of all of these instances—

💬 Hon Todd McClay: How often?

And then the member asks how often; he wants some details. And I’m sure some details will just convert him.

💬 Hon Todd McClay: Yes, it will.

It will, he says. He’ll be right with us. OK, so the Financial Markets Authority (FMA) and Reserve Bank review identified 16—so this is just a simple sample they’ve done—specific remediation activities from their 2019 review, across 10 insurers with a total remediation of $1.4 million. Now, subsequent to that, the FMA has had ongoing conduct and culture work because this triggered—this triggered—a search for more examples. So we’ve already got examples.

💬 Andrew Bayly: Outrageous!

I know $1.4 million is nothing to Andrew Bayly but to a consumer who is struggling with the cost of living, or with any other particular issue, $1.4 million might be quite a lot of money. To the National Party, nothing; they’d rather defend the banks’ rights to carry on doing loose processes. But after that review, they then set about looking at other examples, to see what else was out there.

So, with remedial work carried out after the culture and conduct reviews, life insurers have now identified another $7.8 million in remediation and approximately 400,000 customers affected. Subsequent disclosures from some general insurers identified another $8 million in remediation. These are the kinds of examples, I say across the House, where consumers are at risk—and it’s been identified through reviews and then follow-up work has identified yet more examples and more risk—and these reviews also have highlighted that there is a large regulatory gap here in New Zealand, and that we do not currently have any general oversight or regulation of retail banking insurance, unlike comparable jurisdictions like Australia or the United Kingdom. That means that the institutions themselves just don’t have regulators who are able to detect these issues and risks, so it’s only these reviews we have to go on.

They’ve already identified hundreds of thousands of New Zealanders who’ve been ripped off—hundreds of thousands of New Zealanders, millions of dollars. Furthermore, in Australia, where the parent companies of many of the banks operating here operate today, they had a royal commission at a similar period of time, led by Commissioner Sir Kenneth Hayne—the same institutions, with similar cultures; parent organisations. They had people confessing to ranges of crimes and breaches, including falsified client records, forged signatures, privacy breaches, insider trading, under payment of $80 million of employees’ superannuation benefits—Commonwealth Bank of Australia, parent of ASB; Westpac staff manipulating internal systems such as unauthorised opening of accounts and false recording of offers being made to customers, in order to trigger bonuses; ANZ employee falsified more than 100 loan applications, and two business bankers who colluded with third parties to make 47 fraudulent loans. These are examples where they have dug a bit deeper. They got a royal commission. But here in New Zealand, they uncovered it, and then they kept digging, and they found hundreds of thousands of New Zealanders affected—even here in New Zealand without a royal commission—and millions of dollars owed. We have a regulatory gap here where we don’t have the oversight that they have in Australia and the UK, so we’re actually more vulnerable to this kind of behaviour.

So I think the case is pretty clear. If you believe in the rights of consumers and you want to make sure that consumers are getting a fair deal, you back this bill. If, however, you want the banks to be able to, carte blanche, rip people off, or insurers—hundreds of thousands of people, without consequence—then you vote like the National Party intends to vote.

Thank you very much. Minister, what you just said is we need legislation because there are people in banks acting fraudulently. Fraud is already against the law. You can’t make it more against the law. It’s already against the law. So in the case you gave that I think wasn’t in New Zealand but was in Australia, where one person signed hundreds of loan applications fraudulently, in New Zealand they would be found, they would be caught, and they would go to jail. Fraud is already against the law. So what you’re actually saying is using examples of other countries that have legislation that we don’t have here, to catch fraudulent behaviour; fraud is against the law in New Zealand.

Minister, you also said that the problem is the regulators are not able to do their jobs properly. Then fix the regulators. Don’t bring more legislation to paper over something that the Minister says is not working, because with every single piece of legislation this Minister brings to the House, there is a cost. And we’ve seen the significance and effect of the cost with the last bit of legislation, where he said at the time, “They have it in Australia. We don’t have it here, and all these poor consumers are being ripped off everywhere, and there are nasty people out there giving them loans and so on.” Actually, Minister, as a result of that last piece of legislation, that is still happening for those who are already acting illegally. You can’t make something that’s wrong or illegal more illegal. But all that the Minister has done through rushing that legislation through the House last year and giving guarantees to everybody they would be better, is that those that should be able to afford a house and get a loan for it are now not able to.

Minister, you mentioned in one of your examples that $1.4 million may not be a lot of money for the National Party. It’s quite a significant amount of money, no question there—with the exception perhaps of contracts issued by the Ministry of Business, Innovation and Employment to Nanaia Mahuta’s husband. It is a lot of money, but the point of this, however, is that, actually, once again, this Minister is bringing forward legislation that says, “Trust the Government. It actually is to do the right thing.” And based on the last piece of legislation put through this House by this Minister when he said the same thing, there are New Zealanders today who cannot get loans to buy homes, who would have been able to before the legislation and they weren’t in danger of being ripped off or taken advantage of.

Minister, can you give this House an iron-clad, absolute guarantee that, actually, this legislation will do only what you’re saying it will do, and that there won’t be any additional cost imposed upon these institutions—because, as the Minister says, the regulators can’t do their job—and that that cost won’t be passed on to the consumer.

💬 Dr Duncan Webb: I raise a point of order, Mr Chair. The member made some statements about family members of members of this House, which is—

CHAIRPERSON (Ian McKelvie): No, that’s not a point of order. I heard it very clearly, and I think it was a legitimate use of the House’s time and the member is perfectly entitled to do whatever they see fit.

Thank you, Mr Chair. I’d like to keep this question very specific. I’d like to probe the Minister’s position further on building societies and credit unions. They are already legislated to act in the best interests of members at all times. They don’t have the support of the Reserve Bank from a liquidity and balance sheet point of view, and increasingly our research shows that in New Zealand people are going more and more to credit unions and building societies than banks on a percentage basis because the service is great and they actually have the opportunity to get a fair hearing, fair products, and a fair explanation of what it is they’re buying into. So if you look at all the people that have been excluded from this legislation in terms of lenders, I find it tough that over the last year I’ve asked in the House and to Adrian Orr and Grant Robertson and the Minister of Revenue why we can’t be more sympathetic to credit unions and building societies and let them perform a service out there that is not burdened by this extra legislation. And I’d like to ask the Minister: why can’t they be exempt from this?

Thank you, Mr Chair. I found the Minister’s argument very interesting: $1.4 million. I suppose my first question is—and this has been the central thing—banks and financial institutions make mistakes, and we don’t want them making mistakes. We’ve already got the Credit Contracts and Consumer Finance Act (CCCFA) legislation; that’s already been in place. What this bill does is put another architecture over the top of it and doubles it up—doubles up the requirements on financial institutions to hire lots of people to do lots of compliance. So I suppose my question to the Minister is: what is the benefit-cost ratio of this and how much have the officials estimated these reforms, these new compliance regulations, will cost financial institutions to implement? I’d love to know whether there’s been any assessment of the cost of financial institutions implementing this, particularly when they’ve already had to gear up to meet the CCCFA requirements.

As my good colleague Hon Todd McClay said, between 6 and 10 percent of loans are not now being processed by the banks that would have otherwise been processed up to 1 December last year before the new CCCFA regulations came into force. It has been a disaster. Talk about cost—that’s a real cost, particularly for first-time buyers who are wanting to buy a property or people who are really struggling to get credit who want to buy a car or whatever. What that legislation’s done is stop banks—probably the lowest cost lenders—and driven those people in to high-cost lenders. It’s absolutely been a perverse outcome; and, if you talk about financial cost, the serious personal cost to those individuals has been severe.

So I did ask a question about new section 446M before because I’m trying to understand some of these regulations. They are just unbelievable. Why don’t we try another one—why don’t we try another one, Minister? So I’ve slipped past paragraph (a), (ab), (ac), (b), (bb)—don’t worry, we’re only a quarter of the way through these new regulations! So the minimum requirements for fair conduct programme requires initial and regular ongoing training for each of those employees, agents, and intermediaries. I’m hoping that this is going to be dealt with in the Supplementary Order Paper on the following matters.

So on the relevant services fair conduct programme—so, of course, if you change your fair conduct programme, presumably you have to pull back all your intermediaries. So if you’re a bank selling probably, what, 100 different products—KiwiSaver, insurance, different banking products—every time you make a change in your fair conduct programme I presume you have to call them back and retrain them, including your intermediaries, I think. Checking that each of those employees, agents, and intermediaries has completed the training—so you’ve got to do the old tick box. So a bank like ANZ—I wonder how many intermediaries it’s got. Have you ever worked it out? It would be interesting.

Minister, the second question: do you know how many intermediaries a large bank might have? Because presumably you’ve now got to pull them all back in and ask them somehow whether they’ve completed that training and have a reasonable understanding of the matters that have been covered by the training. So it’s not just a case of turning up and saying, “Did you attend the training?” You actually have to sit down with Mr Penk, Mr Smith, whoever, and say, “Now, tell me, did you understand it all?” And what happens if Mr Penk’s a bit slow? You might have to do retraining. So how does a director know that Mr Penk—an intermediary selling some obscure insurance policy out in the Chatham Islands—actually has understood the new code?

And then we’ve got to do—no, I’m just rapidly ripping through here paragraph (bd) “managing or supervising each of those employees, agents, and intermediaries to ensure that they are supporting the financial institution’s compliance with the fair conduct principle, and monitoring whether those persons are giving that support”—and gee we’ve got a whole lot of stuff we can talk about. Well, can the Minister please just provide a little bit of clarity.

Indeed, as the member Andrew Bayly intimated in his first question, before he got carried into the flow of the argument, indeed that matter is dealt with in the Supplementary Order Paper. The bill previously treated agents the same way as employees, being subject to prescriptive control from financial institutions. However, through discussions with industry, we identified a number of concerns with that position, such as uncertainty over who would even be covered by the term “agent”. So retaining that approach would also have undermined Cabinet’s policy decision to take a less prescriptive approach. In relation to intermediaries, some intermediaries act as agents for financial institutions almost directly while others are more fully independent. So I consider a less prescriptive and more flexible approach is appropriate in relation to agents, and that’s consistent with the principles-based nature of the regime generally.

If I can also just cover off the point raised by the member Damien Smith, it was something I covered off in my initial contribution, but it’s an important question so I’m happy to repeat, around non-bank deposit takers being included in the scope—you know, the community institutions that people attach value to and are using as alternatives to the big banks: credit unions and so on. The suggestion that non-bank deposit takers should be excluded from the regime—it’s the Government’s view that non-bank deposit takers offer a range of bank-like services to consumers and face similar governance and conduct risks, and therefore it’s my view that they should remain subject to the same requirements in the bill. Their inclusion in the regime is also consistent with the Government’s June 2019 decision to bring prudential regulation of banks and non-bank deposit takers within a single deposit-taker regime. I would add that I expect this to be policed, effectively, in a proportionate way—proportionate to the risk and taking into consideration the size and nature of the risk. If they’re smaller institutions, that’s a smaller risk presented overall. But the risks are ultimately the same and, if harm is identified as a particular risk, it should be investigated in the same way, in my view.

I call Andrew Bayly.

Oh, good! Thank you to the Minister for referring to the new definition of intermediary in Supplementary Order Paper (SOP) 173. I was looking at that, Minister. It states in the new section 446SA “Meaning of intermediary” that a person is an intermediary if that person is involved in the provision of a relevant service or associated product to a consumer; a person is paid or provided with a commission; or the commission or consideration is paid or provided directly or indirectly on behalf of a financial institution. That sounds pretty cool. But then the definition of what is not an intermediary—this is what I’m just trying to get my mind around. A person is not an intermediary—this is 446SA(2), Minister; just to help you—if the person is involved only as an employee of a financial institution or an employee of an intermediary.

Well, I struggled a little bit with that. But you are involved if you arrange a contract—presumably you can still be an employee and arrange a contract, and therefore you’re captured by being an intermediary—or you give regulated financial advice. But you’re not involved if you’re distributing an advertisement of promotional materials or you’re carrying out a prescribed occupation—maybe the Minister could tell us what a prescribed occupation is—in relation to their service or carrying out a prescribed activity. It would be maybe quite useful, given these are quite new clauses, knowing what a prescribed occupation and prescribed activity are. Maybe the Minister could give us a very clear synopsis of who within an intermediary is actually captured under these rules, because presumably, if you’re providing the service and getting paid for it, you are, but you’re not if you’re doing promotional activity and you’re not if you’re an employee—apparently. So can I just ask the Minister to clarify that aspect given it’s his SOP?

A “prescribed activity” will be set under regulation and will be duly consulted on to make sure that it’s appropriate definition for the industry.

Please! This is your Supplementary Order Paper (SOP), Minister—sorry, this is the Minister’s SOP. I would dearly like—and it’s a genuine question, right? I’ve got to suggest on the first blush—and I did read it through most of the dinner break trying to get to grips with what is the definition of an “intermediary”—you’ve set out there, there are certain exemptions for not being involved and deemed an intermediary, which obviously has a huge impact. It’s quite clear that you’re not distributing an advertisement. I’d presume if you’re doing administration, you’re not going to be captured under these rules. I presume if you’re running a website on behalf of a bank, you’re not going to be captured under these rules. But if you’re managing the website and using it to gather revenue then you would. But it says expressly, “carrying on a prescribed occupation” or “carrying on a prescribed activity”—these are two exclusions. Surely the Minister must be able to give a couple of examples of each of those.

Sorry, Mr Chair, I’m just wrestling with my mask. As I said to the member, these things will be worked through in regulation if needed. The intention here is to create the space should there be activities that emerge that are contrary to the purposes of the Act. Rather than spelling out in red tape or creating an Act that is no longer fit for purpose the day it’s printed, there is room to create regulation, should it be required, to ensure consumer protection without trying to prescribe every kind of future behaviour that might be contrary to the purposes of the Act.

Well, apart from saying that that answer is thoroughly unsatisfactory, not just for me and members of this House but if you’re a financial institution—and there are many, many covered by this—if you’re listening to this you must be wondering what the dickens is going to happen. Because we know how damaging regulations can be, as we saw with the Credit Contracts and Consumer Finance Act regulations that came out and stunned everyone and led to between 6 percent and 10 percent of loans not now being approved that otherwise would have been approved until the change was brought in on 1 December last year.

So why don’t we try another one, I’ll give the Minister another chance. We’ll go back to the primary legislation, clause 6A: “Section 389 amended (Exemptions from need for market services licence). After section 389(3), insert: Exemption for service of acting as financial institution (4) A person is exempt from the licensing requirement under section 388(ca) in respect of a service to the extent that the service is a prescribed exempt service.”

So my question to the Minister: what organisations are proposed to be excluded under clause 6A primary legislation?

The question is that the Hon David Clark’s amendments to Part 1—

💬 Andrew Bayly: Oh, sorry, Mr Chair—we’re not going to get a speech?

CHAIRPERSON (Ian McKelvie): You’re too late.

The question is that the Minister’s amendments to Part 1 set out on Supplementary Order Paper 173 be agreed to.