Deposit Takers Bill

Members, we come now to Part 3. This is the debate on clauses 59 to 94, “Regulation of deposit takers”. The question is that Part 3 stand part.

Thank you, Mr Chair. Well, I think the first thing I want to talk about is the need for a current credit rating. So clause 59 states, “A licensed deposit taker must have a current credit rating that is given by an approved rating agency.” Now, of course, I think this links very closely to clause 71, which is about the ability for the Reserve Bank to grant an exemption from the requirements to get a credit rating.

This is, again, just highlighting the issue of non-bank deposit takers who are very concerned about this, because there was a great deal of consternation that the Reserve Bank seemed to want to apply these great big, costly imposts on a smaller, but important and viable, part of the banking sector.

So there are some exemptions there when considering it. It specifically notes that when considering the matters of an exemption, “the size and nature of the businesses” and “the extent to which the risks associated with not having a credit rating could be addressed or mitigated by terms or conditions.”

So that’s a big judgment call for the Reserve Bank. Again, it might be useful for the Minister just to highlight what are his expectations of that component part of clause 71. Because I think the committee, and certainly National, were of the view that this comes back to this issue of proportionality, which is covered later in this part, Part 3. But making sure that we don’t impose unnecessary compliance costs—and the most extensive of that, of course, is getting the requirement for a credit rating. So maybe the Minister can just sort of identify what he has in mind.

I thank the member for that query. It really does go to the comments I made in my very first intervention, which is that this is the Reserve Bank’s role and they need to perform it in a way that is consistent and provide certainty—as the member himself has already indicated—that in their operations we need to give them the flexibility to be able to deal with the range of different institutions that are in front of them, and the different circumstances that might arise.

The member’s, really, in many ways, answered his own question, which is if there weren’t an exemption regime, we’d be having a very different conversation because that wouldn’t provide that ability to recognise that this is not a complete one-size-fits-all situation. It has to have some room—some wiggle room—so that’s what’s, effectively, created by that. Clause 70 provides that; clause 71 puts some limitations on the exemption power, and then—as the member himself has indicated—the committee did some really good work in the proportionality framework that comes in clause 76A within this part.

So I think, really, what that comes to is a balance of ensuring we get certainty, flexibility within the system, but ultimately the job is the stability of the financial system. We want to make sure that people who get licences are people who can actually run these institutions properly, but we also want to see that diversity within the market provided by some of the smaller ones. So the exemption criteria that’s in there, I think it’s a pretty good balance overall.

On clause 74, Minister, of Part 3, I just wanted to ask you some advice on the example that’s contained within the bill that differing lending standards may apply to lending to customers in different geographical areas. What exactly does that means?

I will get some advice from officials just to make sure I do get this right, but I’m currently involved in an interesting situation around this, which is the impacts of Cyclone Gabrielle and the Auckland anniversary weekend floods. And from time to time, circumstances arise where you will see different treatment of different customers in different parts of the country, depending on what they’ve been going through. And that I can see right now as I’m working with banks and others around how we find our way to a position where we can support all of the rebuild and recovery that that would be an example, but I will check with officials just to confirm that is an example of what they meant.

Thanks very much, Mr Chair. The questions that I have are in regards to clause 61 in Part 3. As my colleague Andrew Bayly was asking, a large portion of the select committee process in regards to those smaller entities were in relation to the concerns raised, where a very small number of people within those entities fulfil regulatory roles in comparison to the big four banks and, therefore, the capacity within those entities in order to meet the compliance obligations under the bill were seen to be at a higher level of burden than those that could be absorbed by having bigger teams and bigger capability in the major banks.

My question in regards to the Minister is in clause 61(2)(d) and (e). The conversation at the time at which the bill was going through was actually the same time in which the Silicon bank collapse was occurring in the US—and the fact that the rating agencies in the hours and days preceding the collapse of the bank had said that there was no issue with that bank. The committee also spent some time and asked officials around the considerations of what was seen in the UK around 2007, 2008, and 2009 in regard to banking collapses, and again where Standard & Poor’s and Moody’s in particular, both provided strong opinions in terms of the credibility of banks which subsequently suffered significant financial collapse.

And when one is in this legislation, looking at the consistency and comparability of these rating agencies, of which there isn’t particular competition in the market—and in the context of the fact that our major rating agencies that operate within this jurisdiction and in the global environment—from some perspectives one would say, “Well, you know, you haven’t done a very good job in regards to providing assessments in regards to financial institutions which have subsequently collapsed and led to significant financial loss for consumers.” Then, in reality, what is the point of having these type of clauses in place?

Because, you know, going back to my question that I asked right in the first part around the circumstances in which this type of legislation would actually crystallise is those that are pretty rare—so I’m interested in the Minister’s view around that, whether he has any concerns around that, acknowledging that there are major players, whether there is consideration around other options that could achieve a similar outcome or whether basically the Minister is comfortable to say, “Well, we’re going to look at the adequacy of these rating agencies, but we’re just going to sort of ignore the fact that they’ve missed some pretty significant aspects in regards to organisations which subsequently collapsed. And, you know, that’s just the nature of the business.”

With respect to Mr Watts’ intervention just now, I’ll certainly pass his concerns on to Standard & Poor’s and make sure they’re aware of that. Look, obviously, there are a lot of circumstances that sat behind the issues that the US system had at the beginning of the year. I’m not sure the role of the ratings agencies was quite the biggest of those, but the whole point of the clause that the member is pointing out is to make sure that we have quality ratings agencies active in New Zealand. So that’s the point of it.

If we didn’t have the clause and we could appoint ourselves as a rating agency or something like that, I think we’d have much worse—

Andrew Bayly: “Simon Watts and Associates”!

Hon GRANT ROBERTSON: Exactly. I’m not sure I’d go there, Mr Bayly, to that particular ratings agency, but I don’t think that’s quite what we would want in New Zealand. And so the clause is in fact designed to do exactly the thing that Mr Watts has raised.

I just wanted to come back to Damien Smith’s question that he asked—Mr Smith, the question that you asked around the different geographies. The officials have pointed out to me that that’s particularly in a case such as where there are different loan-to-value ratios (LVR) in different areas of New Zealand, for example. So you could have Auckland with a different LVR than another part of the country if the Reserve Bank was choosing to focus on a particular area. So that’s an example of how a different lending standard could be applied to.

Minister, do you think it’s worth including that definition extension in the bill?

No, I don’t.

I just take the opportunity to invite members from the Labour Party to stand up, and particularly some of the members who contributed fulsomely during the select committee process. I’m looking at the Hon Phil Twyford and Ingrid Leary over there, and Mr Halbert over there wants to continuously close down this debate. I’m not sure what his problem is. He should leave if he’s in a hurry. But the issue I want to just raise with this—because I think it’s important, and, unfortunately, the member wasn’t a member of the Finance and Expenditure Committee for most of it, but he was for some of it, so maybe he could make a good contribution.

Simon Watts: A bit restless today.

ANDREW BAYLY: Yes, I noticed that; very restless. The issue I want to just talk about, which I seem to have lost, is the issue around the duties of directors. Of course, what I’m referring to is clause 92. As a select committee, we were concerned that directors couldn’t rely on professional managers. The reason why we were concerned was if you take very large organisations with many thousands of employees, it would be impossible to expect board members or even a CEO to have a really good, in-depth requirement to make sure that the entity was complying with the Reserve Bank requirements. There’s a duty of care which is set out in clause 92, and related to that is a due diligence requirement.

So I think the first thing I want to just note, and I hope the Minister is in agreement with this, but the committee removed the requirement for anti-money laundering requirements because with discussion with the officials, it was viewed that anti-money laundering has its own separate piece of legislation, and, for that reason, we did not need to capture it in this bill, and that is why it was removed.

But the issues in clause 93A about allowing directors and senior managers to have reliance—and, obviously, there is a requirement, certainly in clause 93A(3), that you not act in poor faith and have made proper inquiries, and have no knowledge that such reliance is unwarranted. But I think this is a very important part of this bill to make sure that in those large organisations there should be an ability to be able to rely on other members of the team and not necessarily require directors and CEOs to actually avail themselves of all and every piece of information that they would otherwise be required to.

The second thing is that we talked about making the rules about the guidelines—and there’s a requirement on the bank in clause 94 to prepare guidance on due diligence duties. One of the big things we talked about—and I know Ingrid Leary across the House here is deeply involved in this—is whether, in fact, the Institute of Directors (IOD) should be the party that provides that because, of course, they’re in the business of providing guidance and support to directors. We thought they were most likely to be the best entity to help the bank in preparing its guidelines. Where we’ve ended up is issuing guidance or training in relation to directors’ duties, but actually requiring the bank to go and consult with such entities. In fact, we’ve obliquely referred to the IOD by saying to those entities who are in the business of providing that type of guidance.

So, again, I suppose it’s a question of just putting this on record, but it is really important that we get adequate due diligence. I don’t know whether the Minister wants to make any comments around that, but I think the importance of—in some situations, it will be important for a CEO or whatever to have a very close understanding of this issue, but in much larger organisations that’s probably impractical and unwarranted. I think my view is that where we ended up is we struck a balance on that, but, again, of course, I’d welcome the input from the Minister, because he’s such a knowledgeable person about these aspects.

I’d like to refer the Minister to clause 79, Part 3—the examples on convertible debt securities. I don’t want to read out the whole definition because it’s quite extensive, but in terms of that billion dollar figure, how is the maths done on that from a bail-in standard point of view?

I move, That the question be now put.

The question is that the Minister’s amendments to Part 3 set out on Supplementary Order Paper 361 be agreed to.

Amendments agreed to.

Part 3 as amended agreed to.

Part 4 Supervision of deposit takers