Deposit Takers Bill

Members, the House is in committee on the Deposit Takers Bill and the Fuel Industry Amendment Bill. We come first—

Andrew Bayly: On the what? I’m sure the finance Minister—

CHAIRPERSON (Greg O’Connor): Mr Bayly, be quiet please. We come to the Deposit Takers Bill. We begin with the debate on Part 1. This question is that Part 1 stand part. This is the debate on clauses 3 to 9 and Schedule 1, the “Preliminary provisions”.

Mr Chair, thank you very much. I don’t intend to take a large number of calls in the committee stage because I think it’s a good opportunity for members to ask the questions they do want to ask. But I do want to talk briefly about Part 1, partly to thank the select committee for the excellent work that they have done on this bill, because in Part 1 there are a number of quite significant changes that the select committee made that I think do strengthen this bill. I particularly want to refer to the purposes clause and the principles clause.

In the “Purposes” clause, the essence of this bill is that it is designed to be able to “[protect and promote] the stability of New Zealand’s financial system.” Obviously, the bill does that through a range of means, from licensing and supervision through to the new depositor compensation scheme, which I will also speak about later in the debate. What the committee did was add into clause 3(2)(ba) a new paragraph to talk about the importance of accessibility of financial products and services provided by the deposit-taking sector. Now, it’s clear it’s a subordinate clause because it says “to the extent not inconsistent with” the first subsection that I mentioned before, but it is an important understanding that in addition to stability, which is clearly the goal of managing our financial system through this legislation, we do also want to have a sense that New Zealanders can access the kind of financial services that they need in order to go about their daily lives. So that addition by the select committee, I think, is an important one. I think it gives more clarity for the agencies and entities that will be in charge of administering this bill.

Secondly, under the principles clause, this is where the select committee again did some excellent work around the importance of proportionality. This features in a couple of other parts of the bill which I’ll come to later, but in this particular part of it the principles include the Reserve Bank needing to take into account “the desirability of—(i) taking a proportionate approach to regulation and supervision”. One of the issues raised by a lot of submitters when they came to the select committee and in the feedback we did in the earlier consultation on this was that for small deposit takers—those who aren’t the big banks; the credit unions and so on who are involved in looking after a lot of peoples’ money—they were concerned that the bill would give a disproportionate amount of regulation on them, make it difficult to do the work that they need to do. There is an important role here for the Reserve Bank to have the flexibility that it needs to do its job, but alongside that, making sure that they must take account of the principle of proportionality is critically important.

So that change, also to clause 4 here in Part 1, I thought was a very significant one. And I thought it was worth noting that Part 1 does give the overview of the bill, why we’re here, and I think gives a pretty good summary of that, but it has been added to by the committee’s work.

Thank you, Mr Chair, and I just want to thank the Minister. I’m glad that there was agreement at the select committee process and, obviously, the Minister was very aware of the changes that the Finance and Expenditure Committee put forward.

This is really important, and it’s not contentious at all, but I’m glad the Minister stood up and made that clear. I think it’s really important because we have non-bank deposit takers who are very concerned about the proportionality of this. There’s not a lot of questions in this, but I think it’s important to canvass it so it’s on the public record that there is agreement by both—I think by all parties, I hope, but certainly from the National Party—that these two changes to clauses 3 and 4 are really important, and we want to make sure that the Minister certainly will ensure that the Reserve Bank does take a proportionate approach.

I think the other part of it—and this is one of the underlying themes of the smaller 13 non-bank deposit takers—is recognition that these smaller entities are of a different scale, have different or less access to resources, and their market share is quite different, and therefore it was important that the Reserve Bank understood, and we tried to make it clear, that they need to be treated differently and not as one seamless whole, as part of a group.

I think the other thing is that an important part of clause 4(b) is also to maintain competition—that’s a very important aspect—and paragraph (c) also draws on the need to restrict unnecessary compliance costs, which again can bury these small businesses. We’ve already heard from some of the large banks and, of course, we’ve seen the exit of the Hong Kong Shanghai bank from New Zealand, and one of the reasons quoted was the level of regulation that’s been imposed on the banking sector, and they perceived it to be a major restriction going forward.

The last bit, I think, when you look at paragraphs (d) through to (h)—I just, again, hope the Minister might just confirm this—but one of the other aspects that the sector talked about, the non-bank deposit taker sector, was the need for certainty. I think that was sort of infused; whilst it was not directly quoted, those last parts of it, if we look in a minute from another context, they’re about creating uncertainty and the select committee was keen to make sure that that certainty was not only captured in clause 4 but also in clause 71 and new clause 76A.

Again, I invite the Minister to maybe just to confirm, or otherwise, whether that’s his understanding, because I think there will be a lot of people listening to how both the major political parties regard this particular aspect.

I can absolutely confirm to the member that that principle of certainty sits alongside the principle of proportionality. I think in clause 4, the amendments we’ve made were good. It’s also how it was initially drafted as well in order to make those points, and so I can absolutely confirm that for the member.

For the Minister, the bill barely mentions efficiency. You’ve not mentioned it, and the bill sort of sidelines it. Do you not think that the Reserve Bank of New Zealand’s (RBNZ) undistracted focus should be on systemic risk and price stability in managing its affairs, and that the need to strengthen out from the RBNZ role makes it responsible for ensuring that the known collapse of any individual deposit takers or insurance companies is not really part of their core activities? I’d just like your views on that.

The Reserve Bank has had a range of roles for some time, and it has been added to iteratively over the years. Obviously, if we go back to 1989 and the very central and core focus on monetary policy alone, and, obviously, on price stability alone, but the role of the bank in the financial stability space has evolved over time, and so it does have that role as the prudential role, the supervisory role that it now has, and so we need legislation that governs that.

The bank, I think, has proved over a long period of time that it is capable of doing the many and different tasks that it is now asked to do. The whole purpose of the review that we did was to make sure that the bank itself was organised in such a way that it could fulfil those roles. So we had the three bits of legislation: one that dealt with monetary policy objectives; one that dealt with the institutional framework of the bank, the board, and so on; and one that deals with these specific tasks here that are mainly in the financial stability realm.

So it would be quite a significant and big change for the Reserve Bank not to be involved in those areas, and I think as long as we give them the right framework and the right tools to do the different parts of their job, I think we’re on the right track.

Do you think that if, in a scenario where the Reserve Bank had to put someone under, that this would leave it with egg on its face?

Sorry, could you just repeat that, Mr Smith?

Yeah. Do you think, Minister, if the Reserve Bank had to put somebody under, would this leave them with egg on their face as managers as well?

Well, it’s always very important to acknowledge that the Reserve Bank operates independently of the Government. We set the rules; we set the framework. For the most part, I think people would see the framework in which non-bank deposit takers operate in New Zealand is a strong framework, and I certainly know the member and others would have heard from constituents when we had the problems with banks in the United States earlier in the year—you know, “Could this happen in New Zealand?”

Actually, the whole process of establishing a bank or, indeed, a non-bank deposit taker in New Zealand is quite a rigorous and a strict one. So the rules that have been laid out here are absolutely, in many cases, worst-case scenario and are unlikely to come into force or be used very often, but I think it would be highly irresponsible not to have those, and so, no, I don’t agree with the member that it would be representative of them “having egg on their face”. Whenever there is a situation where a bank or a non-bank deposit taker might get in trouble, people will undoubtedly look and say “Was the bank doing its supervisory job?”, but they can’t be held responsible for every single thing that occurs and every element of the banking or non-bank deposit-taking sector.

We need good rules. They generally operate very well in my opinion, but from time to time things go wrong, and that’s why we have these frameworks.

Thank you very much, Minister. My questions are in regards to, I guess, the context in which this bill has come about to this House, and in regards to the elements of the bill that deals with the risks of the stability—the financial system at a more macro level. The implementation of the depositor compensation provisions for the loss of deposits that people would have within a bank is, in reality, in circumstances that I think one would agree would be very rare. So the context in which potentially those that are watching this and trying to understand why have we got this bill in the reality of actually the challenges we face within our current banking sector. I think it probably might be helpful to provide context in that actually the reality is that the scenario in which would mean that this—some of the provisions of this bill would actually come into effect, would be reasonably catastrophic scenarios in the context of not only New Zealand but probably a broader Australasian implication and implications on our banking sector. So, interested from the Minister in terms of in that context, and in terms of the priorities that face us, what was the consideration around why the Minister has driven the implementation of this type of legislative change? Acknowledging that the circumstances in which it would be deployed would be very, very rare.

The question that the Minister’s amendments to Part 1 set out on Supplementary Order Paper 361 be agreed to.