TIM GROSER (National) : I will take just a brief call on Part 1. National is supporting this bill as one of a suite of bills designed to shore up some problems that have emerged in recent years. It has been a fairly technical bill. The reality is that as soon as we regulate one sector of the financial system, we create, by definition, an incentive for others to operate outside the rules. This is known as the process of financial disintermediation. I note just in passing, for those readers of the Dominion Post who saw the consequences of this reported on the front page just this morning, that the collapse of some of the second-tier financial institutions we are referring to now has created a space for some fairly dubious new institutions to gain business. That is the reality of this process. It is a cat and mouse game between the regulator and the private sector. In the course of recent years we have discovered that the non-regulated second-tier sector we are addressing here has created some major problems for those involved.

Part 1 attempts to put some precision around the definitions of the institutions concerned, the governance structures, and the actual requirements that the regulator—which will be, of course, the Reserve Bank of New Zealand—will expect of these second-tier non-bank financial institutions. In looking at the definitions in Part 1, my colleague Craig Foss has given an excellent overview of this issue, and he has answered some other parliamentarians’ questions about the slightly strange term “non-bank”. As my colleague put it, it has a very specific meaning in the law precisely because of the requirements that anyone who wishes to use the term “bank” must follow.

I was not privileged to be a member of the Finance and Expenditure Committee during this process, but it has put a lot of work into this bill. If members look through the tracked changes in Part 1 they can see—and I take this as just one example of many—the care with which the select committee has sought to define a building society, unless the building society is a registered bank. Then if members look at new section 157, to be inserted by clause 11, they will find that there are consequential amendments in terms of the expected governance regime for that particular type of non-bank deposit taker that take account of the specific characteristics of building societies.

I want to draw attention to a couple of other points in Part 1. New section 157F deals with the issue of risk. Parliament is making a bold statement here, which is that eliminating all risk is not part of the deal. That is not an exact quotation, which is in new section 157F(2)(b)(i) and states: “it is not the purpose of this Part to eliminate all risk in relation to the performance of deposit takers or to limit diversity among deposit takers;”. But we will never overcome the principle that we cannot legislate for common sense. I am sorry, but that is the reality. We are trying to reduce some risk around this issue.

I have always felt that the phrase “caveat emptor” was as cold as charity when it comes to this type of issue, given the degree of financial expertise required on the part of any person who wishes to put his or her deposits and savings into an institution of this type. To expect them to be able to undertake on their own behalf the type of assessment of the risk is, I think, a bridge too far. So although I understand the reason for that old phrase “caveat emptor”, I think that the reality is that we live in a slightly greyer world than this, and we have had to respond in the manner set out in this bill.

I will also focus on the question of the credit ratings, which is also dealt with in Part 1. Clause 11 inserts new Part 5D, and in that part new section 157I sets out definitions of appropriate rating agencies. That provision is perhaps a little more controversial. A bit of a judgment call was required here. There is no question that there is a role for this second-tier financial structure in our community, in spite of the very sad collapse of certain non-bank deposit takers or finance companies in New Zealand over the last 6 months or so. I hope this bill will go some way towards illuminating the situation.

CHRIS TREMAIN (National—Napier) : I rise on behalf of the National Party to support the Reserve Bank of New Zealand Amendment Bill (No 3). The bill implements the main elements of the new regulatory framework for non-bank deposit takers. It deals mainly with prudential regulations for non-bank deposit takers. There is a suite of bills currently before Parliament and the Finance and Expenditure Committee, including the Financial Advisers Bill and the Financial Service Providers (Registration and Dispute Resolution) Bill, which will add to the portfolio of products aimed at hardening up the regulation of non-bank deposit takers.

I acknowledge the members of the Finance and Expenditure Committee, which dealt with the bill, and particularly my colleague from the Hawke’s Bay, Craig Foss, whose experience in matters of banking is excellent and certainly helped us to understand the issues in the bill. I think Craig will be heavily involved in the Financial Advisers Bill as it goes forward, and his contribution needs to be acknowledged.

We are focusing on Part 1. I want to look at a number of clauses within it, starting with clause 8, which deals with policy advice. The clause was amended by the select committee to clarify that the advice that can be requested by the Minister under the regime must be connected with the functions of the Reserve Bank. The advisory function of the bank must not limit the bank in the performance of its primary role. The primary role of the bank is dealing with monetary policy, the official cash rate, and the policy targets agreement. We wanted to clarify that the bank’s additional responsibility to provide advice to the Minister in relation to non-bank deposit takers was secondary to its responsibility for monetary policy. We wanted to make it clear that the bank’s predominant role is, and will always remain, dealing with monetary policy.

The select committee inserted new clause 8A, to make sure that any information collected from non-bank deposit takers would remain confidential to the Reserve Bank, in the same way that information it collects from the main banks is kept confidential. There were further amendments by way of insertion of new clauses 8B, 8C, and 8D, and they were interesting amendments. Mr Woolerton may recall that, currently, the Governor of the Reserve Bank and the deputy governor cannot have an interest in any banks that operate within New Zealand. We felt it was really important that the governor and the deputy governor not have an involvement, a financial interest, in any non-bank deposit takers, as well, to avoid conflicts of interest that could cause issues down the track—particularly given that the bank is seeking quite detailed information from non-bank deposit takers.

The key part of Part 1 is new Part 5D, inserted by clause 11. New Part 5D is a new part of the Reserve Bank of New Zealand Act 1989. It relates specifically to the regulation of deposit takers. It adjusts the Act to allow the Reserve Bank to deal with non-bank deposit takers. New Part 5D is the substantive part of the bill—a very important part. I want to talk about a number of important provisions in it.

I will talk firstly about the provisions that deal with the definition of deposit takers. That definition is very important. It is vital to defining what type of organisation this bill applies to. Members of the committee heard from a number of submitters who were concerned that they would now have compliance costs accorded to them unnecessarily, because, in fact, they were not in the business of taking deposits from members of the public. We made it clear, through new section 157C, which organisation would and would not fall under this regime.

There is an interesting point in subsection (4). It allows groups to be excluded from, or included in, the regime by Order in Council. That is a point I wanted to highlight. I also want to highlight what came to be known as the “hire business clause”. The “hire business clause” comes in via subsection (5). It allows the governor the power to exempt—or to include, for that matter—a business, according to the nature of its business activities. The concern from the likes of hire businesses, which take deposits from customers for hire equipment, was that they would be considered deposit takers, when, in fact, the principal reason for their business was to hire out products to consumers on a day-to-day basis. Although they take deposits to prevent the products from being stolen or damaged, their principal business is not being deposit takers. We inserted that provision to make that very clear, and that is good.

I want to touch on new section 157I, which insists that deposit takers must have a current credit rating. You see, up until this point in time, non-bank deposit takers have not been required to have a current credit rating, although some do have one. Hanover Finance, I believe, had a BB+ rating—which did not prevent that company from falling over. The fact of the matter is that now, under this legislation, non-bank deposit takers that are defined as such must have a credit rating. New section 157I insists that that be the case.

The committee had a look at that, and we put in a new provision to define the principles to be followed by the bank in deciding whether to approve a certain credit agency, so that New Zealanders can have some surety that the credit agencies that are being used to provide these credit ratings have some substance to them. Members will see a range of measures in new section 157J that define the principles to be followed.

That is all I want to say on Part 1. I will leave it at that point. Part 1 is the substantive part of the bill. It defines how we are to adopt credit ratings for non-bank deposit takers. It brings non-bank deposit takers under the auspices of the Reserve Bank of New Zealand Act, and I think that is a good thing. That is why the National Party will support Part 1 going forward.

CRAIG FOSS (National—Tukituki) : Further to what my two colleagues have said, yes, we are speaking on Part 1 of the Reserve Bank of New Zealand Amendment Bill (No 3). I will cover some specifics, and I have some questions I would like to ask of the Minister in the chair, Chris Carter, about these matters. I look forward to his clarifying some of the issues.

The principal Act is the Reserve Bank of New Zealand Act, and I would particularly like to talk to clause 6, which substitutes a new section 16, “Dealing in foreign exchange by Bank”. Clause 7 then talks about foreign reserves. Another bill recently clarified that for the Reserve Bank; I cannot quite remember its correct title. This bill is a clarification, actually, of what the Reserve Bank does, of what it is allowed to do, and of which agents it can use or can use it.

But I would be interested to ask the Minister, if the Ministry of Education was ever dealing in foreign exchange, for example, whether it would deal in it via the Reserve Bank or the Debt Management Office, or whether it would deal in it direct, because that perhaps would give us a clue as to some of the efficiencies in the Public Service. There would not be any point in the Ministry of Education buying foreign exchange through a particular trading bank, for example, or the Ministry of Health selling foreign exchange through the same trading bank, because the bank would be the winner there at the end of the day. So I would like the Minister in the chair to clarify that. I imagine he knows about the Ministry of Education; I would like to think so.

Clauses 8B, 8C, and 8D just provide detail. They talk about the removal of the governor or the deputy governor, and the disqualification of them—that is, they cannot have a vested interest or shares or an equity holding in, or be exposed to, non-bank financial institutions. That obviously makes sense, as suddenly the Reserve Bank will be the regulatory arm for those institutions. That is, I think, identical language to that used to describe what those individuals are able or not able to be or to have in relation to existing banks, which is to be shareholders or to have substantial stakes in those banks—or at least they must declare any stakes that they may have in them. It is quite difficult, in the very thin stock exchange and equity market that we have, for those individuals to not have some investments in those banks, but I am sure the investments are in blind trusts or something like that.

I would ask the Minister in the chair whether he could expand a bit on new section 68B, “Bank to have regard to directions about government policy objectives”, inserted by clause 10. My colleague Chris Tremain spoke about this a little. The bill has gone through a few drafts, to be fair, but when it first came to the Finance and Expenditure Committee one interpretation of it—and, again, I alluded to this in my second reading speech—was that there was possible politicisation of monetary policy here. The extreme example of such politicisation was Robert Muldoon and the old reserve asset ratios. If he wanted to pump the economy up in an election year, funnily enough he would change those ratios.

In fact, what we originally saw here was the ability of the Minister to virtually influence the Reserve Bank, in a bit of a roundabout way, to change the cost of capital to certain institutions. Now, that is totally unacceptable, and I covered the reasons why it is not acceptable in my earlier speech. But if it was an election year—as, for example, it is right now—and the Minister of Finance, in an extreme example, wanted to pump things up, he could have got on the phone to ask for some policy advice from the Reserve Bank governor, and said: “Hey, this is a request for policy advice. We think the housing market needs to go up again. What do you think?”. The Reserve Bank governor was obliged to respond to that question, and the Minister of Finance could have given him directions.

Things are a lot tighter in this final version of this bill, to be fair. However, I would like the Minister in the chair to answer some of the questions about exactly how that process would work. If possible, I ask him to give us an example of the policy questions that the Minister of Finance may ask the Reserve Bank governor, and to describe the way that that process would work, including the checks and balances in it, with reference also to the banking side of the economy, which is of course the larger one.

Many people who are exposed to debt and who have borrowed from the many non-bank institutions are, as a previous speaker alluded to, actually very, very vulnerable. We saw in the Dominion Post today that a little finance company—I think it was in Porirua or Taitā—is advertising interest rates of 8 percent per week. When compounded, that 8 percent actually translates to something like 400 percent per annum—I think, in that example, the paper just used a blind and multiplied 8 by 52, and got a figure of 400-odd percent per annum. The finance company declares the rate per week on its board at the front of its office. The problem is that although the company has actually been up front about its hugely exorbitant interest rates, many people do not see the distinction between the weekly rate and the rate when compounded per annum. That company, because of its exorbitant pricing, and because it is taking advantage of the vulnerable, is up against the Commerce Commission. I also understand that there are some quite extreme collateral obligations around those companies, which, now they have been publicised, will be investigated, I am sure.

Tim Groser: Hopefully.

CRAIG FOSS: Yes, hopefully.

I will now talk to clause 11, which inserts a new Part 5D. I do not know why all this has happened. I guess it was to get the bill through more quickly, with fewer parts to talk about. But there are many new parts of the principal Act in there that I would like to talk to—particularly the credit rating provisions set out in new sections 157I, 157J, and 157K. I would like the Minister to answer a few questions and give us his thoughts on who should be an approved credit rating agency, how they should be reviewed, and what criteria the Reserve Bank would look at when approving them. I would also like the Minister to step up and say whether that means that some existing credit rating institutions in New Zealand should be put out, or at least blacklisted, as some others should come in. As Chris Tremain mentioned earlier, many of the failed institutions did actually have credit ratings, but they were not worth the paper they were written on or the TV ads they were portrayed on.

Again, to be fair, once the select committee went through various drafts of this bill that area was tightened up a lot. It was good practice all round, and I would like to acknowledge the officials here, too. I thank them for all of the work that they have done around this bill and many others.

I would also like to speak to new section 157L, which is about governance requirements. Many submitters had concerns regarding the cost of compliance to them, and, as I alluded to earlier, there is a danger here that this is seen as an implied guarantee of deposits by the Reserve Bank—a deposit insurance. Another downside is that it is skewed against the smaller financial institutions, which may be quite robust, very conservative, and below the radar, but which now have to front up to all the costs of getting a credit rating, managing the governance requirements, and changing their deed to allow for the capital adequacy ratios, etc. The larger institutions, of course, have a larger back office and plenty of lawyers to do that stuff for them, and they have more depositors to spread the load over. There is a problem here with regard to the smaller ones, and we have to be very careful that we are not skewing the playing field against some quite robust institutions.

As we go through Part 1, I would also like to speak about risk management. As long as institutions declare what they are investing in and that is public and open—that is, it is clear what the risk is—that should be fine for many of these institutions. The problem we have recently seen is that the risks were not put up front. So, yes, this bill provides a framework, and the Reserve Bank will monitor the companies, allowing them to invest in whatever they may like. The legislation is not very prescriptive on that, as long as the risks are declared. That is the balance between full, prescriptive parliamentary regulation and the belief in caveat emptor, which we spoke about earlier, and I think it is a pretty good fit down there. The good point—it is somewhere else in the bill; it might be in another part—is that it will be reviewed in 5 years. That is very good.

I know many people do not understand the minimum capital requirement. It is quite technical, but here is a simple example. If a bank or one of these institutions wants to lend to a business, it has to have 8 percent of that capital sum allocated and put aside in case there is a default somehow. But if it is lending against a residential home, it has to have only 4 percent of the same amount of capital put aside. When one looks at that, one can understand why many people borrow against their own home in order to fund their business. New Zealand is a nation of small and medium sized enterprises, and many business owners actually put their own home at risk in order to fund their business. One can see why they do that, because the cost of borrowing against their own home is cheaper than if they were to borrow against the cash flows of the business. The monetary inquiry is looking at some of those issues at the moment. Many people approach this the wrong way. The point is that people are taking a risk with their own assets—be it their own home, a second home, or a third home—in order to invest in a business. So those people are taking much more of a risk than their bank, whichever one it may be.

R DOUG WOOLERTON (NZ First) : Before I follow on from where Mr Foss left off I would like to say in recognition of Mr Foss that he is an ex-banker with a level of financial literacy far above the norm. I will not speak for any other levels of literacy that the man has, but certainly his financial literacy is far above the norm. The Reserve Bank of New Zealand Amendment Bill (No 3) is designed to attend to problems encountered by people with a normal standard of financial literacy, and it is for people who just want to be assured that their money will be looked after. So part of this bill is to enhance the transparency of what goes on, and to ensure, as Mr Foss has been talking about, that some money is put aside if everything goes wrong.

We talk of deposit takers having a risk management programme, and they should tell people in broad terms what they intend to invest in. Mr Foss has covered that. Other parts of the bill deal with governance, and it tries to attend to the sort of thing we have seen recently where finance companies have ostensibly been out there to take deposits from the public and to on-lend them to business people, developers, and the like.

We are finding now—and I am sure many people are startled to find this—that in many cases the people who own and run these companies are the very same people who are borrowing, and, in fact, they are developers who have set up a finance company to get money off the public to finance themselves in some of their very risky ventures. In many cases there are not the capital ratios that Mr Foss speaks of, and the people who miss out are the innocent members of the public who think when they put their money in that they are investing for their retirement, that they are helping business in New Zealand, and that they have some backing from financial institutions and some regulations that will ensure the return of their capital plus a return of interest for the risk they have taken. Very few of them look seriously at the risk and, in particular, at the categories of risk that are so familiar to people like Mr Foss and to the people who live in his world—or the one he used to inhabit.

I am not saying that with any sense of nastiness. I have a high regard for Mr Foss in his previous occupation. But people are searching for a guide when they are investing. This bill goes some way towards that. We would all like to see it go further, but, as Mr Tremain was talking about—or maybe it was Mr Foss, in his earlier speech—it is a question of balancing the entrepreneurial activity that we require in a free and open economy, and ensuring that there is enough regulation to encourage people to put money into a financial institution in order to encourage the growth and the entrepreneurial activity to take place. Unless both sides of that equation are satisfied we will be starved for capital. In fact, that is what is happening worldwide at the present time—the depositors have taken flight.

CRAIG FOSS (National—Tukituki) : I shall pick up from the earlier speaker, Doug Woolerton, who was starting to talk about scarcity of capital. That is a big problem. The word “capital” goes right through here—if one looks at the new section 157R about capital ratio requirement, and even before that it talks about “capital”, etc. As I said earlier, it is a very, very scarce commodity. When times are good, there seems to be plenty of it, but as we have recently found out, all around the world, particularly down here in New Zealand where we are at the end of the capital queue, if you like, it is particularly scarce. That is reflected in New Zealand in what we have to pay for our capital, as well as the general state of our economy.

But it is not just capital that the framework in this bill will start to address. It is the definition and the qualification of what a particular asset is. Then one has to apply so much capital to it. It works the other way, actually. So if one has a house, for example, it is bricks and mortar, and a certain amount of capital is required for that, which is 4 percent. If one has a business with a house above it, then all sorts of different ratios start to apply. Because capital is so scarce, many institutions will go to all sorts of lengths to make sure, or to try to make sure at least, that the regulatory body such as the central bank, or Reserve Bank in this instance, agrees with them about the class of that asset—whatever it is—and therefore that is how much capital is required to be stashed away for it.

If one takes the house example, one could have a mortgage in Australian dollars—one could have borrowed Australian dollars to fund that house mortgage. So not only is there risk on that house of bricks and mortar, and one’s income to be able to fund the mortgage—one’s income might be in Australian dollars, so one has foreign exchange risk. Or one might have a house in New Zealand, from which one is earning money in Australia, for example, so the bank is exposed not only to the bricks and mortar, and one’s income to fund the mortgage, but also to the exchange rate between Australia and New Zealand, and also to the interest rates of New Zealand and Australia, where someone could borrow there to fund oneself here. Take that to the huge extreme, of course, with Uridashi bonds, with the good old Japanese housewife lending about $120 billion, I think it is, to New Zealand.

This raises a very important point, because we must always remember that New Zealand is a debtor nation, and, sadly, that is one of the reasons we have to pay such high interest rates, which have, incidentally, approximately doubled over the last 9 years. We have to address that and not just assume that we are a creditor nation. It makes one approach many things in another way when one confronts the fact that one owes an awful lot more than one owns or earns.

I refer to parts of Part 1, including new section 157S, “Deposit takers and trustees must ensure capital ratio included in trust deed”, and new section 157T, “Deposit taker must maintain capital ratio required to be included in trust deed”; that is all very good, but it does require quite a bit of work for those various institutions. That is countered by the fact that at the Finance and Expenditure Committee we extended time for them to have all that in place to 18 months, which is, obviously, 1½ financial years for most of them. The credit-rating agencies will start to look at their assets to find out how much capital they need, and therefore tell them how much the ratios and what their exposures are, in regard to their trustees and what their allocations are, and the Reserve Bank reassures us that at the end of this quarter it will have at least a starting list of credit-rating agencies. Again, Mr Chair, I alert you to the questions I asked of the Minister in the chair before, around those agencies, and I would like him to consider answering those, and I am sure those listening in would like him to at least consider some reply to them.

In my second reading speech I talked about this thing called Basel II. Basel is a place in Switzerland that used to be the centre of the financial universe. Section 157V starts to talk about that as far as non-bank financial institutions are concerned. All banks reference Basel II—there was a I, now there is a II, and there is, in fact, even a further move from II—and its application to non-bank financial institutions is obviously the commonality between financial institutions and the finance sector.

Interestingly, Basel II has moved to a point where the Reserve Bank can now accept a bank’s own credit rating and measurement models. So as long as a “Foss Bank”, if you like, rocks along to the Reserve Bank and says: “Here’s my model for measuring my exposures; is this OK?”, and the Reserve Banks says yes, then that means I can have different capital ratios outside of Basel II. I would be interested if the Minister could answer whether they would be extending that same freedom—that throttling or flexibility—to non-bank financial institutions. I cannot recall the answer from select committee hearings and submissions, so I would be interested in the Minister’s opinion on that.

Touching on new section 157Y, relating to liquidity requirements, I note it states: “Regulations may impose requirement that liquidity requirements be included in trust deed”, and members can also look at new section 157Z. I presume they are talking about debt ratios, exposure, the 60 percent, 80 percent, or 10 percent leverage—whatever it might be. But again, when the legislation states: “Regulations may impose requirement” we need to know from the Minister in the chair that whatever is required of the institutions, pari passu—meaning all things being equal—for the banking institutions the requirements will be the same, and the cost of capital is not being increased to non-bank deposit-takers. That is my largest fear, because many people rely on such institutions to fund themselves through this increasingly expensive cost of living and increased mortgage rates just to get by. I would be interested in the Minister’s comments around that.

Finally, as we wander through the legislation I will talk about confidentiality of information. Again, the committee made good strides, and I thank the officials for helping us with that, because, again, in the early drafts it was open slather. Confidentiality outside of an institution and the regulatory body—the Reserve Bank, in this instance—is absolutely paramount. Of course, every other bank and institution wants to know the exposures of the competitors, but that information is none of their business; they can fight that out amongst themselves in the market place. It is good that it is confidential, and there are some quite good parameters around that, and checks and balances to stop any dubious leaking of information outside what would be necessary in a prudential bill like this.

I will also talk just a bit further to the offences and penalties. I would like the Minister in the chair to describe some of those in a bit more detail if he could. Earlier I asked about the process around policy advice from the Governor of the Reserve Bank or the Reserve Bank. What happens if one of those parties chooses not to follow that advice? I realise that this particular clause is about the institutions themselves, but what if an institution that is heavily exposed and has a huge amount of deposits chooses not to follow what the Reserve Bank says, because there is a moral hazard there? If a bank or an institution calls the Reserve Bank’s bluff, what happens—if the bank or institution said: “We have done all we can, we have funded all we can, we just have to taihoa, we have good assets here, we just need to ride this storm out.”?

The previous speaker talked about frozen assets. So I ask the Minister in the chair what would happen in that instance. If the Reserve Bank, in that instance, froze a large institution—$100 million in deposits, or whatever it might be—we start to question that, and there could be some systemic problems going down from that, right throughout the financial system. The simple outcome of that is that interest rates will be higher in New Zealand for longer, as they have been, in truth, with this Government here for the last 9 years.

Incidentally, if this bill had come in in 2000 or 1999, the underlying interest rate that these institutions would have had to deal with would have been 4.5 percent. That was the official cash rate when Dr Cullen became Prime Minister—at least, Minister of Finance; I am getting a bit ahead of myself there—and we have recently seen 8.25 percent. Thank you, Mr Chair.

• The question was put that the amendments set out on Supplementary Order Paper 225 in the name of the Hon Dr Michael Cullen to Part 1 be agreed to.

• Amendments agreed to.

• Part 1 as amended agreed to.

The CHAIRPERSON (Hon Clem Simich): This debate includes the schedules.

TIM GROSER (National) : This is a very important, substantive part of the bill, but it is very much briefer in its coverage than Part 1 and I think we can deal with it fairly expeditiously.

The core of Part 2 relates to the transparency of the Reserve Bank’s reporting obligations, which are set out in very clear language centred on, in particular, the Financial Stability Report and the regulatory impact statements. Although we can safely assume that those reports have a tiny audience, it is an audience of great importance to our country, as it would be in any country, because financial stability rests on having transparency and an information base. Experts in other institutions, such as the international financial institutions the IMF and the OECD—which report, as they should, regularly on monetary policy in New Zealand—as well as overseas investors, domestic investors, and a whole host of companies do actually need to see very clearly the key bits of the information puzzle. So the legislation around this issue, although it is not of general public interest, is certainly of immense importance to the general public, because it is one of the foundation stones of the financial stability of this country.

Let us not overlook the fact here that in the midst of the really very, very sad tales about people losing their savings in the non-bank financial sector—something we have just discussed at length in relation to Part 1 of this bill—my recollection of the share of total savings in the banking sector, as opposed to the non-bank deposit taker sector, is that the figure is even higher than the one my colleague Mr Foss gave. I am not 100 percent sure, but I believe it is well above 90 percent. But whatever the actual figure is, we have to be grateful for the fact that for the most part, and so far—and I guess we should be touching wood when we say this—the financial stability of this country is pretty sound. We are tidying up areas here, we are strengthening areas here in the non-bank deposit taker sector, and we are strengthening the transparency procedures that underlie the whole system. But the fact remains that despite the concern that our banking sector is dominated by Australia, I think one would have a hard job to persuade New Zealanders who had just lost their money in a New Zealand financial institution that somehow they were better off, because they had lost their money in a New Zealand institution, than the people whose assets were being protected in an Australian-owned bank.

Part 2 is very, very technical. If we look briefly into the language used in Part 2, we see there is a requirement that the Reserve Bank report on all matters relating to the soundness and efficiency of the financial system, and on other matters associated with the bank’s overall prudential responsibilities. I know that those bank reports are pored over by highly technical people, and their assessments of the information contained in them are absolutely critical for the whole operation of our economic system. So the National Party is pleased to be supporting this legislation.

We also note the changes that have been made in respect of the Reserve Bank’s dividend. Obviously, the bank is in a highly privileged position as the sole issuer of currency. It makes seigniorage from that operation. In fact, if members go back through time they will find that throughout earlier parts of our antecedent political history that was a traditional source of financing for Governments before the invention of direct income tax. Seigniorage is an ancient form of revenue for the Crown, and the principles are now set out even more clearly, to determine what the appropriate dividend to the Crown is. I think that matter is extremely uncontroversial, and we welcome the slight clarification of it. Thank you, Mr Chairperson.

CHRIS TREMAIN (National—Napier) : I rise to take a short call on Part 2. Like my colleague Tim Groser, I can move through this part expeditiously. Part 2 has two key parts: firstly, it deals with the determination of the Reserve Bank’s annual dividend back to the Crown; and, secondly, it deals with the timing of financial stability reports and the importance of them.

In terms of the first part, which deals with the bank’s annual dividend, at present the bank calculates the dividend in accordance with a legislative formula. I take this opportunity to say to the Minister in the chair, the Hon Shane Jones, that given his financial background and the time he spent as chair of the Finance and Expenditure Committee, I am quite keen for him to take a call to give us a feel for what that legislative formula entails, so that we can learn a little bit more about it. I ask the Minister in the chair to seek a call so that he can define how the Reserve Bank calculates its dividend in accordance with a legislative formula.

The formula-based determination does not always reflect changes to the bank’s balance sheet, market, and accounting, and in recent years it has not accurately reflected the amount that should be available for distribution back to the Crown. The committee has changed the provision to make it clearer. The amendments we recommend would allow the bank to determine the principles—which must be published in its statement of intent—upon which it would recommend the dividend. That is quite a change. The bank will have to define how that dividend will flow back to the Crown, and it will have to consider how its own balance sheet has changed because of the impact of the financial markets on it, rather than the dividend just being calculated in accordance with a formula—which I am hoping the Minister will take some time to define for us before we close off the debate on this part.

R Doug Woolerton: Shane will sort it out.

CHRIS TREMAIN: I am just acknowledging that the previous chairperson of the Finance and Expenditure Committee is a wise member of the House. I look forward to his call.

The second part of Part 2, which I will briefly touch on, is new section 165A, in clause 19. It deals with the financial stability reports and the timing of those reports. We have allowed more flexibility around the timing of them. Previously, they had to come out every 6 months, on a specific date. The section has been changed to state that “The Bank must, not less than twice in every calendar year,” publish one of these reports. They are critical reports. They are used by many financial organisations around the world to consider the state of the New Zealand economy; the likes of the OECD and various global financial credit agencies look at them in detail. Making sure that the reports come out in a timely fashion is important for our wider financial credit ratings, and I guess that it is important in relation to our OECD rankings, as well. That particular amendment is a small change, but it takes us forward.

That is the end of my speech on Part 2 of the Reserve Bank of New Zealand Amendment Bill (No 3). Thank you for the opportunity to speak, Mr Chairperson.

CRAIG FOSS (National—Tukituki) : I raise a point of order, Mr Chairperson. I wonder whether we could give the Minister in the chair, the Hon Shane Jones, a copy of the Hansard for this debate, so that he could address the questions we asked the previous Minister in the chair.

The CHAIRPERSON (Hon Clem Simich): I call Craig Foss.

CRAIG FOSS (National—Tukituki) : It was worth a try! Speaking to Part 2—and, yes, I have spoken a fair bit on this part; I was on a bit of a roll before—I note that Mr Tremain alluded to the dividend that the Reserve Bank pays, and also to the statement of intent that it has to produce. Mr Tremain started to describe how the dividend payment will be changed, and that is all very fine, but the size of the dividend depends on whether there is an excess of revenue over expenditure—I was going to say “profitability”, but that would not be right in the Reserve Bank’s case. Hopefully, it is positive. That drives what the bank pays back to the Crown. It will be interesting to see.

I ask the Minister in the chair, the Hon Shane Jones, whether there is a charge on the capital that the Reserve Bank has. The Reserve Bank will now have $2 billion of taxpayers’ capital tied up in order for it to manage and run its operations. A hospital or district health board, for example, has to pay a charge of between 7 and 10 percent on the use of capital. I would be very interested to hear the point of view of the Minister in the chair on that.

In the recent Budget $600 million extra of taxpayers’ capital was allocated to the Reserve Bank to enable it to carry out its operations. I was quite concerned about that. Many people were not aware of it. It has had some publicity now, and the Reserve Bank has explained to the public why it needed that amount. But it is worth noting, because there has not really been a debate on it, that $2 billion of capital is now allocated to the Reserve Bank. That is capital that cannot be used to help fund infrastructure—to help pay for hospitals, schools, etc. That money is tied up with the Reserve Bank, and at risk. I freely admit that it is very conservative with that capital, and one would expect it to be. However, I am somewhat concerned that we have not had a public debate about the matter. The outcome of that debate may be that, yes, it is absolutely fine, but it did seem to slip below the radar. If the Reserve Bank lost some funds in the course of its operations, be it through bonds that it has invested in, be it through foreign exchange that it is engaged in, or be it through the money supply that is out there, that capital would start to be eaten.

The Reserve Bank was given $600 million because its bond portfolio was massively under water when it marked to market. All Government accounts now have to be produced under the International Financial Reporting Standards, so the bank had to put that money up as if it were for sale. The difference in respect of the money it spent to buy all those Government bonds versus the value of those Government bonds today is a huge negative hit to the taxpayer. The Reserve Bank argues, and fair enough, that it holds those bonds until maturity, so it will always achieve the principal—assuming that the Government is still in place, and let us hope a Government is in place to do that. That is fair enough, but this issue should have been considered when the International Financial Reporting Standards were adopted for all public accounts in New Zealand.

Members will note that even the Auditor-General has raised serious questions about the application of mark-to-market valuations to public sector accounts, and that is a typical example of the problem. Landcorp is very open about its problems with it, but we can take it right down to the level of our local councils, which have huge issues with it, because it imposes a huge compliance cost upon them.

Regardless of how the dividend is structured and calculated, the amount depends on the operations of the Reserve Bank and what is at risk. Given the pressure that non-bank financial institutions will be under because of this legislation, the Reserve Bank should put itself under the same framework. The fact that it needed much more capital to fund its operation, because of an accounting change, shows that it was undercapitalised from the start. I know that the Reserve Bank has assured us that its prudential ratios are very, very conservative and absolutely fine—we all know that—but $600 million suddenly disappeared from the Crown bank account to it, to allow it to continue its operation and to expand.

We also know that the Reserve Bank has a short New Zealand dollar position of $4.2 billion—$4.2 billion in foreign exchange. I know why it is doing that, and that is absolutely fine, but does New Zealand understand what is at risk? That is a debate we need to have. I am not saying it is wrong and I am not saying it is right, but we have had big discussions about the purchase of New Zealand Rail—$650 million, and counting—yet $600 million was parked with the Reserve Bank and there was hardly a whisper, apart from two articles in the National Business Review.

Finally, I would like to take issue with the changes to the Act in terms of the statement of intent. The intent of the Reserve Bank, as most people understand it, is to keep inflation between the 1 and 3 percent band. Actually, that is not its intent, at all. The public needs to understand that the job of the Governor of the Reserve Bank now is to ensure that forecast inflation is between 1 and 3 percent over the next term, which is basically 3 years. The effect of that has been to have forecast inflation of 3 percent, rather than inflation being capped at between 1 and 3 percent, which is what most people understand to be the case. Yes, that might sound a bit boring and technical, but it has huge ramifications. It creates uncertainty, because when we calculate the value of something in 10 years’ time—infrastructure investment, for example—the higher inflation and interest rates are, then the less viable that investment is. That is why we need certainty that inflation outcomes will come within the band, which is what has been agreed at the moment. High inflation is devastating. If we look at the interest rate curve in New Zealand, and at the viability of many projects, we see that they do not work, and that is the core reason why.

I would like to have another read of the statement of intent of the Reserve Bank, to measure its outcomes versus its intent, because inflation has been outside the 1 to 3 percent band many times over the last 2 years, and it is forecast to be outside it for at least the next 12 to 18 months. That is devastating for New Zealand. It is devastating for our older folk who have funds invested, because inflation eats financial savings. It is devastating for the first-home buyer, who is trying to get ahead but has to borrow at an interest rate of 8 or 9 percent to obtain a mortgage. That is why it is devastating, that is why we need to be totally vigilant, and that is why the provisions in this bill need to be comparable with the regulations and supervisory commitments of the rest of the banking sector. Thank you, Mr Chair.

• Part 2 agreed to.

CHRIS TREMAIN (National—Napier) : I will take just a brief call, given that we have covered most of the issues in the debate on Parts 1 and 2. I shall refer to the commencement date, which is part of the three clauses we are debating. The commencement dates of many of the bills we are involved in are fairly superfluous, but in this case the commencement date is very important. From the way that the bill was written, these prudential changes would have been immediately imposed on a raft of non-bank deposit takers—depending on the definition. The Finance and Expenditure Committee in its wisdom sat back and saw that a heck of a lot of information would need to be churned through and provided to the Reserve Bank; a lot of detail is involved, even in terms of the definition of which organisations fall under the auspices of the Act, and which do not. So the commencement date was moved out by 18 months, to make sure that the organisations that fall under this regime have time to find out exactly what they need to do to meet the requirements of the bill. This is a short call just to say that the select committee gave due consideration to making sure that the organisations captured by the bill have time to come to grips with what is required, to provide the necessary information, and to do so in a way that reduces their compliance costs. Thank you, Mr Chair.

• Clause 1 agreed to.

• Clause 2 agreed to.

• Clause 3 agreed to.

• Bill reported with amendment.

• Report adopted.

Hon SHANE JONES (Minister for Building and Construction) on behalf of the Minister of Finance: I move, That the Reserve Bank of New Zealand Amendment Bill (No 3) be now read a third time. Tēnā koe, Mr Assistant Speaker, tēnā tātou katoa. E te mātāmua e Winitana, kia ora.

[Greetings to you, Mr Assistant Speaker, and to all of us. Greetings to you, Winston, the elder statesman.]

This bill establishes a framework for the regulation of non-bank deposit takers, with the aim of promoting a sound and an efficient financial system. The bill will do this by establishing prudential standards and providing depositors with a clearer basis for distinguishing between lower risk and higher risk entities. The House has already spent quite some time on this bill this morning, so I do not plan to go back over ground that has been well traversed. However, I think it is important to note that this legislation is a significant step forward and should provide more confidence in a sector that has faced a number of challenges over the last year or so. It complements some important work that is being undertaken by the Minister of Commerce, the Hon Lianne Dalziel. This is important legislation, which has broad support from the House.

I commend the bill to the House.

TIM GROSER (National) : In the course of the discussion around the Reserve Bank of New Zealand Amendment Bill (No 3) over the last few months, one of New Zealand’s experts suggested to me that the position of the Reserve Bank is a little like that of a parking attendant who has a closed circuit television trained on a number of different levels in a parking building, and whose responsibility it is to make sure that everything is tidy and safe. From time to time the regulator—in that case, the parking attendant—will look through and see something slightly dodgy going on at one level of the parking building, which justifies his or her zeroing in and trying to respond in a policy sense to it. Most of the time, it is a sort of cat-and-mouse game. I think the cat wins most of the time, but occasionally the mouse may win.

That is an elaborate way of describing the process that goes on in any financial system. The Government of the day will regulate one part of the financial system, thereby putting into place, almost automatically, an incentive on the part of other operators to try to lower their costs by getting around the regulatory frameworks that the Government has just created and creating a new niche in the market. So we have a situation here in which we have, I think, a very sound regulatory framework for the banking sector of New Zealand, as defined very precisely in New Zealand law, and any institution that wishes to carry the title “bank” in its name, as my colleague Mr Foss pointed out during the various stages of this bill, has a legislative requirement to conform to the very technical and demanding provisions relating to banks. But, by definition, we have created in the past an incentive structure for a non-bank deposit taker sector to emerge, and it is now quite apparent that the light regulatory frameworks that have governed that sector are inadequate. The cat is catching up with the mice again.

Unfortunately I am quite confident that a future Parliament, at some stage, will have to do exactly the same tidying-up effort as this one. As soon as one loophole is closed, by definition that opens the opportunity to game the system and create the opportunity for new loopholes. However, that is the nature of the process, and in this bill Parliament is solidly behind the effort to try to improve the non-bank financial sector.

The reasons for that, I think, have been well traversed. Amongst the many things that make up a sound society, the rule of law, property rights, an independent press, and a sound financial system are clearly of central importance to a well-functioning society. We have learnt, of course, about the importance of the financial system from Adam Smith onwards. He said that when two or three merchants gather together, it is usually for the purpose of deceiving the public, so the very founder of the whole free-market philosophy still accepted that a free market needed to have appropriate regulatory frameworks put around it. There is no more important sector than the bank and the non-bank financial sector in which to ensure that we do have an appropriate regulatory framework. Unfortunately, I suspect that we will not ever overcome the old saying that a fool is very quickly parted from his or her money, but we at least can minimise some of the risk around that through appropriate regulation.

We have here in the bill, I think, a pretty sound framework. My understanding is that the Finance and Expenditure Committee—I was not part of its process—has had access to some excellent international-quality advice, and I think that the end result will ensure that as we move now to regulate beyond the first tier of the financial sector, the banking sector, into the second tier, we have a structure that will provide a robust framework, looking forward. Obviously, we are looking at only the major institutions here in the sector. There is a licensing threshold—from memory, it is around $10 million—that an institution has to meet before this quite demanding framework comes into play. And then, as we have discussed in the various stages of the bill, there are minimum capital adequacy ratios and governance requirements that need to be met. Quite a lot of bespoke engineering has been going on in this bill—for example, in respect of building societies. It is carefully defined in the bill that building societies are not themselves operator banks. There are quite specific governance structures that reflect the reality of a building society.

We have had a very serious look at the two opposing sides of the argument in respect of credit ratings. On the one hand I think there has been widespread recognition amongst members that credit ratings are not a panacea. My colleague Chris Tremain pointed out that the most recently collapsed firm, I think, Hanover Finance, was one of the non-bank deposit takers that had actually found it in its own interest to go out and get a credit rating. But that did not stop Hanover Finance falling over. I think members have been aware that, in reality, there is a bit of a moral hazard around that issue. The public may interpret it that if a company has an international credit rating under the provisions of this legislation, that somehow takes risk out of the equation. Well, the bill has done what it can—quite explicitly, in fact, in its principles—to make it clear that that is not the intent of the bill. The legislation probably will be misread at some future point, but the House has done what it can to lay down the realities. At the end of the day we are into risk minimisation, not risk elimination, on this issue. So on balance, although there was a strong argument against credit ratings, the bill has come out in favour of them for the non-bank financial deposit taking sector.

There is a whole series of provisions around financial disclosure, including some provisions we have just debated in respect of the bank’s own legislative requirements and in respect of its supervisory role, in terms of putting information before a narrow group, a group of international and domestic experts, who do need access to information of a highly technical nature in order to make an informed judgment about the soundness of the system. I am sure that the improved reporting procedure across various aspects of the bank’s responsibilities will further enhance the financial stability of this country.

To sum up by referring to the bigger picture, I think we all understand that although this bill is deeply technical, the soundness of the financial system is of central importance to this country. We have taken a beating in the non-bank financial sector recently, but the majority of New Zealanders have had the protection of a very sound system, which is one of the world’s best systems. It has been put under pressure, obviously, as the effects of the subprime crisis have worked their way through the system. I think there are some improvements here. I am sure this is not the last word, for the incentive reasons I have tried to explain. The process of financial disintermediation is an ongoing process, and we will have to deal with it again. But I do think New Zealanders should be confident that we are going in the right direction.

R DOUG WOOLERTON (NZ First) : New Zealand First wholeheartedly supports the Reserve Bank of New Zealand Amendment Bill (No 3) and its intentions. To follow on from Mr Groser, I say that we absolutely support the free market, even though we sometimes criticise aspects of it. We recognise that regulation is needed to give confidence, because this bill, apart from anything else, is about confidence. If we have a situation where those with the money are reluctant to lend it on to those who need it, then that will stifle business and stifle the growth of this country. This bill will ensure that that does not happen, by putting in place some light regulations around that area.

Speaking personally, I am one of those who are criticised in this country. My family, coming from farming stock, like to be able to see, touch, and walk over their assets rather than have somebody look after them. We have a stockbroker in the family by marriage, and he is far wealthier than the rest of us, so maybe that proves something.

I think that credit ratings for the non-banking sector, which this bill brings into play, are important. I am in agreement with Mr Groser that it would be wrong for that sector to give the general public the idea that there was no risk and that they could rely absolutely on those ratings. However, it is another step forward in terms of supplying more information to the public. We applaud that and think it is long overdue. If we have a situation where confidence goes down the tubes, we will have a country that forever has a stop-start economy. We would not like to see that happen. One of the previous speakers spoke about this aspect of the financial sector being mainly New Zealand - owned. I just want to say that we should not take anything from that, apart from the fact that there has been less regulation in this area than in others.

New Zealand First looks forward to the day when more banks, as opposed to the second tier of financial institutions, are owned by New Zealanders. We would like to see our first tier of banking institutions owned by New Zealanders, and we believe they could run them with aplomb, dignity, and absolute surety, just as they do with Kiwibank and the Taranaki savings bank. The banks can make sure their depositors do not lose out.

New Zealand First is keen to see the Reserve Bank of New Zealand Amendment Bill (No 3) progress, so I will not take up any more time of the House. I say again that New Zealand First enthusiastically supports the passage of this bill.

CRAIG FOSS (National—Tukituki) : I rise to speak on the Reserve Bank of New Zealand Amendment Bill (No 3) for the last time. We are up to the third reading, and I have already covered many of the points that I and my party have been concerned about.

I acknowledge the previous speakers; I think we are pretty much all on the same page. The bill is quite technical. It is about my field—finance. The bill says a lot about the need for many New Zealanders, or for New Zealand per se, to have a better understanding of all things financial. We have our house and we have our income, but sometimes some of the biggest risks we take are financial risks, and many of us are not fully aware of the underlying risks we take.

For example, we see advertisements for investments over 3 months, 6 months, 1 year, etc., and underneath we see the word “Terms”. Those terms may state that the deposit is guaranteed by first debenture, or guaranteed by so-and-so, or has a triple B rating from some outfit we have never heard of. If we are not in the finance sector, or if we do not have an awareness of it, then it all sounds legitimate, but it is quite deceptive. That is one of the reasons why the National Party is voting for this bill and for the other bills I alluded to earlier—the Financial Advisers Bill and the Financial Service Providers (Registration and Dispute Resolution) Bill. When the report of the Finance and Expenditure Committee on the inquiry into monetary policy comes out, I am sure we will see a familiar theme along those lines—from the National Party, at least.

I point out that if, for example, a non-bank financial institution states that it is taking deposits and that they are guaranteed by person B, that sounds great to a lot of people, but it all depends on the integrity of person B. Effectively, the depositor is lending money to person B, not to the headline institution with the nice, flashy brochure that is doing a roadshow around town. Once these prudential declarations have come out and the frameworks are in place, and after the initial hiccup or two that is bound to happen, then, at least, what is at risk—a very important term—will be exposed to daylight. There is nothing like a bit of daylight, particularly in relation to finance, to make sure everything is clean and certain.

I reiterate what I said earlier: the mission of this bill, which, I think, Mr Groser alluded to, is not to take away risk but to declare fairly and transparently the actual risk being taken by, first, the depositor and, second, the institution taking the deposits. This bill is not retrospective, by the way, so, unfortunately, many of the difficulties we are having with many finance companies will not be fixed by it, but, hopefully, at least it will provide a platform and a framework that will decrease the number of such events in the future. It would be very naive to say we will not see a repeat of those failures in the future. It is very important that what is called the “funding risk” is transparent. As I said earlier, the Serious Fraud Office and other agencies, with all their powers, are looking at some of the institutions that have allegedly misled depositors—the public. Under this legislation, some of the related-party transactions would have come out in the wash, in the various declarations.

Some institutions have failed because of dubious behaviour, which the authorities are looking into—and all speed to them, and I hope those people who have misled the public get their comeuppance—but other institutions are suffering because of the scarcity of capital, the scarcity of committed funding against whatever assets they have. In fact, some institutions have frozen funds in order to secure their assets. Interestingly, some institutions have frozen only withdrawals in excess of a million dollars. They have got a bit of grief for doing that, but they are trying to protect their smaller depositors, because the larger institutions that have on-deposited to them, if you like, have moneys in excess of a million dollars. The result is the small investors are quite OK and can withdraw funds. Those institutions argue that the asset—the building, the apartment block, or whatever it is—will still be there in 5 or 10 years’ time, and they just need to taihoa and to get themselves through this trough.

That does not mean much to someone who is suffering at the moment, but my point is those institutions have a funding issue and a funding crisis, and that would have been apparent and would have been declared under the capital ratios that this bill brings out. As long as it is declared and is apparent to everyone, then there is no problem at all. I think most parties would agree with that.

The legislation has been tidied up a lot on its way through the House. My main concern has been the various holes in the legislation. The extreme, almost absurd, example in earlier drafts of the bill was the possible politicisation of monetary policy in New Zealand in so far as non-bank financial deposit takers are concerned. As we spoke about earlier, the people who borrow a lot of funding off these institutions are very, very vulnerable. They will be looking for somewhere to get credit. That is one point, and the select committee’s inquiry into monetary policy may come up with a similar theme. Hopefully, that report is not too far away.

One thing that was not mentioned in the Committee stage was an obvious change that the Finance and Expenditure Committee made to the definition of “deposit taker”. The commentary on the bill states that the committee recommended that the “definition be extended so that a person who had offered debt securities to the public that remained unpaid could be subject to the regime.” That was a very important point. If an institution advertised for investments, and if something untoward happened to it between someone committing to send a deposit to it and the funds actually arriving, under the bill as originally drafted only funds that had already arrived would have been looked after. Of course, we are talking about intent here, and if there is an intent to mislead or not show as much information as an institution should in order to be fair and transparent, then I say well done to the committee and the officials for picking that up, and for many of the other improvements to the bill.

I spoke before at length about the various capital adequacy bits and pieces, and I also alluded to my interest in the Reserve Bank’s own books and balance sheets. It is quite interesting, in that it is very difficult to go and look at the Reserve Bank’s books. We cannot go via the Auditor-General; there has to be an independent auditor, and we have to go via that organisation. That is an interesting challenge for us; I am spending a bit of time on working out how to get that one put before various committees, etc.

Finally, I acknowledge the various speakers and the Minister in charge of this bill and the other two bills that the National Party is voting for. The bills set up a more transparent, viable framework. They are good for New Zealand, but we have to make sure that we are not skewing the system in favour of, or disfavouring, one part of the sector. There is an internationalised, global financial system. New Zealand gets its capital, its funds, from elsewhere, from outside our borders. We do not fund domestically, so we should say thanks to the Japanese housewife, etc. So we have to make sure that whatever we do in this bill, and whatever we do prudentially and in and around our central bank, does not politicise in any way the operation of our regulatory body—our central bank—and does not put us out of step with the other partners and parties we deal with around the globe.

Thank you, Mr Deputy Speaker. I have enjoyed speaking on this bill, and I thank the earlier speakers.

SUE MORONEY (Labour) : It is my pleasure to take a short call on the third reading of the Reserve Bank of New Zealand Amendment Bill (No 3). This bill establishes a framework for the regulation of non-bank deposit takers, with the aim of promoting a sound and efficient financial system. The bill also promotes a sound and efficient financial sector in which the public has confidence. It will increase the public’s confidence in the professionalism and the integrity of the advisers, so it is very timely from that perspective.

This bill is part of the largest-ever reform of the non-bank finance sector, and it has been conducted with wide input from, and the support of, that industry. It also promotes the development of a more consistent regulatory framework for financial services, and coupled with the advent of KiwiSaver it will promote a stronger savings culture and encourage greater levels of investment. This issue was well traversed with the previous bill passed by the House, the Employment Relations (Breaks and Infant Feeding) Amendment Bill. We want to ensure that we shift from the credit card - type culture that has developed here in New Zealand to a stronger savings culture, and this bill will aid and abet that process. Thank you.

CHRIS TREMAIN (National—Napier) : National will be supporting the Reserve Bank of New Zealand Amendment Bill (No 3). In the Committee stage debate on Part 2 we discussed the financial stability reports and some changes around them. It is on that note that I wish to start my debate in the third reading, and refer to page 30 of the financial stability report presented in May 2008 that lists the financial companies that have gone into receivership in the last couple of years. The total number of financial companies in receivership or in moratorium relates to $1.925 billion in deposited funds. That is a significant amount of this country’s money, earned by hard-working Kiwis. The companies in the $100 million - plus category are Provincial Finance, $300 million; Bridgecorp, $459 million; Nathans Finance, $149 million; Capital + Merchant Finance, $187 million; Lombard Group, $127 million; Geneva Finance, $141 million; and MFS Boston, $319 million. All in all, these total $1.295 billion. That is justifiable reason to be standing here debating this legislation today and taking it through its third reading, and that is why National supports the bill.

The bill does not cover all the companies that have gone into receivership or into moratorium during the credit crisis that has been in place. There are companies like Blue Chip New Zealand, property investment development companies, that many New Zealanders have suffered at the hands of. I can talk only about my own electorate of Napier, where a number of people who have come into my office had invested money with Blue Chip and bought not just one but two investment apartments, using their home as security. Unfortunately, they will lose their home as a result of that investment decision.

This legislation will not fix that, but it will add some more prudential supervision to those second-tier finance companies. Although the bill will not fix it entirely, hopefully it will provide a high level of scrutiny and more security to New Zealand investors in those second-tier companies. If we go back 2 years and look at the balance sheets of those companies, most of them were in pretty good shape then. The problem was that when the credit crunch came, many people got the jitters. These companies had borrowed from depositors, short term, and had lent long term, and all of a sudden the investors wanted to withdraw their funds from these companies. They were faced with not having the strength in their balance sheets to be able to sustain a run on their funds, and that put them into a difficult position.

Although the prudential requirements from the Reserve Bank that will be implemented by this bill may improve the balance sheet requirements, in a credit crunch there will still be times when it will be difficult for these companies to stop a run on their funds, so I do not see how we can overcome that problem in all situations.

The bill introduces a new regulatory framework for non-bank deposit takers. I have canvassed that during the Committee stage today and I will not go into it in any more detail than is necessary. I just want to say that although the bill does add a higher level of prudential requirement to second-tier deposit takers, it will not solve all the problems in that area.

Under the new arrangements, the Reserve Bank’s role will be to license deposit takers, to develop and enforce minimum prudential and governance requirements, and to apply credit-rating requirements. Trustee corporations will continue to be the front-line supervisors of deposit takers. There will always be a risk in any investment, and it is important that that is understood by all consumers. Take, for instance, Bridgecorp with a credit rating of BB+. This business, to all intents and purposes, had an investment rating, yet it still went into receivership. Although we will introduce credit ratings across the second-tier financial sector, it will be important that a strong education programme follows so that consumers out there understand, firstly, what the credit ratings mean, and, secondly, that a credit rating does not guarantee that their funds will be safe 100 percent of the time; they need to understand that.

This new bill is, however, a means by which New Zealand can add more checks and balances on non-bank deposit takers to provide depositors with another level of security. I will say, lastly, that this will not reduce or remove all risk from the equation. There will always still be a risk at this level, and that must be taken into account at all times. Thank you, Mr Deputy Speaker.

• Bill read a third time.