Hon BILL ENGLISH (Minister of Finance) : I move, That the Crown Retail Deposit Guarantee Scheme Bill be now read a second time. Members who spoke during the first reading have covered, I think, the essence of the bill, and I welcome the broad support for it in Parliament.

I want to make just a couple of additional points as we move through the second reading. The first point is to make it clear that in passing this bill it is the Government’s intention to move, over time, back to normal market conditions in our finance sector. The details of the extension of the guarantee will show that the Government is moving the pricing of the guarantee somewhere towards what market pricing would be. However, we have given an extension whereby from today there will be a bit less than 2½ years until the guarantee expires around 2010 or 2011. That should be a clear signal to financial institutions that they should ready themselves for normal market conditions beyond that point.

The second point I want to mention is one that is often overlooked and has occasionally been confused in commentaries and in some speeches. The previous Government, following on from the finance company collapses, passed into law a new regulatory regime for the non-bank deposit-taking institutions. That regime will come into place over the next 6 months or so. The regime involves more direct supervision by the Reserve Bank, liquidity requirements, and capital ratio requirements, as well as a requirement for credit ratings. It is quite important to understand that that process is separate from the guarantee. It will require those institutions to meet higher prudential standards than they did before. So the extension of the guarantee will raise the hurdle, but that does not occur until after October next year. Between now and then, credit unions, building societies, and finance companies will be required to meet the standards set by the non-bank deposit-taking regime. That has been the subject of extensive consultation with the industry, which was begun by the last Government and has been continued by the Reserve Bank under this Government. The sector is fully aware of what kind of requirements there will be. It has had the opportunity to discuss and, in some cases, disagree with them.

It is important to understand that those two processes, although related, are actually separate. I expect that the challenge posed by the non-bank deposit-taking regime is more immediate than the change in the conditions of the retail deposit guarantee that we are legislating for today.

Hon DAVID CUNLIFFE (Labour—New Lynn) : I rise in support of the bill, and in so doing I draw attention to the fact that this is one of those processes that the public often say they like to see, and rarely do see, and by that I mean the major parties cooperating on issues of major importance across the House. I begin my remarks by thanking the Hon Bill English, who, when he was doing my current job—that of Opposition spokesperson on finance—was honourable in his cooperation with the then Minister of Finance when the first scheme was set up, before the election. We would like to acknowledge that, and we would also like to acknowledge the courtesy the Government has extended to the Opposition in briefing us on the introduction not only of the bill but of the policy. I thank the Minister and say that that has enabled us to form a more balanced view of proceedings. If I might express a hope, it is that this will not be the last time that we are able to cooperate across the House on matters of major economic importance. I think all members of the Parliament are agreed that New Zealand faces difficult times in a fragile world, and, of course, we cannot have it both ways. It cannot be the case that this is the worst of all recessions and it therefore justifies any response, and that, at the same time, a thousand flowers have now bloomed and it is all hunky-dory. It cannot be as easy as that, and we are happy to cooperate with the Government, within reason, on trying to work through some longer-term solutions that get us away from some of the cycles and roller coasters that may have made this recession more severe than it might otherwise have been.

Let me touch briefly on a couple of the issues that have been raised in recent contributions to the debate. If I might, I will pick up where the Minister of Finance left off and thank him for raising the issue of the contemporary regulation of the non-bank finance sector, which is something I was going to cover, in any case. Three pieces of legislation were carried forward by the previous Government: the Financial Service Providers (Registration and Dispute) Act 2008, the Financial Advisers Act 2008, and the Reserve Bank Amendment Act of 2008. They had three interlinked objectives that are relevant to the situation we now find ourselves in. The first was to register financial service providers, and the second was to register and provide rules of the game for financial advisers, who had too often been front-door salespeople for pre-packaged products from the finance industry, and not at all independent advisers acting in the interests of their clients. I say that not to besmirch any individual, but to say that there were structural problems with the way the industry was set up.

Finally, the Reserve Bank Amendment Act extended, for the first time, the prudential supervision role of the Reserve Bank into the non-bank finance sector, and, as the Minister has rightly said, in many ways that provides higher standards of supervision than are required in this framework legislation, which specifically applies to the retail guarantee scheme. That is to say that that is all work in progress; that it has transcended the change of Government, and that we all agree it is in the interests of the country, is so much the better.

Let me come on to some related issues, which I believe also require bipartisan consideration. These are some of the matters that were raised by submitters in the recent banking inquiry. Leaving aside the fact that the Government did not want the inquiry to happen, it has happened. There were a large number of submissions, and there was a very strong consensus among submitters: firstly, that the official cash rate was not working, because much of it was locked into fixed-term mortgages, so it was not able to respond quickly enough to catch the business cycle or the property cycle; and, secondly, that the official cash rate was not being fully passed through, and therefore to achieve a given amount of sterilisation of economic cycles the Reserve Bank had to have greater amounts of either upward or downward movement of it, allowing for the discounting process from the banking sector.

Many submissions said that the housing bubble was big and dangerous and likely to happen again, and from that arose the question of whether the official cash rate on its own is a sufficient tool to address that, or whether it needs to work hand in hand with additional monetary policy instruments, savings policy instruments, or possibly tax instruments, which potentially could operate to create a more level playing field. These are big, important, and difficult issues, which require careful long-term thinking. Some of it may emerge from the Government’s tax review working-group. We will be watching with interest as the banking inquiry reports—to see what emerges from that—and hope there will be an opportunity for more discussion in the national interest across the House.

I come back to the structural elements of the Crown Retail Deposit Guarantee Scheme Bill that is before the House today. It is structural, skeletal legislation. It provides powers to the Minister of Finance, and the Minister has outlined how he plans to use them in the short term. The Minister has made it clear that it is a stepping stone towards unwinding a scheme that was brought in quite rightly by agreement to address a specific set of problems at a specific time. We are all agreed that we need a strong financial system. We are all agreed that the scheme was a good way of maintaining that, and that it makes sense to extend the scheme. It is appropriate to extend the scheme for a further year under structured conditions to match the timetable of our colleagues’ scheme across the Tasman.

What this says, however, is that all the finance companies—the non-bank financial institutions—will have to meet interest costs and they will have to get themselves rated by a credit-rating agency. A previous Labour speaker, Mr Stuart Nash, pointed out that the process of rating can be difficult, that some, due to reasons of scale rather than viability, may not qualify, and that that could perversely contribute to their falling over, to the detriment of many ordinary New Zealanders who are depositors in those schemes. We will watch with interest and care as this is implemented, to ensure that there are not any side effects that are worse than the disease that it seeks to cure—the level of risk that exists in the first place.

We have said it before, and I want to repeat it, that one area where we depart from the Government is in the treatment of the major banks in this scheme. Under the previous Government we made it clear to the banks that they would need to participate in both the wholesale and retail schemes, if they proceeded with either; that spread the risk, and it meant the Crown, the taxpayer, was better compensated for that risk. By signalling to the banking sector that it is all right for it to participate only at wholesale levels, we believe that that is narrowing the fee base, concentrating the risk in the non-bank financial sector, and thereby elevating the average level of risk on the taxpayer. We ask the Government to seriously consider that matter: whether it is not worth having a further set of conversations with the banks along the lines that it would be better if they maintained a presence in both schemes, if they remained in one. We have said it before, and I will repeat it, that in other respects it would appear that the Government is treating the non-bank finance sector with a rather sterner stick than that applied to the major banks.

AARON GILMORE (National) : I rise to support the second reading of the Crown Retail Deposit Guarantee Scheme Bill. I want to touch on a few things: the timing, the rules of engagement, and the industry acceptance. I am pleased that everybody in the House today is wide awake and listening to the debate on this bill.

I want to firstly touch on the timing of this bill. At the moment we are having discussions, particularly out of the US, on the so-called green shoots of economic recovery. I think the previous guarantee scheme had an expiry date of October 2010. Many people who invest, particularly those who invest in non-bank finance companies, invest for a period of about 12 months, so we are nearly getting to that period of 12 months, and between now and the end of that scheme people will start to make a decision on whether they reinvest their funds. That makes it quite an appropriate time to take the opportunity to get this revised new scheme in place to take over and extend through to December 2011. One of the reasons I look forward to that is that those green shoots by that time, having gone from being a planted seed to green shoots, should hopefully be a beautiful rose bush that we can harvest and hand out to the wonderful people of New Zealand. It has been mentioned that one of the reasons for a finishing date of a little over 12 months is to align better with our friends across the Tasman in Australia. As someone who has spent a number of years in the financial capital markets I say that it is critical, given the tight time frames and links that we have with Australia, that there is as much alignment as we can possibly get. I think that is of significant benefit to New Zealand savers and investors. However, as many speakers in the first reading and previous speakers on the second reading have mentioned, this benefit to investors and savers does come at some cost—there is no free lunch.

This scheme has been redesigned from the existing scheme; hence the reason why we have a brand new bill. The scheme grants the Minister of Finance specific powers to develop rules of engagement—as I call it—under which the scheme guarantee would apply. Importantly, the scheme—as I mentioned—comes at a cost; it will require participating companies to pay some sort of fee, as well as have what is known as a BB credit-rating. I want to spend a little bit of time on this issue of credit ratings. There is a little bit of confusion, I think, in the House today. A BB credit-rating as provided by the largest credit-rating provider in the world, a company called Standard and Poor’s, actually implies an investment that is below an investment grade; a typical investment grade is commonly known as BBB-. By giving a rating of BB, Standard and Poor’s implies normally that an investment is a speculative type of investment, not an investment of investment grade—not a safe investment—but a speculative investment with perhaps, based on normal work, a 25 percent chance of failure. That shows an interesting aspect that has not really been picked up by any previous speakers: that this guarantee cuts in at quite a relatively low level with quite a high speculative rate for investment.

The members on the other side of the House say that the cost of getting such a grade from a credit-rating agency like Standard and Poor’s is too expensive to participate in this scheme. I say to the members that this bill actually removes the compulsion to be in this scheme. It is absolutely optional for participants to take advantage of the scheme should they wish. To take up the advantage of a credit guarantee, obviously, participants have to spend some money. It is also interesting that no one has touched on the fact that the scheme is available only to participants currently in the existing scheme or to mergers or changes of companies that are in the current scheme. As far as I am aware, nearly all the participants currently in the scheme already have some form of credit rating.

Interestingly enough, also, the cost to take up the option of the scheme is relatively low, relative to the size of some of these companies. Most of the non-bank financial institutions in New Zealand that are of any note have anywhere between $100 million and above in assets. The cost of gaining a credit rating from entities such as Standard and Poor’s is somewhere in the region of about $100,000, and thereafter ranging from $100,000 to $200,000 per annum. Relative to an asset base of $100 million, it is quite a small cost for the opportunity to take advantage of this scheme. I think that most of the 19 finance companies that have collapsed in the past 2 to 6 years were small finance companies worth under $100 million in invested total assets. It just shows us that one of the reasons why that cost exists is that larger companies can pay the $100,000 and often they survive in many ways.

I will touch on a couple of things. I had the pleasure of giving a speech recently to a group of people from the Financial Services Institute of Australasia (FINSIA). FINSIA is the leading organisation for those who are involved in the financial sector, particularly in Australia. I am proud to be a member of the organisation.

Hon Clayton Cosgrove: You’re a member of everything.

AARON GILMORE: Absolutely. The single most popular question I was asked about the speech I gave was what we are going to do about the retail deposit scheme. Interestingly enough that speech was about 6 weeks ago. At that time I had to dodge the question quite appropriately because it was not clear at that stage what we would or would not do. We were still in the development of the scheme as outlined in the bill. Today I am quite pleased to be able to stand here and talk on the bill and to discuss the fact that we have a scheme, which will be extended past the 2010 deadline. I am pleased, and I am sure my fellow members of FINSIA will be very pleased as well, that the scheme is being extended.

The bill will not in itself save us money or save our economy, but it will provide some certainty and surety to those people who want to save and invest, in particular in our non-banking sector. We have heard some economic voodoo from people on the other side of the House about what is required to right the economy, about what is wrong with the banking sector, and about the perceived failure to participate in some form of charade of a banking inquiry. People on this side of the House are blessed. We are blessed with the experience of many people from the banking sector who do not have to undertake an education about the banking sector. We have a reasonable understanding and knowledge of the banking and finance sector, and the bill we have before us today is a classic example of that understanding and knowledge. I am pleased to be part of that team. The bill is one the finance sector wants. Since the introduction of the bill has been announced a number of people in the wider sector have accepted it and been very happy for it to be introduced. It is a bill I am very pleased to speak on today. Thank you.

Hon CLAYTON COSGROVE (Labour—Waimakariri) : I will not take up much of the House’s time because I think a lot has been said. There is cross-party support for the Crown Retail Deposit Guarantee Scheme Bill, but I note—as I did in the first reading debate—that the Opposition has some concerns. The member Aaron Gilmore made a variety of comments about small institutions. The concern we have is that the bill does not outline the eligibility policy. That is left to the Minister and provided for under the Minister’s authority to determine eligibility. The issue we have some concern about is the situation of a number of smaller institutions, which the previous speaker spoke about in his wonderful speech, which, presumably, was akin in his own mind to the Gettysburg address. Mr Gilmore is a member of everything and has done everything. Some people wonder whether he has fixed his “I” problem—“I’ve done this, I’ve done that, and I’ve done everything.” Maybe he has not. He is not concerned about the smaller institutions and companies that may not have the capacity, for instance, to meet the requirements—although he thinks that all one has to do is cough up a bit of money and the rating agency will gave them a rating. Well, it is not as simple as that.

In order to achieve a BB rating, a company or institution has to be up to the mark. I am advised that it is quite an exhaustive process. It is not like ordering a double meat burger and chips from McDonald’s, as that member may be wont to do. A company or institution does not just pay money and get a rating, just as one does not just pay money and get a degree; it has to pay the money and then go through an exhaustive process. That is why those credit-rating agencies are particularly credible. A number of smaller companies and institutions have insufficient scale to meet the requirements of those credit agencies, which in itself can create instability. If they cannot meet the mark and they cannot then get that guarantee, does that become a shakeout scenario in the financial sector?

Again, as I said in the first reading debate, no one would wish companies and institutions to fall over and for mum and dad Kiwi investors to be left in their wake. No one is predicting that, and no one would want it. We are simply asking the question whether, if the smaller institutions and finance companies do not meet the mark, it is possible that, in a financial investment sense, there may be flight from those companies to larger institutions, thereby bringing about the potential collapse of those smaller institutions. Who will be left to mop up what is left? It is the big Aussie banks and the big end of town that National seems to be particularly concerned for. The banks are able to benefit from the wholesale guarantee without, as I understand it, being obliged to contribute to the retail scheme.

The member Aaron Gilmore mentioned the banking inquiry. Mr Gilmore is the learned professional who has done everything, been a member of everything, and knows everything, by his own admission. I wish I was half as good as he thinks he is! I would have thought he would acknowledge that it is appropriate, given the public perception around banking—whether that public perception be factual, misguided, or incorrect—to have a bipartisan banking inquiry, as I said in the first reading debate. We had a banking inquiry. It was non-partisan for the three parties that participated in it—the Greens, the Progressives, and Labour—but there was a refusal by National, ACT, and a few of the others that linger around this place to even participate in an unofficial, if you like, informal inquiry, let alone a full-blown parliamentary select committee inquiry. Such an inquiry—I think we all agree—would have been the best option because it would carry with it the authority of Parliament.

The question I raised in the first reading debate—and I raise it again now—is why any party would object to such an inquiry unless there was something the party did not want us to know, unless there was something it did not want this House to expose, or unless it did not suit its political purpose for us to have a thorough examination of the sector of our economy called the banking and financial sector. I cannot, for the life of me, see where the politics in this particular question would be, because the truth is that Kiwis—rightly or wrongly, and it could well be wrongly, I concede that—hold the view en masse that they are not getting a fair go from many of the participants in the financial and banking sector. As Kiwis look across the ditch to Australia they perceive that our official cash rate reductions are not being passed through as swiftly as those of our Australian cousins. I think it was worth it to have a crack at looking at that. In fact, it would have been one of the finer moments of this Parliament if we did not play politics but just said that that is an issue New Zealanders are concerned about. In a recession the mortgage bill tends to be the biggest we face. That was a moment in Parliament when we could have dealt with something without politics and see what comes out of it.

There is now a big debate around how we deal with inflation. There is a big debate with our manufacturing sector as it struggles with the high dollar and as it struggles to export and be competitive with its counterparts in other countries. There is a huge debate about how we can continue to control inflation and how, if we choose to, we incentivise, or perhaps disincentivise, different forms of investment in the non-tradable economy as opposed to the tradable economy. I would have thought that was a simple proposition that would not have taken a lot of steam or political venom to discharge, but it appears that it was not. I think that lessens this place and some of the participants here in Parliament.

We support this bill. It is a measure that, as other speakers have said, will indeed reinforce stability. The question I have with this Government guarantee is that, contrary to what some people have said, the big end of town will benefit, because it has a guarantee. I think Mr Foss and others said the shareholders of the larger Aussie-owned banks will benefit. Any institution that has a guarantee has greater stability and greater confidence, which is therefore seen by those who may invest in it—that is, the shareholders. Generally—in my world of market economics anyway—that encourages an increase in the share price as a vote of confidence in a company or bank that holds that Government guarantee. I do not think we should delude ourselves by saying that the bill will not benefit shareholders and banks. Give me a break; of course it will. But the question is whether it will have a counterbalancing effect, because the bar is very high—a BB credit-rating—for the non-banking institutions that may not have the scale to meet the mark. I will conclude with those points and reiterate that we support the bill with those reservations and points made.

Dr RUSSEL NORMAN (Co-Leader—Green) : I rise to speak on the Crown Retail Deposit Guarantee Scheme Bill. As I said in my first reading speech, the Green Party supports this bill. The Green Party supports the deposit scheme. The scheme was introduced because it was essential in order to maintain confidence in the banking sector in the middle of a global financial crisis. We support a time-limited extension of the deposit scheme, and, hopefully, a phasing out of the deposit scheme over time.

For me, it has been most interesting in this debate to listen to members of the Government speak as if being part of the financial sector was something they were championing, and as if they should be proud to have come out of the banking sector. Well, as a matter of fact, the banking sector collapsed the global economy. That is a basic reality. Members opposite are saying that somehow the banking sector is still the master of the universe, even after taxpayers of the entire world had to put their hands in their pockets to bail out the banking sector. It seems to me extraordinary that people in the House say we should somehow worship at the feet of banking executives, when they have demonstrably proven they do not know what they are doing.

This bill is part of the bail-out in which the taxpayer had to get involved in order to save the financial sector from itself. Of course, we have gone through periods like this before. During the Depression and the postwar period the people and the Governments of the world had to intervene to stabilise the system. Once again, the people and the taxpayers of the world have had to intervene to stabilise the system, and that is exactly what this legislation will do, along with the wholesale guarantee scheme. It seems to me that if taxpayers have to intervene to save banks from bank executives, who made such a complete mess of the banking sector, then surely the quid pro quo should be that chief executive officers’ salaries should not be obscene. It is obscene that in our country the chief executive officers of banks earn millions of dollars, while ordinary workers, who are the foundation of our economy, have very, very low wages. Why do ordinary workers have to pay taxes to underwrite banks while the chief executive officers of banks, who got us into the global financial crisis, earn millions and millions of dollars? That is obscene and unacceptable.

Why do banks continue to make very large profits on their interest margins? Banks lost some money because they invested in firms that turned out to be bad investments. They made poor decisions about which firms to invest in and they lost quite a lot of money, so they have had to put quite a lot of money aside. Although they have put all that money aside, however, they still make very large amounts of profits on the interest spreads—the interest margins they charge people. Profits on interest are still up on last year, in spite of what members might have heard. Why do taxpayers have to pick up the pieces through legislation like this because bank executives are so useless that they made a complete mess of it? Why do taxpayers have to pick up the pieces, yet the treatment of bank staff is still appalling? We are sending jobs in the banking sector overseas. One would think that as long as the New Zealand taxpayer is underwriting and supporting the banks, the banks would keep jobs in New Zealand. But they are not: they send them overseas. One would think that as long as the banks are being underwritten by the New Zealand taxpayer, they would change some of the practices around pushing loans and money on to people who cannot afford them. Surely banks would pull back on the system they have set up to incentivise their employees—pushing on them the idea that they have to sell more loans to people who cannot afford them, which is part of the reason why we are in the mess we are in—because the taxpayers are underwriting this system.

The other part of this issue, as I talked about a little bit in my first reading speech, is that we need some solutions to deal with the fact that we have just been through a debt-fuelled, consumption-led boom. We saw house asset prices double over the space of 2002-07, which was a completely irresponsible policy on the part of the Government at the time, in that it did not intervene and do something about it. The current Government cannot be held responsible for the ridiculous boom in housing prices, which has made housing unaffordable, but the current Government is still not changing the policy settings to do anything about it. It is all very well for Bill English to say it was a debt-fuelled, consumption-led boom—I agree with him—but we need to change the policy settings to do something about it.

We know the changes we need to make. We know that investment properties and the tax incentives to speculate in housing were one of the key drivers. We know that is a simple fact. Every tax adviser across the country was telling people to invest in investment properties in order to reduce their tax. We can change those rules. Those rules are within the Government’s purview to change, and I encourage the Minister of Finance to follow through and do that.

We also know that we can change monetary policy. If we are to maintain the stability of the banking system, not to mention the stability of the New Zealand economy, we need to change monetary policy. Relying on the official cash rate has been a bit of a disaster. All we did when we increased the official cash rate was suck foreign capital into New Zealand, which the banks then loaned on to the housing market. The safest way banks could think of to make some money was to push it into the housing market. Instead of giving it to New Zealand businesses, which could have used it productively, the banks were good only at passing on loans into the housing market, because it is easy and simple to do. Houses continue to increase in price, so the banks just loan money into the housing market. The hard thing to do is to back small to medium sized businesses in New Zealand that want to borrow money to invest in productive enterprise, so they can compete with imports and so they can export. That would be a responsible and useful thing for the banking sector to do; simply borrowing billions and billions of dollars from overseas in order to push that money into the housing market asset inflation was not in the best interest of our country.

On one hand we say that we will give banks a bit of a hand, because we have no choice. We cannot afford to let the banks fail. They are too big to fail as they are fundamental to our economy. On the other side of the equation, we need to regulate banks in order to make them useful to us. It is useful to us for banks to loan money into the productive sector, not to put more and more money into a housing asset bubble. One of the ways we can make banks useful to us, if we have the courage to do it, is to intervene directly in terms of Reserve Bank ratios. This has been discussed in a number of places. It is a mechanism whereby for every dollar the banks put into any sector we identify as an asset bubble, such as the housing sector, the banks have to deposit a proportion with the Reserve Bank or hold it within the bank, whatever percentage that is. The effect of that mechanism is that it makes it harder for the banks to shovel foreign currency through into whatever particular asset bubble one is concerned about. In particular, the housing market has been the asset bubble. Using reserve ratios overseen by the Reserve Bank is one way to try to restrict the flow of foreign capital borrowed from overseas into the housing asset bubble, and speculation in the housing market. These tools are available if the Government has the courage to take them on.

If the Government has the courage to do more than say that it will cut red tape, which sounds really great, or that it will try to free up the productive sector, then I ask what will it really do. If we really want to intervene in the sector, we need to reduce the level of the New Zealand dollar. One of the key things driving up the New Zealand dollar has been the official cash rate. It has kept the New Zealand dollar high. We should reduce interest rates. Again, the official cash rate has been one of the drivers of interest rates, amongst other things. In order to reduce interest rates, we need to target inflation in the housing market. The official cash rate is a very blunt instrument when we use it to try to suppress inflation right across the economy. It drives up the New Zealand dollar and it makes it difficult for New Zealand productive businesses to borrow money. It would be much more effective to target the housing market itself and then to make capital available for New Zealand business who actually need to borrow money to produce things. In the process, we would reduce the level of the New Zealand dollar and reduce interest rates to the productive sector. All of these things would make a significant difference.

This bill is fine as it is, but we need to have a broader policy debate about monetary policy, financial instruments, and the stability of the New Zealand economy and the New Zealand banking sector.

JONATHAN YOUNG (National—New Plymouth) : Investors and depositors still remain nervous in New Zealand, and it is at times such as this time that Governments need to act in order to bring stability. This Government has sought to protect New Zealanders through the turbulent economic times we have been through and continue to face.

Recently, the New Zealand Herald reported that John Kidd, a McDouall Stuart analyst, had said “The Government must provide some clarity around the future of the retail deposit guarantee and soon to minimise uncertainty and avoid another looming funding crunch in the beleaguered finance company sector,”. The New Zealand Herald reported further that “After being starved of retail investor money after a string of high-profile failures in the sector, the introduction of the guarantee in October last year saw a flood of cash into finance companies. But there has been no official word on whether the scheme will be extended when it expires in October next year. Because of that, investors have been reluctant to invest further in finance companies for terms beyond the scheme’s expiry date.” That is a concern. It is good to note that the Minister of Finance, the Hon Bill English, is responding not only to the international situation but also to the needs of the finance industry here in New Zealand, which will continue to fuel and finance our recovery out of this recession in the years ahead.

The Crown Retail Deposit Guarantee Scheme was instituted in October 2008 in the wake of a growing sense of uncertainty regarding deposits. As we walked in step with Australia, New Zealand also, under the previous Government, set up a retail deposit guarantee scheme. It followed other measures of the Reserve Bank to ensure liquidity at that particular time. Apart from protecting depositors, the guarantee also afforded banks and businesses with a sense of stability during those troubled times that we experienced, by ensuring investor confidence. A number of changes are coming up in this bill, which others no doubt will allude to, but some of the changes are to bring some transition back into normal business practice. This means that people or companies such as banks and other institutions that take the step into this extended scheme for a further 14 months will, at the end of that period of time, come back into normal finance and business practice.

Thank you, Mr Speaker. I am happy to commend this bill to the House.

KATRINA SHANKS (National) : It is my pleasure to take a call tonight on the Crown Retail Deposit Guarantee Scheme Bill. This is an interesting bill, because it is a continuation of a scheme that we already have in place to address the issues around the confidence that our investors have with the banks that they deposit with. We know that a year ago there was real concern around the viability of many of the overseas banks and financial institutions. There was concern that investors were withdrawing their money and that they did not have any confidence in the banking system.

I will address the comments that Russel Norman made earlier, and to be honest, I do not quite know where to start. At the end of the day, it was the strength of our banks down here in New Zealand that helped our economy along. We did not have our banks folding. We had relatively strong banks, and the Government got in behind the banks and put in a retail deposit guarantee scheme to ensure that our investors will have confidence in the banking system in New Zealand.

This bill has extended the current scheme until 31 December 2011, which is an extension of another year. The current scheme was to expire on 12 October 2010. We were finding that there was a lack of confidence around the uncertainty of what would happen to these deposits, so we have continued that scheme in order to help out our economy.

We realised that if people do not invest in our economy, then we will not have any growth. That is what it is about. John Key’s Government is about getting some bounce out of this recession, so that we can get some good solid growth. It is so that we can be leaders going forward with our very strong economy and our export markets, and we can ensure that we get cutting edge technology and cutting edge businesses. We are out there at the front end, getting our fair share of the business that we should be getting in those areas.

It is really interesting to find out that currently there is $120 billion worth of guaranteed deposits in total in existence, over 73 institutions. There has been a big take-up of the retail deposit guarantee scheme and this will continue. It was my pleasure to take a call on this bill this evening. Thank you very much, Mr Deputy Speaker.

MELISSA LEE (National) : It is a pleasure to rise and take a short call on the Crown Retail Deposit Guarantee Scheme Bill. Already many members have spoken on this bill, but I want to add my tuppence worth to make a couple of points. I was trying to get to the House this afternoon to watch some of the debate that was happening and I was quite appalled. Let me start by saying what a load of hogwash from Labour! Apparently it is supporting this bill and it feels the need to blame others. Let me remind members opposite that the mass financial company failures—some 30 financial institutions—happened on its watch, when Labour was in Government. I ask members whether we are all glad that the 9 long years of Labour taking New Zealand around the bend and then down the gurgler of the OECD rankings are over and that we have a great Prime Minister, a fabulous Cabinet, and a caucus who are focused—yes, focused—on getting New Zealand back on track.

Hon Parekura Horomia: What are you talking about?

MELISSA LEE: Yes, the member does not know what we are talking about because Labour was concerned about putting New Zealand down the gurgler. We are on the way up.

Katrina Shanks: 9 long years!

MELISSA LEE: That is right—9 long years. We are on the way back up and on track.

If the approval rating of our Prime Minister is any indication, the National Government is doing a sterling job—a fantastic job. What percentage did the Leader of the Opposition have? I believe it was a single figure—a single digit. This retail deposit guarantee scheme was a direct response to international financial market turbulence. The National Government is extending the scheme while tightening some of the conditions.

Compared to other speakers, I have no background in finance or banking. There are some hints that the concerns about the stability of the financial systems are now abating. Some countries are even announcing economic growth. For me as a mother, not a financial person or a banker, as a daughter, and as a business owner responsible for paying staff, I like to know that my deposits are safe and that I will not lose my hard-earned money and the moneys for my family and my staff members. I like to know that it is safe and that this Government is guaranteeing the deposit. It is a prop up for the country’s financial system, but until we are back on track I like to know that the Government guarantees it, and the thousands of retail depositors—the ma and pa depositors of this country who want a better future for themselves and their families—will agree with me.

The new scheme starts on 13 October 2010 when the current scheme ends, which is the day before, and it continues until 31 December 2011. The planned extension will maintain confidence and help both the depositors and institutions to adjust back to a more normal business environment. What a fantastic thing that will be. New Zealand will be back on track. I commend this bill to the House.

STUART NASH (Labour) : I rise to speak in support of the Crown Retail Deposit Guarantee Scheme Bill, as I did in the first reading, for a number of reasons. I was interested to hear Melissa Lee emphasise this Government for the whole of her speech, and how this Government is responsible for guaranteeing the deposits of ordinary New Zealanders. Ms Lee has a very short memory. In fact, Dr Michael Cullen instigated this bill under urgency. Dr Michael Cullen was one of the great Labour politicians who believe in listening to the people. He understood that hundreds and thousands and millions of dollars had been lost by New Zealanders due to the collapse of financial institutions. He went around the country with people like Phil Goff, Annette King, and Maryan Street, and they spoke to constituents around their electorates. They realised, after hearing the stories about people losing their life-savings, that something simply needed to be done. So I tell Melissa Lee that the National Government did not do this; it was a Labour Government measure.

This bill is going through under urgency at the moment because the National Government did not get off its chuff and sort this thing out. The current retail guarantee expires in about 4 weeks. It was set up for 1 year. We are debating this bill under urgency so that the extension of the scheme will be in place and will give a high level of stability to the mum and dad savers who rely on their savings for their retirement. We all know that the Government will cut superannuation and raise GST. Bill English’s Tax Working Group has said that it thinks it would be a great idea to raise GST to 15 percent, maybe 17 percent, or even 20 percent. It wants to do that so it can drop the top tax rates from 38 percent and 33 percent down to 30 percent. How will that help the vast majority of the people of New Zealand? How will that help superannuitants? That is why Dr Cullen brought this deposit guarantee scheme in.

There is a fundamental difference between the groups of people who were losing the money they had invested: there are savers and there are investors. Savers are the people who had put their hard-earned savings—which they had built up over 30, 40, 50, 60 or many, many years of working hard and paying their taxes—into these funds, only to see their savings wiped out. Savers do not necessarily price risk like investors do. Investors are professionals who understand risk, or are supposed to, and therefore invest appropriately. They understand that risk equals return, whereas savers—mum and dad investors who lost all their money in the financial sector—were not pricing risk; they were putting their money away ready for their retirement, for their children’s education, or for their grandchildren’s education. As I alluded to in some of the examples I gave earlier, we are seeing the downside of the collapse of the financial sector in terms of the increase in ill health and decrease in the well-being of a huge cohort of New Zealanders. I spoke of at least two people who had committed suicide because they had lost their life-savings. I spoke of the tremendous hardship and mental anguish of those New Zealanders. Melissa Lee smiles, but I do not think the issue is particularly funny or worth smiling about. Many, many Kiwis have suffered, and this deposit guarantee scheme will alleviate a lot of the anguish and harm caused to many people who have their money invested at this time.

I support this bill for two reasons. First, it is about ordinary New Zealanders, whom members opposite tend not to understand. I cannot believe that when we are talking about New Zealanders who have committed suicide because they have lost their life-savings, we see some members opposite smiling and clapping. Quite frankly, that is one of the saddest things I can imagine. I read about it in the New Zealand Herald and I thought: “Goodness me! Imagine if that had been my parents.” Let us imagine that it had been our parents who had lost their life-savings after paying taxes for 50 years. Imagine them seeing their life-savings suddenly wiped out and being told to sell their family home to pay their debts to those blokes who are living the high life in Sydney. I do not think that is fair.

Dr Cullen did what all good Labour politicians do: he remedied the problem. He came up with this retail deposit guarantee scheme, which said that the Government of New Zealand would guarantee the deposits made by good, hard-working, ordinary New Zealanders. He put this scheme in place in the space of 24 hours. How do I know this? I was at a Taradale branch meeting. Michael Cullen was one of those MPs who go to every branch meeting in his or her electorate. My God, they were great meetings! We heard Dr Cullen, the then Minister of Finance and also Deputy Prime Minister, talk about what was going on. Once, for the first time since I had been in Hawke’s Bay, Michael Cullen sent an apology to that meeting. We thought that something serious must be going down, because Michael Cullen always attended those meetings, just like every good Labour Cabinet Minister. We woke up the next day to find out that he had been working for the last 48 hours, without sleep, with his Australian counterpart, the legislators, and the Secretary to the Treasury to come up with a scheme that he could take to ordinary New Zealanders and tell them not to worry. They could sleep easy because he guaranteed that, if any of these finance companies collapsed, people would not lose their money. He went back and, as Minister of Finance, said that the Labour Government would guarantee that people would not lose their money.

That scheme put in place the fundamental philosophies of social democracy. The fundamental philosophies of social democracy are to look after ordinary Kiwis who have saved hard, who have paid their taxes, and who have saved for a rainy day. That is what Dr Cullen did, and I think it was fantastic. Now we are debating this bill, which will extend that scheme. I really support the bill and I commend Mr English for understanding the value of it. But I think Mr English sees just the financial side of things as opposed to the hardship faced by ordinary New Zealanders.

The second reason I support the bill is that it shores up the banking system. I was at the banking inquiry and it was very interesting. I take my hat off to the chief executive of Kiwibank.

Paul Quinn: One of your mates.

STUART NASH: I do not think the chief executive of Kiwibank is one of my mates, but he came along to the banking inquiry. He stood up and said that he was there because he was accountable to the people of New Zealand. I was talking to one of the bigwigs at Westpac before this inquiry was held, and I asked him to come along to the inquiry. I told him that if he had nothing to hide, he should come along and tell us what he is doing, and dispel the perception that the big banks are ripping Kiwis off. He said: “Cobber, I probably should come along and tell them what we’re doing.” I said that that would be fantastic. I told him that if he could see his way there it would be the best piece of public relations his bank could possibly do. But he could not. Kiwibank fronted up because it is a bank that is owned by Kiwis and is for Kiwis. I applaud Kiwibank. I applaud the other people who had the guts to put in submissions, stump up with the figures, and actually say that for short-term floating mortgage rates the banks are rorting ordinary New Zealanders. That is what the inquiry heard from a number of people, including Bernard Hickey. Someone said to me that Bernard Hickey was coming along and that he was a friend of the banks. I said that Bernard Hickey himself admitted this.

The reason why short-term floating interest rates on mortgages were the terms of the inquiry was that Mr English had said that he would support an inquiry. Suddenly, after a weekend of beers with his mates, or some phone calls—we do not know what happened—he withdrew his support. He had already stated in the press that the banks needed to stump up and bear some of the pain, that the banks needed to come on board, and that the banks needed to face up to ordinary New Zealanders. But suddenly the rhetoric changed. He said he was not supporting a banking inquiry. To tell the truth, I felt quite sorry for Mr Foss, the chair of the Finance and Expenditure Committee. He does a good job; I take my hat off to him. He was put in a very difficult situation, because the Minister of Finance had said that the Government would support this inquiry. Mr Foss went to the select committee and said that he thought they could get it through. Then suddenly Mr Foss had to go along and say that he did not support the inquiry, at all. We asked Mr Foss what had happened and who had been talking to him. He said that no one had been and that he had just made that decision himself. We said that we thought his Minister of Finance had made that decision. So poor Mr Foss was put in the unenviable position of having to go against what he believed in. I know that Mr Foss wanted this banking inquiry. In fact, it is a shame that Mr Foss himself did not put forward a submission, because I know that the submission would have read like every other submission that we heard—that is, that the banks are not treating New Zealanders the way they should be treating them. It is a shame that Mr Foss did not come along to the inquiry, but we can have these conversations off the record.

Getting back to the bill, I say that one of the reasons why it is important, which has been alluded to, is that—let us face facts—we need a strong banking sector in this country. The Australian banks, which basically have about 80 percent of our market, are some of the most profitable banks in the world. I accept the fact that we need profitable banks, but they are some of the most profitable in the world.

Hon LIANNE DALZIEL (Labour—Christchurch East) : I am happy to speak on the second reading of the Crown Retail Deposit Guarantee Scheme Bill. I am pleased that the Government has decided to introduce this bill and to deal with the issue in a legislative way. However, I am deeply concerned about the bill being dealt with through all of its stages here in Parliament under urgency. The reason that I am concerned about that is that there is no opportunity for any of the institutions that will be affected by this bill to have any public input into it by way of submission to the Finance and Expenditure Committee. The select committee does not have the opportunity to give detailed consideration to all of the elements of the bill.

I am also quite concerned to pick the bill up off the Table of the House, as I come in here this evening, and find that the regulatory impact statement is not set out in full in the bill. It is, in fact, to be found on the Treasury website, if I want to go and read it. That is what I will have to do now over the tea break. Giving this speech at one end of the tea break obviously gives me an opportunity to comment on it when I return. But the problem I have is that that means the legislation will not get the degree of scrutiny that it deserves.

• Sitting suspended from 6 p.m. to 7.30 p.m.

Hon LIANNE DALZIEL: Thank you for the opportunity to continue my contribution on the Crown Retail Deposit Guarantee Scheme Bill. When the House rose for the dinner adjournment, I was making the point that the bill, which I had just picked up off the Table of the House, included a comment in the regulatory impact statement that it was not, in fact, the regulatory impact statement. It was only the executive summary of the regulatory impact statement. We are directed to the Treasury website in order to find the full regulatory impact statement—all 25 pages of it. There was a very interesting comment that I found right at the very beginning of the regulatory impact statement, in the executive summary. It said: “Given the time imperative, implementation is to be through urgent legislation for some or all of the stages with a limited select committee process.” Where is the limited select process? That is what I want to know. There is a reason why the executive summary of the regulatory impact statement says there was to be a limited selected committee process, and that is that there has been no public consultation on this bill whatsoever. That is a serious issue when we are talking about something that will obviously have an impact on a significant number of individuals, particularly those who invest currently in institutions that will no longer qualify for coverage under the Crown retail deposit guarantee scheme.

When consultation is talked about in the regulatory impact statement, which has been generally hidden from public view because it has been tucked away on the Treasury website instead of included in the bill itself, the statement says: “The decision was made not to consult proactively on the proposals with the public. This is due to: officials already having a reasonable amount of information about stakeholder views from regular interactions (Summarised in Annex 3); desirability to make an announcement soon, limiting the time available for any consultation; a period of consultation would make timing significantly worse and may not make us any better informed;”—that is a Treasury line, if ever I heard one—“commercial sensitivity of the policy decision; concern that public consultation would create further uncertainty in the market. The proposed course of action is temporary.” Well, so was the original course of action, which was not subject to legislation at all. In the recommendation it says: “For these same reasons, we recommend the some or all of the stages of legislation to enact these changes, be passed under urgency with support from key support and opposition parties. There could also be a limited (one-two day) select committee process.” But no select committee process is being allowed for at all. I am a little bit nervous about that, because I think it is important that we have the opportunity not simply to receive public submissions, but actually to receive a full briefing from officials to our key spokespeople on legislation of such major significance. I think it is a very unfortunate approach that the Government has decided to take with this legislation.

Do we, in essence, support the legislation? Yes, of course we do. We were the Government that introduced the Crown retail deposit guarantee scheme in the first place. Are there issues around some of the detail of it? Yes, there are, and I think of the question I raised immediately preceding the resumption of debate about those individuals who currently have investments in institutions that will choose not to continue with the scheme and those that will be unable to continue with the scheme due to the new requirements of the scheme. They will have some concern about how the changes might impact on the decision they have made to reinvest, knowing that the guarantee was there in the first place.

It is important that we have a guarantee scheme in place, but not so much because our banks need any protection from the circumstances that we saw occurring in the rest of the world. In fact, I think our banks were better placed than many, and the reason they were better placed was that we had much better regulatory oversight and prudential supervision from the Reserve Bank of New Zealand than many other jurisdictions. Much of the talk that we hear from overseas about regulators now beefing up the rules is about actions that New Zealand does not have to take, because New Zealand has had beefed-up rules in those areas for a long time. Where there has been a disadvantage, I guess, to investors in the New Zealand marketplace, is in the non-bank deposit-taking sector, and we have seen the fall of many finance companies over several years. We have seen regulatory frameworks now put in place to address concerns around non-bank deposit-taking organisations and financial advisers as well, and that is an important step for us to take.

With three bills passed last year before the general election, of course we are in a much better position to go forward. The problem, though, is that, before that legislation is fully effective, certain actions need to be taken. Considerable work is going on at the moment in the financial advisers sector, and the Reserve Bank is working very closely with the non-bank deposit-taking sector in order to put in place the rules that will be needed.

The reason New Zealand had to have a deposit guarantee scheme is simply the fact that we are in a situation where money can be transferred out of our country across what are now called e-borders. They are not physical borders. That could have been done in an instant. As a result, if we did not match what was occurring in other jurisdictions with deposit guarantee schemes, we would have risked essentially a run on perfectly healthy, well-regulated institutions, because a guarantee would have been seen by those perhaps less sophisticated in that regard to offer a better deal than the situation in New Zealand. That is obviously why we needed to have it. It was not so much to protect investors in New Zealand banks, but to protect New Zealand banks from investors’ flight of capital, as it were, to a more protected market where a deposit guarantee scheme was operating. In Australia they have a different set of rules from us, and theirs operate for a further year. That is why we support the Government moving to match Australia in respect of the timing of this initiative.

When we get to the Committee stage I think we will have to do some pretty serious and detailed analysis to substitute for the kind of briefing that we would have got in the 1 to 2 day select committee hearing that Treasury recommended parliamentarians should receive. As a result, I hope that the Minister, when he takes the chair, will be in a position to give us the kind of response that we will be looking for as we go through this recommended change in some considerable detail. With those caveats on the table, I reiterate our support for the Crown Retail Deposit Guarantee Scheme Bill, and regret that we have not had the opportunity to consider it in more detail.

JOHN BOSCAWEN (ACT) : It is a privilege to speak on the second reading of the Crown Retail Deposit Guarantee Scheme Bill. What I say tonight I say in the public interest. The basis of a financial system is confidence and trust. The reason that this measure was initially introduced last year was a total fall in confidence in the world banking system, not just in New Zealand but throughout the world. We saw that manifest itself in the failure of many finance companies. Reference was made this afternoon to, I think, some 16 finance companies. Well, over 30 finance companies went into receivership or a moratorium. I have spoken at length on this subject over the last 6 months.

Tonight I would like to talk about one specific finance company, and about the issue of confidence and trust—trust in the financial system. Mr Cunliffe, in his first reading speech, talked about the banking inquiry that the Opposition organised. He referred to the front page of the New Zealand Herald business section of 15 July, calling on the Government to support that inquiry. It is interesting that on that same page of the business section, tucked down in the bottom left-hand corner, there was an article about a company called Strategic Finance.

Hon Darren Hughes: What’s the headline?

JOHN BOSCAWEN: The headline is “Strategic warns of $98m loss”. The article is about a finance company that presented a proposal for a moratorium to its investors last December, and it set out a case for those investors to support that moratorium. Its base forecast—its base case—was that its investors would be repaid in full and would get a full repayment of interest. So they were to get 100c in the dollar of principal, plus interest.

Some 7 months after that moratorium was put in place, Strategic Finance told the market that it was now anticipating that it would lose $98 million, but it still believed it could meet its commitments. But it did say that its accounts were subject to final audit and that the loss could well change when the audit certificates were completed. Just over a week ago Strategic Finance announced that in fact its loss was some $175 million. To put that into context, I understand that the deposit holders—the holders of debentures; the creditors—of Strategic Finance are owed some $400 million. So since last December, Strategic Finance has been telling its investors, its creditors, that its financial position has declined by some $175 million—by roughly 40 percent of its loan book. I wonder how New Zealand investors can have confidence in investing in such companies, which is important. The Minister of Finance said this afternoon that it is important that New Zealand has a strong non-bank sector.

Let me tell members what concerns me even more about the Strategic Finance situation. There was an article in the Sunday Star-Times as recently as Sunday of this week referring to Strategic Finance and the Nelson investor John Lacey. One of the issues that Mr Lacey raises is the salaries being paid to the directors of Strategic Finance. I believe that the chief executive is quoted as receiving something like $500,000, and a number of other staff as receiving salaries of in excess of $200,000.

I wish that was the worst of it, but I have been told in recent times that the situation is actually a lot worse than that. Strategic Finance lends on first mortgages and on second mortgages, but I am told that in its lending it has preferred creditors. If one likes, the second mortgage is broken into two parts—Part A and Part B—and those people who fund the top part of the second mortgage are, in essence, preferred creditors. These people might be called friends of Strategic Finance, who have advanced money in the knowledge that they have a prior charge over other bondholders. I am reliably told that these so-called preferred creditors have been receiving an interest rate of 17 percent up until very recently. At a time when the general creditors have been receiving nothing and are losing their capital, a group of creditors is achieving a 17 percent return. That money is being paid at the expense of mum and dad investors. Essentially, those investors know that the company they lent money to invests in first and second mortgages, but I believe it is not clear to them that in the case of a second mortgage they actually rank behind a preferred creditor. In effect, mum and dad investors are lending on a third mortgage. I wonder how many of the people who invested in Strategic Finance were aware that on some of their loans they were essentially lending as third mortgage creditors. I wonder whether they would have voted for the moratorium if they had realised that they had that level of prior charge.

I am told that there may well be shareholders, and certainly directors or people associated with directors, who hold a privileged position as preferred creditors. I have looked through the Strategic Finance prospectus. It talks about prior charges to the Bank of Scotland International. There may well be evidence in the accounts that points to those prior charges; I have not been able to find it yet. I would have thought that had that been the case, perhaps someone in the media might have disclosed it. I may be wrong, but I cannot find it. It concerns me also that when the bondholders go along to an extraordinary meeting to vote on a moratorium, they do not realise that there is a group of people who vote equally with them but who have a preferred status. Why would the people who have that preferred status not vote for the moratorium, if the moratorium is to cement their preferred status, and to keep the company trading so that they may get a higher return than the average mum and dad investor? I believe that the mums and dads who voted at that Strategic Finance moratorium meeting did not have a chance, because they were a lower class of creditor.

It saddens me a great deal that many thousands of New Zealanders—mums and dads; a lot of elderly people—have lost money in finance companies. Some of those finance companies have been very well run, but a lot of them have not. The Hon Lianne Dalziel talked about the protections that the current Government is putting in place and the protections that the previous Government put in place. I know that there will be an inquiry at the Commerce Committee level into the practices of finance companies. But we will not address the real problem until we address the issue of confidence and trust. If what I have been told is true, and I have no reason to believe that it is not, I wonder how those people who invested in Strategic Finance can have the confidence and the trust to deal with other companies in the future. Thank you, Mr Deputy Speaker.

Hon DAVID PARKER (Labour) : I rise to take a call on the second reading of the Crown Retail Deposit Guarantee Scheme Bill. Before addressing the bill in particular, I will add to some of the comments made by Mr Boscawen. I hope the inquiry being undertaken into finance companies looks at some of the related party transactions of some of the finance companies. I will be interested to see what the inquiry finds in relation to any of the personnel who were involved in those transactions, which were effectively fraudulent related party transactions whereby finance companies were getting money off people, then lending it to themselves in other guises in high-risk ventures, sometimes with limited liability, so that if the loan could not be repaid by the corporate borrower that was related to them, there was no recourse to the personal covenant of the person who was behind the company. If it transpires that that was a pattern of behaviour, and it further transpires that the individuals who were involved were some of the individuals who were involved in similar transactions in the last crash in the late 1980s, then I would suggest that some of our regulatory agencies like the Serious Fraud Office should take a close look at themselves and see whether they did their duty during that period. It is all very well to be wise with the benefit of hindsight, but some of those agencies had a duty to be looking into those issues before they were obvious to everyone. So I agree with some of the things that Mr Boscawen was saying.

But having said that, I point out that we also need to be careful that we do not tar everyone with the same brush, because just as there were some irresponsible finance companies, there were also some reasonable finance companies that acted responsibly. It is a truism that no financial institution can withstand a run on the fund. That is true of a finance company; it is also true of a bank. I think banks, in the fallout from the international financial crisis, have at times been a little bit cute in pretending that they have been immune from the effects of a run on the bank, and in pretending that people would not have had their money at risk in banks. Although it is true that that money might not have been as at risk in a bank as it might have been in some finance companies, it is also true that, were it not for the Government guarantees that were provided at both the wholesale and retail levels, there could have been a run on the banks. Those banks could no more have withstood that than a finance company could have withstood a run.

So it was necessary for the prior Government to intervene and to provide some certainty to lenders and to depositors in banks and in other non-bank financial institutions to ensure that they did not get so frightened that they all withdrew their money at once. That would have caused the demise of the banks and the finance sector, it would have caused a loss to all of the depositors, but it would have also caused the wheels of commerce to grind to a halt, to the detriment of the economy in a wider sense and not just to the detriment of those who had invested in deposits in those banks and finance companies.

Having said that, I return to the issue of the distortions caused by guarantee schemes such as this. I note that one of the objectives contained in the general policy statement in this bill that the Government has introduced is to minimise economic distortions and to ensure in the credit markets that we have properly priced risk—what it calls “well-priced credit markets”. It is a sad reality that whenever we have a guarantee scheme like this, we have distortions. There are distortions in the market that are unavoidable. One of the distortions we have here is that collective investment schemes are not eligible to have a guarantee, despite the fact that the nature of the underlying transaction is very similar to other schemes that are not collective investment schemes. These are essentially deposits made by people in things like unit trusts or group investment funds. The money is invested by people in the fund and then invested by the fund in mortgages, often first mortgages over land.

Those sorts of credit instruments are more secure than a finance company investment, because a finance company investment is generally a first or second-rating debenture stock, which often gives a second-tier interest in securities behind other creditors, whereas some of these group investment funds and unit trusts, which are backed by first-level mortgages, give the investor a trust interest in the mortgage. If we look through the paper, we see that they are effectively obtaining a first-mortgage interest to secure their deposit. There is nothing that is more secure than that. It is possible to have a widespread depression in credit markets, and people who invest in first mortgage - based securities will suffer a loss if the value of those securities decreases but they will never suffer a total loss. We are finding in some of the finance companies, though, that, if we have a second-ranked security, our security interest ranks behind the first debenture holder, and therefore a depositor can be without any effective security and lose all of his or her money.

If we look at those two comparisons—the mortgage-backed security compared with the finance company investment—we would say that the mortgage-backed security is a lot less risky. Yet, because we have to have boundaries to a guarantee scheme like this, the mortgage-backed security gets no guarantee; it cannot avail itself of the guarantee provisions of this scheme, but the finance company can. We are causing a distortion in the market there; when we have had a run on mortgage-backed funds, and because people cannot avail themselves of the Government guarantee, they understandably say: “Well, I will put my money where I can get the Government guarantee. Even though a first mortgage might be better than an investment in a finance company facility, I will put my money with the finance company rather than with the mortgage-backed investment, which is not covered by the guarantee.”

I mention that in some detail because it shows the sorts of distortions that are unavoidable if we have a Crown guarantee such as this. It points to why we should be trying to get beyond these Crown guarantees and get out of the market eventually, because in my opinion we want to have a sound secondary market and not be reliant only on banks. There are a number of reasons why that is important. One reason relates to the fact that the major banks in New Zealand are all overseas-owned. So the profits they earn are generally repatriated overseas and are lost to our economy. Indeed, a large part of New Zealand’s current account deficit now is the invisibles—both the interest we pay on the overseas loan-lines that are re-lent by banks in New Zealand and also the profit margins they earn on those loan portfolios that are currently repatriated overseas. It is desirable that we have a set of regulatory affairs in New Zealand that enables our New Zealand - based financial institutions to grow. They ought to be competitive in the New Zealand market, and they ought not to have competitive disadvantage as a consequence of regulatory policy settings.

If we look at the fees to be charged to those who avail themselves of the retail deposit guarantee scheme, we see that different rates will be charged according to the different risk that is perceived. The risk is lowest for those that have the highest credit-rating. So if a finance company has a triple A rating, then the rate charged for the guarantee will be 15 basis points, or 0.15 percent per annum. But if a finance company has only a B rating, then the rate will be 1.5 percent, or 150 basis points. People might think that that makes sense for finance companies, but if they look at what is happening in respect of banks and building societies—

Mr DEPUTY SPEAKER: There is far too much noise coming from the Government benches. I am having difficulty hearing the speaker.

Hon DAVID PARKER: —they will see that there is quite a range there, too. The reality is that the only institutions that are big enough to get the high rating used by the rating agencies—up around double A, or better—are the very largest of financial institutions. Again, we are preferring the very largest of financial institutions, which happen to be overseas-owned banks, over some very important New Zealand institutions, like smaller building societies. I would like to see some consideration being given to changing that fee structure, because I really do not think that it is in New Zealand’s long-term interest that we are giving more competitive advantage to the largest banks and disadvantaging our building societies. Thank you; overall, though, I support this bill.

• Bill read a second time.

CRAIG FOSS (National—Tukituki) : I rise to speak to Part 1 of the Crown Retail Deposit Guarantee Scheme Bill. This is obviously the Committee stage, and questions have been raised by one or two previous speakers about why there will be no select committee process for this bill. I will quickly touch on that first—because, as you will note, Mr Chairman, Part 1 is quite a small part.

Quite simply, this bill potentially has commercial impact on the equity, the share price, and the debt price not only of New Zealand institutions but of institutions around the world, particularly the parent institutions of some of the banks in New Zealand. I ask members to imagine the bill going through our normal select committee process, with submitters arguing about what the various ratings and costings should be. I can understand why someone would like that process, but this bill is quite particular, and we do note that when the guarantee scheme was first initiated, according to the underlying rules and regulations here, it did not go through any select committee process. It was brought in under urgent circumstances by the previous administration, as speakers have noted during the first and second readings.

So it seems somewhat unusual that something that is more of a voluntary extension supposedly needs to go through a select committee process. The imperative is that the markets are closed, at least in New Zealand, but members may notice that some debt prices moved around quite substantially when the media discussed whether the deposit guarantee scheme would be extended.

Another point is that a previous speaker thought that the current scheme ends in about 4 weeks’ time. In fact, it ends on 12 October 2010, so it ends in 4 weeks and 1 year. That might seem a minor matter, but it is essential to what is being implemented here. Again, this is an extension of about 14 months in about 13 months’ time.

Again, I know we are in Committee, but I note that the scheme was brought in to ensure liquidity in the market. Liquidity was needed to keep money moving around, to keep loans, and to keep the velocity of money in the economy happening, because, as we recall, it was frozen at the time, and there was no liquidity out there whatsoever. That was the imperative reason why the scheme was brought in, and, interestingly, this now addresses the difference between the Australian scheme of about 3 years at the time and the New Zealand scheme of 2 years. But it recognises that things have changed, and that the risks to the taxpayer and the institutions themselves, hopefully, will have played out somewhat.

Again, a previous speaker seemed to miss the point that the scheme is voluntary for larger banks. So they are getting no subsidy whatsoever, and, in fact, the charges for them, released by the Minister 2 weeks or so ago, were higher than what they are currently paying under the existing deposit guarantee scheme. So they will be making a rational economic decision as to whether they are included in the extended scheme. Hopefully, at that time, as far as the taxpayer is concerned, the larger banks will not be in the scheme, because they feel no need to be. Hopefully, liquidity will be back in the system and things will be moving towards normality. If that was the case, the underlying contingent liability on the books of $120 billion would probably move down to something like $30 billion. From the taxpayer’s point of view that is not a bad deal. I note that members opposite are voting for the bill, and I am sure they have some issues to raise.

I have one final point in relation to Part 1. The mortgage-backed securities that the member was talking about were, allegedly, supposed to be matched books. So if the funding on the liability side, the term and the maturity of it, matched the asset side, it did not matter too much whether they had guarantees, because they had matched funding books. So they lent long and borrowed short, and therein lies the problem of much of the New Zealand financial system, which this bill, plus the changes to the non-bank deposit takers, which are coming in within the next year, will start to address. Thank you, Mr Chair.

Hon DAVID CUNLIFFE (Labour—New Lynn) : I rise to take a call in the Committee stage of the Crown Retail Deposit Guarantee Scheme Bill. I want to focus on two particular issues: first, the level of consultation on the bill, and, second, the costs in relation to the role of the banks.

Let us begin with the costs, because that issue—the participation or not of the banks and whether that makes a difference—has been raised by several of the speakers from Labour. So far we have been discussing that in qualitative terms. We have said it would be better in principle if those banks that were benefiting from the wholesale guarantee scheme were also in the retail scheme to spread the risk and, I presume from the point of view of the fiscal system and the Crown, to ensure that there was adequate fee revenue. But we have not yet gone into the details of what that fee revenue is, so I thought it would be instructive to look at some of the numbers.

Fees to date on the retail guarantee scheme, in the regulatory impact statement, are $87.4 million, which is slightly more modest than the $119 million per annum forecast in the original proposal. Here is the rub: of the $87.4 million, $81.9 million is fees from banks and only $5.5 million is fees from non-bank financial institutions. So if the banks are out, which this Government is prepared to allow, the revenue stream to the Crown collapses and, arguably, the Crown is left holding an elevated average level of risk in the face of a much reduced level of revenue offset.

The position is even worse if one looks at the interrelationship between the retail guarantee scheme and the wholesale guarantee scheme. These numbers are really quite significant if we go back to the original projections. For the wholesale guarantee scheme, overwhelmingly from the bank rather than the non-bank sector, the figures are $300 million in the 2008-09 financial year; $450 million—and this is just the fees to the Crown—in 2009-10; $400 million in 2010-11; and $1.15 billion between 2011-12 and 2016-17. That is a total of $2.3 billion in revenue to the Crown in fees from financial institutions for the wholesale scheme alone. It is little wonder then that the banks are perhaps keen not to participate in some of those streams at their choice, and the parent banks in Australia, we understand, are considering their options.

The point is simply that if the Government is going to allow banks to pick and choose which of the schemes they will maintain a presence in, the fee revenue to the Crown will collapse and the taxpayer will be left supporting a riskier bundle of assets. That is a significant issue and I call on the Minister of Finance to take a call to defend that and to say whether and how the remaining revenue streams will sufficiently offset the risk that the Crown is taking.

There is another issue that has been much the subject of debate in the latter part of the first reading. It is the question raised by the Hon Lianne Dalziel about lack of consultation. Yes, it is true, as I have previously stated, that the Minister has allowed officials to brief Opposition spokespeople, and we welcome that. But as my colleague has pointed out, that is a poor substitute for a proper select committee process where interested parties, the public, and members from around the Chamber get to ask formal questions on the record of officials and to deal with the matter in submissions. We do not believe that with the existing scheme going as long as October 2010 there was a necessity to rush this bill through in urgency without at least a limited select committee process. We think that is a matter of regret.

I guess there is a growing feeling in the community that one of the hallmarks of this Government is either the refusal to consult or the setting up of processes best described as sham consultation. A couple of examples might serve to illustrate the point. The first is, of course, the Auckland legislation in several tranches. The first one, which terminates the existing territorial authorities, was rammed through under urgency with no consultation and no select committee process. It terminated the existing institutions, thereby making change a veritable fait accompli. The second issue was the subject of the Māori seats for the Auckland super-city. A special committee was set up but the Government did not even refer to the results of that select committee because it had not yet reported. The decision was made in Cabinet without reference to the report, and poor old John Carter, a decent bloke, was left presiding over a select committee that was not a real process. He, the Minister responsible for the bill—

The CHAIRPERSON (Eric Roy): The member will come back to the bill.

Hon DAVID CUNLIFFE: A further example of the lack of consultation is the adult and community education cuts—a matter that I am sure the Government will—

The CHAIRPERSON (Eric Roy): Can you talk about this bill.

Hon DAVID CUNLIFFE: The reason this is relevant is that this bill is yet another example of the Government dispensing with the select committee process at its behest, at its fiat, saying: “The poor little public does not need to be troubled with the details of this. We, the learned and important members of the Government benches, shall decide for the peasants and inform them when the decision is made.” Unfortunately, those peasants vote; those people vote, and it is very, very important—

Hon Dr Jonathan Coleman: Peasants—like they did in the last election!

Hon DAVID CUNLIFFE: That was a quote from the Government. I say to Mr Coleman, the electoral maestro of Mt Albert, that I would be rather careful if I were him, in this regard.

I sum up the position as follows. The objectives of this bill are reasonable. The option that the Government has chosen, which is to broadly extend, under somewhat tighter circumstances, the life of the retail scheme to match that across the Tasman, is a reasonable position to take. I note that the Government is not foreclosing on the option of a permanent deposit guarantee scheme when further research has been done, and we look forward to consultation on that matter.

The issue is in the fine print. The regulatory impact statement was not publicly available. It is on Treasury’s website, and people can go to that, but it was not publicly available with the bill. The select committee process has not happened at all, and we are doing this under urgency, for something that does not fall due until October next year. It is not clear why that has been required. The Government has not maintained, crucially, the position of the previous Government to very politely but firmly say to the banking sector that if it wants the benefits of the wholesale scheme, it should be in the retail scheme, as well. The numbers prove why that matters. Ninety percent of the revenue to the Crown that covers the Crown’s risk exposure—around $180 billion of risk exposure—is through the banks’ participation in the scheme, not the non-bank finance sector’s participation.

Something we are all agreed on is that the non-bank finance sector needs further work. Of course, it was the previous Government that brought in legislation to expand the oversight of the Reserve Bank into that sector, and we hope that the current Government will continue the work to clean up and tidy up the non-bank financial institutions. The question that we will find out from hindsight is whether the BB rating and the move to require participation on that basis will be a step too far for some. We hope that the Government will continue to work constructively with the sector and with the Opposition to iron out those speed bumps, and we look forward to working with the Government on the long-term deposit guarantee scheme if that occurs. Thank you, Mr Chairman.

AMY ADAMS (National—Selwyn) : I rise to take a call on Part 1 of the Crown Retail Deposit Guarantee Scheme Bill, and before I start I really have to comment on the speech made by the member who has just resumed his seat, David Cunliffe. He purported to make quite some mileage out of the fact that this bill is being passed under urgency and he purports to be quite concerned about this. That concern does not extend, obviously, to his not voting for it. To me, the fact that that member does not understand the urgency that relates to this measure, notwithstanding that we are 12 months out from the expiry date, really highlights his lack of grasp of this area. Retail deposits are not decided on the day they fall due. The retail market in deposits needs to know now what the situation will be 12 months out, and preferably 18 and 24 months out.

Anyone in the financial market understands that this matter is urgent, so we need to process this legislation quickly. Already the sector is calling out for some guidance. Already we are seeing that decisions are not being made and that investor confidence is starting to flag, because that guidance is not there. We have to process this bill as a matter of urgency, and if that member had a better grasp of financial reality and the reality of financial retail deposits, he would understand that. Clearly, he does not; none the less, his purported concern does not extend to not supporting the bill. Furthermore, I would have thought that the fact that there is unanimous support for this bill across the Chamber would tend to suggest that it is quite appropriate for it to be processed in this way. I would have thought that those members would be supporting the process, but if they want to score points, that is fine.

The bill is focused on ensuring depositor confidence. As I said in my first reading contribution, it is this country’s stable financial system and stable banking system that has enabled us to avoid the worst part of the global recession, which the rest of the world is experiencing. We are lucky in this country that we have a relatively stable financial sector—

Hon David Cunliffe: So?

AMY ADAMS: —and it is important that we work to maintain confidence in it. The member opposite says: “So?”. It is no big deal to him whether there is stability and confidence in the market. Those members opposite could not care less, because they do not understand that side of it. We have to have a stable system and a viable banking and non-banking sector. That is what this bill does and that is why the scheme has been extended. That is why National set aside its political point-scoring when the scheme was put in place last year, and that is why National, now in Government, is acting quickly to ensure that there will be ongoing confidence in the scheme as New Zealand develops its path out of this recession.

As the New Zealand recovery continues to consolidate, we want to ensure that that deposit guarantee remains in place so that we do not see a loss of confidence in New Zealand and so that we do not see investors looking to move their money into Australian equivalents, which would continue to have a guarantee in place. It is important in our close trans-Tasman relationship that we work on similar terms in this market. We have always tried to benchmark ourselves to Australia to a certain extent, and there is a real risk, in my view, that if we had left the expiry date at October of next year, then we would have seen a preference for many of our investors to invest across the Tasman. As I have already mentioned, if we lose deposits in New Zealand we lose liquidity for our businesses, we lose jobs, and we lose productivity. It means mums and dads not being able to feed the kids or pay the mortgage because they have lost their jobs because the business could not get funding. There is a real social cost to not getting this right, so that is why I applaud our Government for taking urgent steps to put this legislation in place.

I turn to one particular aspect of Part 1, and that is clause 3, “Interpretation”, which gives us some important criteria around what the Act will do. The lawyers in the Chamber will know that the interpretation clause, which is much overlooked by laypeople, is in fact one of the most important clauses of any bill. I want to look in particular at the terms “eligible entity” and “debt security”. Under this bill, the Minister of Finance is able to set criteria for the eligible entities, and I think we need to be conscious of the fact that the Minister, in doing so, has to be clear that it is necessary or expedient in the public interest. I think the words “necessary or expedient in the public interest” are the key words. This whole legislation, this whole retail guarantee scheme, is about working in the public interest. As I have said, a stable banking system, the confidence of mum and dad investors, and the continuation of liquidity in our financial markets are key for New Zealand. They are key for our economy and they are central to the public interest.

Hon LIANNE DALZIEL (Labour—Christchurch East) : I want to return to the issue of consultation, which I raised in the second reading debate on the Crown Retail Deposit Guarantee Scheme Bill. I have in front of me the 25-page regulatory impact statement, which I downloaded from Treasury’s website during the dinner break and which, of course, was not included in detail in the bill, largely because it would dominate the bill, as the bill is so small. The executive summary of the regulatory impact statement is all that appears in the bill itself. I think it is important that we have a discussion about what we were actually seeking, which was something that Treasury itself recommended in the regulatory impact statement. We have just heard from the member Amy Adams that somehow we are asking for a full 6 months at a select committee, which we are not. We are simply asking for what Treasury recommended as an appropriate process, given that there has not been adequate consultation.

Let me read paragraph 65 of the regulatory impact statement: “The proposals for policy changes to the retail DGS were developed by The Treasury and the Reserve Bank of New Zealand in consultation with the Ministry of Economic Development (including the Companies Office), and the Securities Commission. These views have been reflected in the policy development. Annex 3 provides further detail on the issues raised in consultation and how these were dealt with.” These agencies developed the legislation that we have before us today. I actually believe that parliamentarians have a right to hear from those officials, to be fully briefed on all the detail, and to have an opportunity to debate some of the decisions that have been made. I am not 100 percent sure about them, and I think that when we go through the detail of this bill and get some feedback from the Minister of Finance, we will find that some issues need to be talked through a little bit more than this bill and this process allow.

The regulatory impact statement goes on to state: “The decision was made not to consult proactively on the proposals with the public. This is due to: officials already having a reasonable amount of information about stakeholder views from regular interactions (summarised in Annex 3).” I have now had an opportunity to read annex 3, which I had not had when I spoke in the second reading debate. Annex 3 creates further difficulty for me because it talks about some of the feedback that the Government has, in fact, had in respect of concerns raised by both the banks and the non-bank sector. I want to highlight a couple of these concerns, and I think it is important that the Minister responds to them.

The first is the questions around distortions that were being created by the deposit guarantee scheme. My colleague the Hon David Parker raised those concerns in his second reading contribution. The regulatory impact statement states that “many non-banks are finding it difficult to attract deposits after the end of the guarantee period (creating a ‘wall’ of maturity). A business grouping has expressed concerns about the distortions to financial markets created by the DGS.” When the Government responds to this, Treasury says: “The extended DGS is designed to minimise economic distortions by having much more risk sensitive pricing. It is designed with a definite end date,”—it has gone from 2010 to 2011, so not much has changed except for the actual date; the definite end date was already there—“to help reduce the risk of another wall of maturities forming before the end of the guarantee period.” This means that there will be no lending after 2011 from the mezzanine finance sector. That alarms me, because essentially the Government is admitting that this bill will simply delay the problem.

I am not opposed to the idea of extending the deposit guarantee on the basis that it matches with that of Australia. I was also interested to see that the banks do not actually regard themselves as at any risk now from flight to Australia, which is very interesting, because that certainly was not the view at the time that the original scheme was put into place. There was a real concern that if we did not put a scheme into place—with, unfortunately, the lack of sophistication in our investing market—people would be persuaded to put their deposits over the Tasman in order to ensure that they were covered by a deposit guarantee. This is certainly a particular concern.

STUART NASH (Labour) : I stand to support the Crown Retail Deposit Guarantee Scheme Bill. There were two reasons for the scheme being undertaken by the Labour Government in October 2008. The one that most people have talked about was the desire to maintain liquidity at a time of immense tightness in global cash flows. I am aware that the BNZ was very close to implementing its contingency strategy on how to operate without access to foreign funds. We saw what happened when there was a rush on the funds of finance companies—they collapsed. As my colleagues have spoken about, the first charge of the Labour Government was to provide a Government guarantee to depositors to ensure that there would not be a run on the funds of banks.

As the Hon David Parker said, had there been a rush on the funds of banks similar to the rush on the funds of finance companies, the New Zealand economy would have been in grave danger of experiencing the sort of collapse we had seen overseas, in Europe and in the United States, or perhaps of being in even worse shape than that. Of course, the mess in the UK ended up costing the British Government significant amounts of money, and it was forced for all intents and purposes to nationalise large chunks of the banking sector. The whole argument about banks being too big to fail was belied by the fact that the UK Government nationalised much of the banking sector, at a huge cost. And let us not talk about the situation facing US investors.

We on this side of the House understand the importance of a strong banking sector. It annoys me a little bit when I hear members of the National Government standing over there preach at us as if we do not know anything about finance, we do not know anything about the economy, and we do not know anything about the banking sector. After all, the Labour Government is the only Government in two generations to lower the corporate tax rate. I would say that the small to medium business sector would say the Labour Government was the friend of small to medium businesses.

Hon Darren Hughes: That party voted against it.

STUART NASH: That is dead right. Mr Coleman actually voted against dropping the corporate tax rate. It was amazing.

The reason that the Labour Government introduced the scheme, and, more specifically, that Dr Michael Cullen worked all of a Sunday evening to get it up and running within 24 hours, was to shore up deposits within the banks to match what was happening in the Australian sector, and therefore to prevent a possible run on funds and a collapse of the New Zealand banking sector. We understand that. But there was also another reason that the Crown Retail Deposit Guarantee Scheme was put in place, and it seems that the National members are totally ignoring it. They have not mentioned it once. I will quote Dr Cullen: “The government is offering this deposit guarantee to address the current situation of international financial market turbulence and it will be for a two-year term in the first instance. This will give time to see how well international financial markets stabilise in the months ahead.” That reinforces what I was talking about—shoring up the banking system. But he went on to say: “The deposit guarantee is designed to give assurance to New Zealand depositors. The New Zealand banking system remains sound. We want to ensure that ordinary New Zealanders feel that their deposits are safe in the current uncertain international financial market conditions.” I think we must not forget that the other reason why the retail deposit guarantee scheme was set up was to protect ordinary New Zealanders from losing their hard-earned funds. That is one of the reasons why I support this bill. I would hate to see ordinary New Zealanders, having lost their funds in the finance companies, lose their funds in the banks. This bill is about providing confidence, not only to the international credit sector but also to ordinary mum and dad, grandma and grandpa Kiwis.

When it comes to the matter of urgency, I hear what the National members have said, but I just do not buy it. The National members, and more specifically Ms Amy Adams and Mr Craig Foss, say that our not enacting this bill now might have a distortionary effect on the financial markets, or, more specifically, the banking sector. So what we have here is, on one side, the rule of law and democracy, which Labour members support, where the bill would be taken through the full select committee process, versus the banking sector. What does one favour? The National Government has said it favours the banking sector. It comes before democracy, before the right of the people—and it is a fundamental right of our democratic system—to stand before their elected parliamentarians to present submissions on what should happen to the scheme. It is 13 months away before the scheme expires. Ms Amy Adams said we are debating the bill under urgency because people demand certainty. If it is so important—

JO GOODHEW (Junior Whip—National) : I move, That the question be now put.

Hon DAVID PARKER (Labour) : I note that the Minister in the chair, the Hon Bill English, has yet to respond to any of the questions that have been raised by the Opposition in respect of a bill that is not going to a select committee, and that the Government sees as a very important bill, yet we already have closure motions being put forward by National members. I suggest, Mr Chairperson, that you should not listen to those closure motions for a while yet.

I have a question to ask the Minister in the chair about how he plans to get New Zealand out of these guarantees. Although the regulatory impact statement makes the point that this is necessary and that it seeks to minimise distortions in credit markets, there is no doubt that it is distortionary and there is no doubt that it inhibits the operation of parts of the market. There is no doubt that it advantages some institutions relative to others, and there is no doubt that it creates a distortion in that finance companies that are higher risk than banks are none the less guaranteed. Although the payment that they have to make for the guarantee facility might, to some extent, vary to take account of that, I suspect that we have seen a flattening of rates in New Zealand as a consequence of the ability of some finance companies to avail themselves of the Crown guarantee. I think it is important that we see a way forward when there is a plan for either a permanent guarantee scheme, which would be very difficult in my view, or we have to transition away from any guarantee scheme.

I say to the Minister that we currently have a scheme that applies only to debt securities. Debt securities have a legislative definition that is, to a certain extent, like all definitions, a little bit arbitrary. The arbitrariness can be illustrated from the difference between something that is nominally a debt security and something that is nominally a collective investment. As I have mentioned previously, investors in mortgage-based contributory mortgages or mortgage-based group investment funds or unit trusts cannot avail themselves of this guarantee scheme. That has led, effectively, to a rush on what are very secure forms of lending. They are mortgage-backed securities and they are far less risky than finance company investments, on the whole. Yet because of the way in which there has to be a boundary around a guarantee scheme such as this one, which is found in Part 1 in the definition and is limited to debt securities, and which does not refer to participatory securities and collective investment schemes, effectively, through this definition we are limiting the guarantee to finance companies, banks, and building societies, but investments of money that are giving people a trust interest in a first mortgage are not covered by the guarantee scheme. As a consequence, that important part of the market—less important in New Zealand than it is in Australia, but none the less an important part even in New Zealand—is shrinking. Who is that to the relative advantage of? It is to the relative disadvantage of New Zealand because of the ownership structure of our major financial institutions. It is mainly to the advantage of the banking sector. We know that our banking sector is predominantly overseas owned. Therefore, we see further concentration of profits into the non - New Zealand - owned part of the banking sector, to the disadvantage of New Zealand - owned parts of the sector. I ask the Minister to take a call to give some understanding to the Committee as to how, when we come to the end of the extended period of the scheme, he sees New Zealand transitioning away from the scheme.

I will also talk a little bit about the proposed fee structure. It is relevant to Part 1 because the fee structure arises under the guarantee scheme and the guarantee funding facility. The terms of those facilities include fees that are charged to the recipient of the guarantee. My second question for the Minister relates to the breakdown of fees. I acknowledge that the Minister has a very difficult task and that he wants to see that the guarantee properly takes into account the relative risk of different investments. It is appropriate that riskier investments pay a higher fee for the guarantee, because it is more likely that the guarantee will be called upon. For that reason I can see why finance companies should have a higher fee charged than a stable bank, but unfortunately the metric that is chosen for the investment of fees is Standard and Poor’s - type ratings. The higher ratings are available only to very large institutions. We know that the only very large institutions in New Zealand are overseas banks. All of the smaller institutions that cannot get that high AA rating by virtue of their size, including some very secure building societies, smaller institutions like some of our smaller building societies, and some of our better finance companies, will never get a very high rating. As a consequence they will always be paying a higher guarantee fee.

I ask the Minister to justify how that situation is in New Zealand’s interest. Although we have to have regard to relative risk, Standard and Poor’s ratings—which internationally have been found wanting in the last year or two, at least in some of the markets that have been rated by the agencies—are a too simplistic way to look at it. We do not want to have a system that further entrenches the existing advantages of the major banks, to the detriment of the New Zealand economy, because we know that for those major banks all of their profits are repatriated overseas, except to the extent that they reinvest in expansion in their New Zealand business. There are a lot of profits, which are a large contributor to our current account deficit and we do not want to see that contribution to our current account deficit grow. It concerns me that the way in which this fee structure is proposed will further entrench the advantages of banks and disadvantage the smaller New Zealand institutions, including our smaller banks like SBS and also the Taranaki savings bank. I would like to think that the fee structure could reflect the fact that although under Standard and Poor’s rating terms those entities are not seen to be as stable, in practice I think they are no more at risk than the larger banking institutions. Indeed, those larger banking institutions may well lend to higher multiples of equity than some of the smaller banks. I hope the Minister takes a call to respond to those two points.

CRAIG FOSS (National—Tukituki) : I move, That the question be now put.

Hon LIANNE DALZIEL (Labour—Christchurch East) : I am disappointed that the Minister of Finance has not responded to the questions we have put to him. I think it is important that he responds. The question that I really have been looking for an answer to is why we cannot have a limited select committee process for the Crown Retail Deposit Guarantee Scheme Bill. That was recommended by Treasury in the regulatory impact statement. It is not often that Treasury recommends something and the Government simply turns a blind eye to it, unless there is a reason. But we have no reason; nothing has been presented to us by any of the Government members who have been asked to get up and speak on that particular matter. For them to seek closure motions after a very short debate, and to have no response at all from the Minister, is quite strange. I am surprised because I thought this Minister was capable of responding to the questions.

I will go back to the details about the consultation, which are in annex 3 of the regulatory impact statement. Banks raised their concern about the extension of the scheme, saying there was “mixed support for extending the Scheme to match the Australian scheme … Banks tend to think it is not necessary for them and risk of depositor flight to Australia is low. Finance companies”—surprise, surprise—“tend to support extension. Some Credit Unions have chosen not to opt into the DGS because they have a relatively sticky depositor base.” That is obvious. The regulatory impact statement continues: “Entities operating outside of the DGS (e.g. fund managers) are concerned about the competitive disadvantage that the Crown guarantee puts them at.” That is exactly the point that has been raised by the Hon David Parker and must be answered in this Committee tonight as the bill progresses under urgency.

I raise another issue that was also raised in the various engagements with stakeholders, as Treasury and the Reserve Bank have described them. A workers union and an economic thinktank—they are not described by name—have said that this bill is an opportunity to attach conditions on institutions’ behaviour for the extension. The two particular examples that were raised with the officials were employment protection and mortgage holiday provisions. I can understand why unions and any economic thinktank worth its salt would want employment protection at a time like this, and also that mortgage holiday provisions are absolutely vital to enable some people to survive the first redundancy their family will have experienced in a lifetime. That genuine concern has been expressed to me as a constituency MP, and I am sure constituency MPs on the other side of the Chamber will know exactly what I am talking about.

I will read the officials’ response to that suggestion. They said: “We have assessed the idea of introducing conditions on the guarantee, but consider such conditions may undermine the objectives of the guarantee, e.g. it may stop firms downsizing, when that sort of change is necessary to ensure their future viability.” That may well be in terms of the direction the Government wants to point some of the non-bank sector to, but when we are talking about the banks, I understand very well why certain unions would be pushing for a removal of the risk of outsourcing to other countries. The banking sector has seen a lot of that. If the Government is to provide this guarantee, we are talking about the taxpayers of New Zealand basically underwriting performance in this regard. It is important that we have a bit of a debate around these conditions.

The mortgage holiday provisions are another issue. As I say, that issue is not even responded to by the officials, which is a bit unfortunate because we are trying to protect depositors over the period of uncertainty that has been created by the global economic environment. That is exactly what the banks would be protecting by giving a mortgage repayment holiday on favourable terms. That in itself is a protection that could be offered during this period of economic uncertainty. It is unfortunate that we have not really been given an opportunity to debate these matters. That is what a short time—1 or 2 days—at a select committee would enable us to do.

STUART NASH (Labour) : I will talk about some of the clauses in the regulatory impact statement of the Crown Retail Deposit Guarantee Scheme Bill. I will also pose a couple of questions in the next 5 minutes to the Minister of Finance, in the hope that he will take a call and answer these questions. As has been mentioned, I think, this is a very important bill, and it has fiscal implications. It has wide-ranging investor and saver implications, and I think all of New Zealand would like to hear what the Minister of Finance has to say on those things.

As my colleague the Hon David Cunliffe mentioned, the amount of the fees collected under the current fee structure to date is approximately $87.4 million per annum. Imagine, I ask my colleagues, how much of that $87.4 million collected in fees for the retail guarantee scheme could have gone to the adult and community education scheme. If the Government put $13 million into adult and community education, it would not be in the bother it is in at the moment. But anyway, that is another story. One thing I will elaborate on, which the regulatory impact statement talks about—

The CHAIRPERSON (Eric Roy): A thoroughly different story.

STUART NASH: It is another story, but it is a very important story, Mr Chairperson. One day we will talk about that. I found the regulatory impact statement on the Internet. It is not in the bill. It is not in the bill at all. If we want to know what this bill is about, we have to go to the Internet, which I do not think is a great process.

Hon Lianne Dalziel: It would be all right if we had a select committee hearing.

STUART NASH: Well, we should have a select committee hearing, really, should we not? I will elaborate on a couple of points that my colleague the Hon David Parker talked about, which relate to economic distortions. I will read a couple of things in this regulatory impact statement. “Economic distortions include encouraging guaranteed depositors and deposit taking institutions to make riskier investment decisions since the gains from these riskier decisions will be accrued by the depositors and deposit taking institutions, while potential losses to depositors (of up to $1 million per depositor per institution) will be borne by the taxpayer. This is referred to as a ‘moral hazard’ problem. An example of this ‘moral hazard’ problem within the current DGS is that finance companies, which tend to be involved in higher-risk and higher-return lending, have grown their deposit books by approximately $880 million (19%) since the guarantee was introduced in October 2008. Before the guarantee, the deposit books of many finance companies were shrinking. In some cases, finance companies have used retail funding to replace their bank funding lines.” I think many New Zealanders would find this rather abhorrent, considering how many ordinary Kiwis have lost their life savings through the mismanagement of depositors’ money.

Let us look at the objectives in the regulatory impact statement. “The Government seeks a stable and economically efficient financial sector that supports growth in economic activity by minimising economic distortions while not exposing the Crown (and thus, taxpayers) to undue fiscal costs or risks.” I think we all agree with that. “This requires a diversity of innovative financial service providers that are prudent in their lending decisions, can adapt to changing circumstances, and investors in these institutions that understand the risks involved and can price these risks accordingly. This reduces moral hazard, ensuring well-priced credit markets. Ensuring a viable non-bank sector in the future is important to this end, particularly as it provides competitive pressures upon banks and provides services in areas not otherwise provided.” This is what I talked about in my second reading speech when I discussed the differentiation between savers and investors. The vast majority of Kiwis who lost their money in finance companies were actually savers. They trusted Colin Meads, Richard Long, and all those characters—

Hon Lianne Dalziel: Sir Colin Meads.

STUART NASH: —sorry, Sir Colin Meads—who said: “Invest in this.” Ma and pa, who watched Colin Meads play his 55 tests, said: “He knows what he is talking about. I will put my money”—

Amy Adams: Solid as!

STUART NASH: Good one! They said: “I will put my money in this.” The savers did that. I argue that the vast majority of Kiwis who lost their money were savers, but I now contend that many people who put their money in finance companies—we are talking about $880 million worth of funds that have been invested, which is an increase of 19 percent—are actually investors. They are not putting their money in there to save; they are putting their money there because they know it is under a Government guarantee.

I want to know how the Government and the Minister of Finance believe that the Government will be able to extricate itself from the situation it has found itself in, without a further run on non-bank funds, like we saw with the collapse of the finance sector. It could be that once the Government guarantee is over, people will pull their money out, because it is a risky investment, and they will put it back into a bank. That is a big concern, and it invites the question: will we be back here in a year again debating under urgency an amendment to the Crown Retail Deposit Guarantee Scheme Act called the Crown Retail Deposit Guarantee Scheme Amendment Bill of 2010?

Hon BILL ENGLISH (Minister of Finance) : There have been a couple of questions. Firstly, there has been the question of why the Crown Retail Deposit Guarantee Scheme Bill is going through the House in this form. There is a simple reason for that. It is the need for maximum certainty, particularly in respect of listed entities and any institutions that may be under financial pressure currently. A judgment was made, and I do not pretend that it is any more than a judgment, that the process we are using is the best way to ensure that certainty.

With regard to consultation, through the mechanism of the Reserve Bank consultation with non-bank deposit takers over the new regulatory structure—actually, there was a significant discussion with the sector about this particular issue over time—it became quite apparent that with only a bit more than a year to go until the end of the existing guarantee, it was quite important for the Government to move with some speed to create certainty. Members might see in the regulatory impact statement a graph that shows the build-up of deposits against the end date of the guarantee. That was clearly going to become a pressure of instability in the sector.

On balance, the Government made the judgment that it should get on with making a decision about the extension of the guarantee, and to execute that extension as quickly as is reasonable. The Government appreciates the support of Parliament in doing that.

Hon DAVID CUNLIFFE (Labour—New Lynn) : I will take the opportunity to respond to a couple of things the Minister said, and then to do a wrap on some of the macro and debt issues that are covered in Part 1 under the term “debt security”. In respect of the first matter, the Minister said in response to the Opposition that the reason we are in urgency and dispensing with any select committee process is to maximise certainty. There are two aspects of certainty. The first is in respect of timing, and the other is certainty in respect of detail. It is certainly not as adequate for Parliament to debate this under urgency with no recourse to a select committee, with no opportunity to hear the concerns of ordinary members of the public. They are the depositors, as Mr Nash said, who have, in many cases, lost their life-savings through failures in the non-bank finance sector. The questions that may be raised by the institutions themselves in public session, which may or may not be the same as they have raised in private with the Reserve Bank, deserve a fair hearing. As I said in my earlier intervention, this Government is getting a bit of a name for sham consultation processes, and it is a shame that this should be added to the list.

The Minister of Finance mentioned consultation by the Reserve Bank. The issue with that is that the public cannot see it. The public is not exposed to the arguments for and against. The process is opaque. It is behind closed doors. The public is not even fully aware of what tools the Reserve Bank has at its disposal, or the adequacy of those tools. But, having said that, the Opposition supports this bill, because on balance, notwithstanding those weaknesses, it is important that we extend the scheme under controlled circumstances to match or approximately match the Australian scheme. Otherwise, there could be a flow of funds potentially from institutions here to institutions across the Tasman that are covered by a deposit guarantee when ours are not.

One aspect that has been debated in the Committee stage is the voluntary nature of the scheme, and in particular the de-linking of the retail from the wholesale guarantee scheme. So it is instructive on page 10 of the regulatory impact statement to see these beautifully crafted words of bureaucratise: “The economic and stability pros and cons of delinking the retail and wholesale scheme are finely balanced, including a possible variant of making it compulsory for some groups only, (e.g. banks).” Well, is that not what the Opposition has been saying? If those banks, the self-touted pillars of security that the member opposite Amy Adams was keen to propound, are providing 90 percent - plus of the breadth of assets that spreads risk, and 90 percent - plus, because of their size, of the revenue streams to the Crown, is the Crown not, paradoxically, exposing itself to a higher average level of risk if it allows them to opt out?

In the end, it brings us to the bottom line. This first part is about debt security. The debt we are talking about is private debt. It is overwhelmingly bank debt—90 percent - plus bank debt. How much? New Zealand’s GDP is around $140 billion to $150 billion. New Zealand’s gross debt is 140 percent of our gross domestic product. That is 140 percent, in gross terms, of our gross domestic product, and it is rising at 10 percent per annum—that is 150 percent of gross domestic product in current trends; a year from now 160 percent, if one rolls out 2 years. At what level does that become an unsustainable level of national debt? Compare that with the Crown’s balance sheet. The Government was, perhaps rightly, concerned to ensure that it did not get out of hand. We would, too, if we were on the Treasury benches. But it is not the main game in town, nor is it the only responsibility of the Government of the day. The Government has its handle on the country’s most potent economic levers. The public elects a Government to manage the country’s book, not just the Government’s book. Therein lay the weakness of this year’s Budget. It had much to say about the Government’s debt, but nothing at all to say about the country’s debt, which dwarfs it at 140 percent of GDP. Yes, let us shrink it, I say to the member opposite, Craig Foss. It is 140 percent of GDP—and the Government’s debt is how much? In net terms it was zero. It was single-digit percents, post-crash.

AARON GILMORE (National) : I move, That the question be now put.

Hon DAVID CUNLIFFE (Labour—New Lynn) : Part 2 of the Crown Retail Deposit Guarantee Scheme Bill provides for the powers that allow the Minister to specify types of entities and criteria. It will allow the Minister of Finance to give a guarantee according to those criteria. It requires the Crown to assume creditors’ rights and sets out the responsibilities of payment in respect of guarantees. This is the meat in terms of the operations of the bill, and in that regard it is appropriate for us to turn to the relevant assessment in the regulatory impact statement of the extension options.

Three broad options were considered. One was a continuation of the status quo, which we have described as the cold turkey option. It is the option that the scheme will terminate in October 2010. As one member opposite rightly pointed out, the reason for having an early decision—although we believe the process should not have been as truncated as this—is to allow institutions to manage their books. The data is that about one-third to 40 percent of the debt is for a period shorter than 1 year in duration. About another third is for a period of between 1 year and 2 years, and that third is now within the window of the closure of the current scheme. So it is appropriate that we are considering now the future of the scheme.

The arguments in favour of allowing the scheme to go cold turkey at that point were that we would remove so-called distortions from the market, whereby the risk to investors is masked because of the guarantee scheme—that the lame were covered as much as the only partly lame. The argument was put up that by having banks and non-bank institutions with different credit-ratings put together—albeit at slightly different interest rates—the risk and the return were blended, and that that was opaque to the market. So that was the first argument. The second argument for going cold turkey was that it was the fastest way to reduce the exposure to risk of the Crown.

If the Government is to be believed when it says the recession is over, then it would seem sensible for it, following its own philosophy, to allow the banking sector to adjust to the new post-recession era by removing these guarantees altogether. However, it has decided not to do that. The reasons for extending the scheme by one year are, firstly, to roughly match the timing of the extension to the duration of the Australian scheme, thereby preventing a flow of funds from New Zealand institutions to those across the Ditch, and, secondly, to ease the sector into a post-guarantee era and to more gently match the withdrawal of protection to what the sector may consider to be a slow and, perhaps, fragile recovery.

We believe that the Government has been trying to have it both ways on the rhetoric of this recession. At the same time that the Minister of Finance has been saying the Government should never waste a good recession, and that it should prepare for privatisation and for other radical measures, like raising GST as soon as he can get the working-group to report on that—let us not waste a good crisis—he has also been telling us that gardens are growing, the green shoots are up, the sun is out, spring is here, and the worst has passed. Treasury has said it will be all hunky-dory, with only 7.5 percent of people unemployed. That is only double what the figure was before the election! That is only 2 people losing their job, their identity, their family’s livelihood, where it was one before the election—so there are serious, serious consequences.

That was the argument for a slower return to a post-guarantee world, and, on balance, that is what the Government has gone with. We believe that it was the right decision. We believe that it is right to match our scheme with the Australian scheme, and we think it is right to give the sector some time to adjust. We also think it is fair enough to have reasonably tight criteria, so that we do not mask undue risk. Although we acknowledge that it is harder for small companies to get credit ratings, we believe that there has to be some relatively objective measure of creditworthiness. That is kind of enough of a shared zone for us to vote for the bill.

But we do have major reservations, which show up in this part again, about the role of the banks. It is our considered view that it would be more secure for the Crown, in terms of the spread of risk and of less exposure to the Crown in terms of fiscal revenue streams, if the banking sector were expected to be included in both the retail and the wholesale schemes. In taking both together, the risk, while being partly masked, is bundled in a way that we believe adds more security to the system as a whole and protects the Crown from a revenue loss, because the income stream is greater. As we said in a previous intervention, the magnitude of potential loss is in the order of 95 percent bank and 5 percent non-bank. That really is a huge, huge difference. So by allowing the banks to opt out, the Government is concentrating the risk on the part of some of the smallest entities, and vastly reducing what could be described as the premiums that are paid for that insurance.

But at the end of the day the Opposition believes that mum and dad investors need to be protected. There have been enough families ruined, and, sadly, tragically, there have been too many suicides by ordinary New Zealanders whose lifesavings have been lost due to the inappropriate management of risk and companies being caught by the international recession. We certainly want to send our condolences to any families that have been so affected. It is therefore of paramount importance to us that New Zealanders have the protection of a scheme like this throughout the duration of the recession and the early phases of whatever recovery is coming, and that is a key reason why we are supporting this bill.

The technical complexity arises in Part 2, and my colleague the Hon Lianne Dalziel put very eloquently that we think more consultation here would have been appropriate. The Minister has said it was a judgment call and the Government thought it would get the bill through. The Opposition’s point of view is that even a 1-week process to allow a select committee to question officials and get matters on the public record would have been very, very useful, as we look back on this experiment, if you like, in years to come.

But the bottom line is that there is no doubt that it is worth having a statutory power for the Minister of Finance to operate under, and it is recognised that the only reason why that did not occur prior to the last election was that Parliament had been prorogued and we were in an extraordinary situation. So no one wants to go back to the dark days of September-October. We do want to regularise this matter, and the Labour Party will be supporting this part of the bill. Thank you, Mr Chairman.

PESETA SAM LOTU-IIGA (National—Maungakiekie) : I acknowledge the previous speaker, the Hon David Cunliffe—

Craig Foss: The “Prince of Ponsonby”.

PESETA SAM LOTU-IIGA: —the “Prince of Ponsonby”, of course—and the points he raised about aligning our laws with those of our partner, Australia. The Minister of Finance alluded to the reason we are pushing this bill through under urgency. There is a sense of urgency out in the financial industry. When one goes out into the industry—and does not hold bogus inquiries in Parliament—one realises that finance companies are hurting. It is true that 95 percent of the market is banks and 5 percent is non-banks, but by making that statement my learned colleague ignores the important role that non-bank finance companies play within the finance market in New Zealand, particularly for those in rural areas and for those who are not able to access capital from the big banks. Those non-bank finance companies play a crucial role for those people, and that is why this legislation is critical to the continuation of that role.

The transition, as Mr Cunliffe alluded to, will be a slow one. The deadline will be will be December 2011. That date dovetails well with the timing of the next election, given that the action of the previous Government, in October 2008, to put in place the original scheme was done with a little bit of haste over one weekend, as Mr Nash mentioned.

I turn back to the bill. One of the important clauses is clause 6(2), which states: “The minister may give the guarantee on any terms and conditions that the Minister thinks fit.” That discretion is important, given that the criteria for the Minister to grant it will be a public-interest test. What was also referred to was the fact that people have lost their lives. I have to say that it is really poor taste to mention such people within the realms of the discussion of this bill.

It is poor taste because families have suffered, and to use it for political grandstanding and political capital is just a bit out of line. But that is OK, because a finance company inquiry is being conducted by the Commerce Committee, and I applaud the members who have pushed for it, particularly my colleague John Boscawen, and the chair of the Commerce Committee, the Hon Lianne Dalziel, who has steered a good course in respect of the terms of reference for the inquiry. It will cover a number of aspects, which some people have alluded to tonight. Some people have referred to the nature of moratoria and a corporate trustee model, and all that work will be reviewed in due course under the terms of reference for that inquiry.

So this bill is about the creditworthiness of the finance companies—we will not touch on the banks. It is important that finance companies are creditworthy, and to say that a company that has, say, a B or a BB credit-rating is a company that is of high creditworthiness. Obviously some members across the aisle will misunderstand the rating system, because those types of companies are non-investment grade. They carry higher risks than the banking sector, and, appropriately, they should be priced for carrying that risk. I concur with the Minister and my colleagues in supporting this bill.

STUART NASH (Labour) : I will make one point with regard to Sam’s speech because he may have got the wrong end of the stick.

Moana Mackey: Probably; I think he is on council time at the moment.

STUART NASH: That is all right. I brought up the fact that people were suffering. The reason I brought up that fact is that Michael Cullen—the previous Minister of Finance, who put the Crown Retail Deposit Guarantee Scheme Bill into place—said that one of the main reasons that the previous Government did this, aside from shoring up the financial sector, was to guarantee ordinary New Zealanders would not be put under the financial and emotional stress that they had been put under due to the collapse of 40-odd finance companies over the preceding 2 years or so. The financial and emotional hardship of ordinary New Zealanders was not brought up in the debate to make a political point, at all; it was quite the opposite. It was brought up to say there are two sides to this bill: there is the fiscal or financial side and there is the social side. The social side is just as important as the financial side. So I correct Sam on that: there was no disrespect whatsoever; it was brought up to emphasise two points.

I make another point: when the Minister of Finance stood up to take a call on Part 1, I was very hopeful that he would answer two questions that the Labour team had posed to him earlier in the Committee stage. The first was how the Government was going to extract itself from this scheme without once again inherently damaging the non-bank centre through a run on deposits by investors in so-called high-risk funds, which are currently under guarantee. As mentioned, the majority of people who I believe are new investors in financial companies—the $880 million worth of new funds in the finance companies—are investors, not savers. I have a real concern that, once this scheme runs out, people will withdraw their funds from the non-bank sector and therefore create another financial tsunami, which may affect the finance companies.

The second question that I had hoped the Minister would answer is how long the Government will continue with this guarantee. If we look at the regulatory impact statement again, we see that it states: “Stability is aided to the extent that moral hazard is reduced, thus decreasing the likelihood of more failure in the long run through imprudent lending.” I suppose my concern is that once the market, investors, and savers—and banks, for that matter—become used to such a scheme, then extracting ourselves from the scheme will become incredibly difficult. In fact, we may find—and this is a risk—that overseas lenders will demand that such a scheme remains in place, otherwise the cost of overseas funds will skyrocket, having an adverse effect upon homeowners, the farming sector, and the business sector, as overseas lenders price risk accordingly. At the moment the international sector prices risk by looking at the risk of funds falling over. At the moment there is no risk that any funds in any institution that is in the Government guarantee scheme will fall over. How will we extract ourselves from this scheme without the risk premium on overseas funds increasing? I know we are talking about depositors here, but it still has implications across the whole banking sector. Unfortunately for the vast majority of New Zealanders, for the Labour Opposition, and, I am sure, for the Minister’s frustrated National colleagues, he did not talk about this issue, at all.

Another thing that came up in the regulatory impact statement was the statement—and this surprised me—“Letting the DGS cease in October 2010 would avoid the direct costs associated with the Treasury continuing to operate the DGS for an additional period, but forgo the fees currently collected.” The reason I found that slightly surprising was that the fees are there to mitigate risk to a certain extent, but not to a great extent. I hope Treasury is not varying the scheme simply because it can collect a whole lot of money. There are many reasons for this scheme, and one of the very, very small reasons is the money it can collect. But, as mentioned, Treasury has collected over $80 million from this so far. Maybe it should give $13 million back to the adult and community education sector—only $13 million!

That is OK; let us look at Part 2, which contains some other clauses we can talk about that, for retail depositors, are just as important as the adult and community sector is to those who are taking night classes.

DAVID BENNETT (National—Hamilton East) : In regard to Part 2 of the Crown Retail Deposit Guarantee Scheme Bill, I will touch on a point that the previous speaker made. The previous speaker from the Labour Party was talking about a so-called risk premium. Basically he was saying that international investors will require the New Zealand Government to maintain the scheme, and that to get out of the scheme would be very expensive for our Government and our country. Well, that shows the level of knowledge of the financial system that the Labour members have. Maybe I was wrong. Maybe Labour members do need an inquiry, so that they can learn what is going on in the financial system. Maybe it should not have been an inquiry. Maybe it should have been an educational trip for the Labour members. Even better than that, maybe they needed to create a forum where they could discuss things, come up with a policy agenda, and write up a series of reports to file amongst the Labour Party so that they could be framed and members could say that they are some of the great leaders of the Labour Party, like Michael Cullen. He was known for doing a series of reports so that Labour members could be comfortable with some paper behind them. Unless they have paper behind them, Labour members do not care. They do not understand—

Stuart Nash: I raise a point of order, Mr Chairperson. We are debating, if I am correct—and correct me if I am wrong—Part 2 of the Crown Retail Deposit Guarantee Scheme Bill, and so far all I have heard is Mr Bennett talk to those beside him. He keeps looking in their direction, but I have not heard one word at all about Part 2 of this bill.

The CHAIRPERSON (Eric Roy): I think the point is well made, but I could have directed it to some of the member’s colleagues at odd times, as well. By and large they have been very good, but there have been blemishes. I ask Mr Bennett to debate Part 2.

DAVID BENNETT: I think that is fine leadership from our Committee Chair, who has shown a good understanding of what both parties have been saying.

In going back to the Crown Retail Deposit Guarantee Scheme Bill, I point out that the previous speaker talked about a risk premium. Let us put it this way. If anybody had any idea of the financial system, especially the Australasian financial system, he or she would understand that in Australia and New Zealand the banks are trying to get out of retail deposit guarantee schemes. The banks in both New Zealand and Australia are in a situation now where they believe they have weathered the worst of the storm, and therefore they do not think they need this kind of legislation. That is the reality of the situation. The Labour members needed that banking inquiry so that someone could tell them that, but most other people would have found that information if they had been aware of the market and taken due diligence, rather than having to argue it through the debate on the Crown Retail Deposit Guarantee Scheme as we have tonight.

When we look at Part 2, we see that it essentially goes to the heart of the matter. It talks about what the bill entails in the sense of the Minister’s ability to specify the types of entity and criteria, the Minister’s ability to give a guarantee, recovery of money, the assumption of creditors’ rights, and payments in respect of the guarantee. The heart of this legislation is in Part 2. It contains the components that we have been talking about in regard to the Minister of Finance and the Crown Retail Deposit Guarantee Scheme.

What has happened in the financial situation in New Zealand in the last few months, and the situation is reflected by our Australian neighbour, is that due to the stability afforded to the financial system in this region through the Australian banks performing extremely well, the need for this guarantee scheme has, in essence, waned. This legislation is a very good sign for the New Zealand economy, because it shows that we do not need the props of that guarantee scheme as much as we did 9 to 12 months ago. It shows the incredible stewardship of the economy by this Government, which has managed to make the right decisions through its budgetary process, and has continued through that process to give New Zealand and international investors a sense of security about the financial leadership of New Zealand and the security of our financial markets and our banking system.

It is a good sign for New Zealand that we are able to do this. The Labour members are voting for it because they know it is a good sign. They should be applauding the National Government for making this good sign a reality within such a short period of time. But they cannot bring themselves to do that, and they have to hide behind banking inquiries and suchlike to try to console themselves about their financial woes. The guarantee scheme was started by the previous Government at the end of its political term, but it was a bit of a rush job, and it was done only because the Australians did it.

Hon LIANNE DALZIEL (Labour—Christchurch East) : I have been looking at the questions and answers that Treasury has released on the Crown Retail Deposit Guarantee Scheme Bill, and the concern I have is that they do not resolve one of the question marks I have over the whole thing. We have been talking about how urgent this legislation is, and how it must be dealt with under urgency. We are told on the Treasury website that there needs to be certainty so that people can act with certainty as soon as possible: “We want to give depositors and institutions certainty as soon as possible. Approvals for institutions to participate in the extended scheme are expected to begin from late September to early October this year.” So obviously this legislation is passed now, and by the end of the month or early next month we are into applications for approvals being lodged by institutions who want to participate in the extended scheme. The advice then states that details of institutions participating in the extended Crown retail deposit guarantee scheme will be published on the Treasury website. Essentially this is an answer to a question that a depositor or investor might be asking, such as: “Where do I find out if my deposits and investments are guaranteed now? How and when will I know if the Crown guarantee still covers my deposits after the scheme is extended?”.

One would imagine that we are rushing under urgency because there will be a relatively short period of time when applications for the extensions will be made, so that everyone can know whether their particular institution will be in the scheme. In fact, Amy Adams told the Committee that we had to deal with the bill under urgency because we were so stupid on this side of the Chamber that we did not realise that people made decisions a year in advance. But guess when applications for extensions close? If an institution does not have a credit rating yet, when is the latest that it can apply for the extended scheme? When do members think that might be?

Paul Quinn: Who are you looking at?

Hon LIANNE DALZIEL: I am running a little thing over here. Applications for extension to the scheme should be made by 12 October 2010! So the legislation does not have to be passed immediately at all. In fact, there is not the certainty for people who are currently—

Aaron Gilmore: Read the rules for the non-banking sector.

Hon Darren Hughes: The member wrote them!

Hon LIANNE DALZIEL: I think that he actually invented the finance sector. We never had a single finance company in this country until Aaron Gilmore thought of it! It is unbelievable. What that man has not contributed to his nation is not worth speaking about, but there we go.

The point I make is that it is all very well for the Government to say that this bill has to be introduced and passed urgently so that there is certainty, but in actual fact the real sector that wants this is not the banks—the banks do not want it all—it is the finance companies and the people who are making decisions as to whether they are going to reinvest in finance companies. They want to know when that will be, and that is what the wind-down, as the Government has described it, is all about. But they do not have to decide whether they are going into this until 12 October 2010.

Members opposite have said that the pricing of risk around the cost of entering this extension has been more appropriately aligned by the reference to the BB rating. I think that the members who have made those comments do not know how the current system is priced. There are two price ranges, one leading up to the BB rating and one for those who have improved to the BB rating and beyond. So to tie it back to the BB rating—and I agree with the Government that it is the bare minimum in respect of extending the deposit guarantee scheme—with the introduction of the requirements to have credit ratings under the new non-bank deposit taking legislation makes good sense. But I think members opposite are assuming that there was nothing in the previous scheme that tried to encourage these non-bank deposit taking entities to move to a credit-rating situation before they were legally required to do so in order to be registered under the Reserve Bank legislation.

I think that the Minister should respond to these questions, but if nobody else wants to have a chat about this I will continue. It is a serious issue that I would like the Minister to respond to, because everything hangs on the fact that we are not having any element of select committee input. Even the officials briefing for 1 to 2 days that Treasury recommended should happen is not happening, and the reason we were given was that this all had to be done so urgently. We have just shown that the one sector that is relying on this measure more than any other sector does not have to have its application in until 12 October 2010.

The second thing I wanted to focus on again comes from the regulatory impact statement. I have to say that finding out that the regulatory impact statement was not in the bill and having to go and download it over the tea break was not helpful. There is an issue in relation to the changes that the Government will make to the conditions around the guarantee, and the Minister may like to take the opportunity to address this. I have read the changes that Treasury is now recommending through the regulatory impact statement, and I assume that they have been signed off by Cabinet, but it is difficult to tell. Paragraph 63 of the regulatory impact statement talks about “More active management levers:” and “Redefining trigger events for default so institutions entering statutory management would not necessarily be in default.” and I think that is an interesting expansion of the scheme. It also refers to the “Change of control authorisation requirement;” and that is essentially looking at the risk of a buyer entering the market with the aim of using the guarantee to rapidly build a deposit book and perhaps not meeting other conditions that the Reserve Bank or Treasury would want to impose. I think that those three matters are serious issues, and they are worthy of debate and consideration. We have seen them included in the regulatory impact statement, and it is assumed that they will represent, or already represent, Government policy, although one can never be sure. They were certainly not mentioned in the questions and answers that I referred to.

But the questions that were raised by the unions and by the economic thinktank that are referred to in annex 3 about the other conditions around employment protection and mortgage holiday provisions simply have not been included in the regulatory impact statement other than to say: “We have assessed the idea of introducing conditions on the guarantee, but consider such conditions may undermine the objectives of the guarantee, e.g. it may stop firms downsizing, when that sort of change is necessary to ensure their future viability.” Again it is very much targeted to the finance company sector, not to the banks, yet I am sure that it is the banks or the banking unions that are looking for some security for their banking officers, who are facing contracting out to overseas placements. I think that the Minister ought to respond to this. Because we have not had the opportunity to debate these issues with officials during a select committee process, we missed the opportunity to ask ourselves whether it would be worthwhile from a public perspective to say that while we are giving this protection to investors, we will also give this protection to those who have borrowed.

The mortgage holiday provisions are clearly designed—from the promotion of those who brought them to the attention of the officials—to help people through a difficult situation in a difficult economic climate. I think that the public would find a lot of this kind of proposal much more satisfactory if they could see that there was a benefit that went beyond what they were prepared to meet the cost of, or meet the risk of, whereas the mortgage holiday provisions really do not represent a significant risk to the banks and would be a huge sign of goodwill at a difficult time, especially with so many people facing redundancy. These redundancies are affecting families that have never experienced redundancy in their lifetime. Because these issues have been raised in the regulatory impact statement, which was not tabled in the House but in fact hidden on the Treasury website, I think it would be worthwhile to have some dialogue around these issues, because they are conditions whereby I think it would be a ripe opportunity for a bit of a win-win. The public would see some broader benefit being brought to bear and at the same time it would provide for confidence between our two markets. I would like the Minister to respond to the fact that in the regulatory impact statement the banks say that they see no risk—

JO GOODHEW (Junior Whip—National) : I move, That the question be now put.

RAYMOND HUO (Labour) : Part 2 contains the main seven clauses of the Crown Retail Deposit Guarantee Scheme Bill. Clause 5 enables the Minister of Finance to set the eligibility criteria for the extended scheme. This clause is very flexible and broad. However, it does not provide the eligibility criteria. Actually, the entire bill does not outline the eligibility policy; it merely provides the Minister with the authority to determine eligibility. Based on the broad terms indicated by the Minister at the end of August, the key eligibility criteria are likely to be that applicants must be in the current scheme—except for new banks and merged entities, at the Crown’s discretion—and they must have a BB credit-rating or above. Collective investment schemes will not be eligible for the extended scheme.

Labour members have some concerns about this policy. The first concerns the requirement that companies have at least a BB credit-rating in order to be eligible. The problem is that some companies might not be able to obtain a sufficient credit-rating, having insufficient scale to meet the requirements of the credit-rating agencies. Secondly, it could cause a shake-out in the non-bank sector, resulting in further finance company collapses and further losses for mum and dad investors, while the big banks move in to mop up customers. Thirdly, the banks are able to benefit from the wholesale guarantee, without being obliged to contribute to the retail deposit scheme. To that extent, it is fair to suggest that big banks may win twice. They pay less in fees and they get a greater degree of the market share at the expense of smaller institutions, which will no longer be able to rely on the guarantee and will fall over.

My having said that, we should remind ourselves that the above policy, which has caused us such concern, has added to the whole range of policy settings that shelter the internal economy at the expense of the traded economy. I was involved in the public hearing of submissions to the multi-party banking inquiry last week. For me, listening to the submitters across the board expanded my horizons. Let me quote what was said by Mr John Walley, who was representing the New Zealand Manufacturers and Exporters Association. It is relevant to what we are talking about regarding the bill: “Banks have grown faster than the surrounding economy, indicating wealth transfers from the traded economy to the non-traded economy.” Therefore, “the ‘must-trade’ imperative must be at the forefront of our policy design if greater investment, and consequently higher growth and productivity in the export sector, and ultimately our entire economy, is to be anticipated.”

It is worth noting that in 2008 the banks made consistent growth over time of around $3.2 billion—more than the entire NZX50 less the banks. I quote again: “We doubt this is either healthy or sustainable for our economy.” Thank you.

CRAIG FOSS (National—Tukituki) : I move, That the question be now put.

The CHAIRPERSON (Eric Roy): The question is that the question be now put.

Hon DARREN HUGHES (Senior Whip—Labour) : I raise a point of order, Mr Chairperson. We have been on Part 2 for only a little over 30 minutes. It is the substantial part of the bill. It is a bill that the Opposition has not seen, it being introduced under urgency. There are other Opposition speakers; Mr Chauvel has just arrived, and wants to speak on this part. I think that for a bill that has not been seen by the Opposition and that has not been to a select committee, to accept the second Government motion of closure on the main bulk of the bill after a little over 30 minutes of debate is disappointing. I wonder whether you would consider accepting a few more calls, given that we are debating this bill under urgency.

The CHAIRPERSON (Eric Roy): I do not need any assistance. There have been nine calls. I try to be as fair as possible. There is not a great degree of divergence of views on this part. I have not been persuaded by a great wealth of new information to accept more calls. I have listened very carefully to the debate. I have made the choice that I will take the closure at this point.

Hon DARREN HUGHES (Senior Whip—Labour) : I raise a point of order, Mr Chairperson. We have now come to the title and commencement clauses of this bill. I think it is pretty fair to say we were disappointed by the shutting-down of the debate on Part 2 after such a short time, on a bill that we have seen only today and that did not go to a select committee, when other Opposition speakers wanted to take a call on it. You have been in the Chair all evening, Mr Chairperson, and you have sat through debate on Part 1 and Part 2, so you have heard a lot of the debate. Because you have heard Part 1, which influenced the debate on Part 2, I wonder what factors you are looking for here. This debate will be the only scrutiny this bill will get, and the bill is an important economic instrument. The Opposition wants to have an understanding of where you are coming from.

The CHAIRPERSON (Eric Roy): When a bill has not gone to a select committee, there is a convention that the debate on clauses 1 and 2 can be slightly extended. Given that, as Chair, I have to make some decisions about relevancy, new material, repetition, and all of that, in the same way as before. But I say again that when a bill has not been to a select committee, there is a convention that the debate on the title and commencement date can be somewhat extended. But the debate must still be relevant to the bill.

Hon DAVID CUNLIFFE (Labour—New Lynn) : Debate on the commencement and title—by convention, as you have said, Mr Chairperson—is an opportunity for a relatively broad-ranging discussion of the key themes of the Crown Retail Deposit Guarantee Scheme Bill.

I will start with the commencement clause. The commencement date of the bill is 31 December 2011, which is the date the existing guarantee scheme continues until. That carries on from the earlier date of 12 October 2010. We have said that the decision to extend this commencement date to cover a period similar to the Australian legislation is appropriate because it avoids the risk of the flow of funds to Australian institutions. We have also said we think that the amount of time spent scrutinising the bill has been inappropriate. There has been no select committee consideration, and the time in the House has been under urgency. That time will be half a day, and it will be all New Zealanders will hear.

Many thousands of New Zealanders will be worried about their funds. As my colleague Lianne Dalziel has said, people want to know whether their fund is covered. They might want the opportunity to look it up on the Treasury website. Of course, they will not find the answer, because this bill is only framework legislation. It does not even vest the whole policy; that has to be promulgated by the Minister through the Gazette and regulations. The public does not have an opportunity to see how this scheme affects them. We know that for many investors, particularly those who have been burnt in the finance company collapses, this can be a matter of huge personal consequence. So the commencement date matters, and it matters because there really was time—and I think the Minister of Finance alluded to this when he took a call at the end of the debate on Part 1—if we had been pushed, to have a contracted select committee process. It is a disservice to the public that that process was not allowed, and I invite the Minister to take a further call. Perhaps he would be willing to change his mind at this point and allow a further process of some kind, perhaps some further consultation with the public, before he promulgates his regulations under the Gazette. That might be a compromise.

With respect, Mr Chairperson, I say that if the rest of the Part 2 debate had been allowed, we would have touched on the fact that the Minister has not taken any calls since Part 1. He has not taken a single call to defend the two key issues: why we are leaving the banks out; and, when the non-banks are in, why we are setting the threshold at BB. BB is an uncomfortable middle ground in some ways, is it not? For many, particularly smaller, finance companies, the cost and difficulty of process of going to a rating agency and getting a rating would be prohibitive. Some will not make the BB cut. I am not saying that the Minister is wrong to have signalled BB, but how would the public know? The Minister has not deigned to take a call and defend that key issue. The public deserves to know from the Minister why the rating is BB. Why not BB+, BB-, or BBB? It is sub-investment grade, but it is only just below. I ask the Minister whether that is the rationale. The public would like to know, because people will be worried about their own schemes and where they fall on the rating scale.

Hon Darren Hughes: He’s good at schemes!

Hon DAVID CUNLIFFE: He is good at schemes, as my colleague has said.

Another thing the public will want to know is why the maximum threshold was set at $500,000 per institution deposit or $250,000 per non-bank institution deposit. Why bring it down from $1 million, which was the previous institution limit? Why contract that? To be fair to the Minister, I say that there may be an argument about weaning the public and the finance sector off the guarantees, but, again, it would be proper for the Minister to take a call to explain the logic. This is his policy. He signalled it a week ago, but he has not been subject to parliamentary debate on the very heart of this issue. It is appropriate that he takes a call, because this bill is the framework bill that gives the Minister the power from Parliament to the executive to promulgate those or any other regulations to manifest his policy.

Hon Darren Hughes: It’s important enough for urgency!

Hon DAVID CUNLIFFE: If it is important enough for urgency, it is important enough for the Minister to say to the public of New Zealand why the figure is $500,000 and not $1 million, why the rating is BB and not BBB, and why he is doing it this way with no select committee process and not giving the public an opportunity to talk.

The Minister is not hugely known for wanting participatory public processes. There was an earlier comment that he was desperate to shut down the parliamentary banking inquiry. The poor old National members on the Finance and Expenditure Committee had proposed an item of business to hear from the finance and banking sector around the more narrow issue of the pass-through of official cash rate cuts into retail short-term rates. They put up the motion and then, if hearsay is to be believed, a week later, under pressure from the Minister, they voted against their own motion, leaving the public to wonder what on earth was going on and what could be the motivation for that backflip. The public believes that somehow the Minister roared like a lion in Parliament about protecting the public from voracious banks. But then, after a couple of phone calls from the chairman, he rolled over and forced his own MPs to stymie the banking inquiry. His office has been flat out on the phone. We have not been able to get a phone line into the Minister’s office for the last 3 weeks. The staff were on the phone the whole time trying to stop banks and finance institutions from turning up at the inquiry. Well, tough luck. They missed out: there were 50 submissions and a dozen very substantive briefings.

What did we learn? We learnt, first, that banks have been, after all is said and done, inappropriately failing to pass through cuts to the official cash rate. It is hard to put an exact number on it but it is between 0.5 percent and 1 percent of somebody else’s money. Mr Boscawen will take note because he is very strong on those issues, and good on him. It is 0.5 percent to 1 percent of someone else’s money with no reasonable explanation in the data, despite some acknowledged increases in costs—but not enough to count.

Even more important—and this is where it comes back to the coverage of this bill—we are unearthing terrible difficulties with the impact of the official cash rate on the monetary system, because every time it is raised, hot money is sucked in, which expands credit and lifts demand, and has the exact opposite impact of what we wanted it to do, which was to cool off the housing bubble. It leaves us with an underlying problem that the Minister, we hope, will address in some way when his Tax Working Group reports, and that problem is what we do about preventing the next housing bubble. The commencement and title of this bill are about debt securities, and in Part 2 we heard that the total volume of debt securities is now 140 percent of New Zealand’s GDP, rising at 10 percent per annum, with 90 percent of it funnelled through the banks into the property sector. That is where the money that this bill will cover goes. The point is, is it good for anybody? Is it good for our manufacturers? No. Is it good for our exporters? No. Is it good for the real economy? No. New Zealand will not pay its way in the world by speculating real estate. It cannot be done. We have a trade deficit, and we have a current account deficit of which two-thirds to three-quarters is the bleed from the banking sector of offshore repatriation of profits. How big are the profits? They are bigger than the profits the entire NZX50 makes. That is how big the problem is. That is the context within which this bill fits: a financial system that is fundamentally misaligned to the needs of New Zealand.

What is the Government doing to address it? Why does the Minister not take a call? If he will not address this bill, he should tell us what his plans are to address that misalignment. New Zealand’s future depends on getting capital to people who make things, build things, sell things, and export things so that we can earn our way in the world.

Paul Quinn: It’s a pity you didn’t understand that for 9 years. Where were you when we needed you?

Hon DAVID CUNLIFFE: Now the Government benches are getting excited because we are getting a bit close to the truth.

Budget 2009 was an idea-free zone. What was the Minister doing for 9 long years in Opposition, if he came into Government without a clue what to do and had no new ideas in his first Budget? Not one. Oh, sorry, I missed one: to suspend superannuation payments for a decade. That was it. His solution to the recession was to ruin superannuation. Nobody in New Zealand believes that this Government can maintain entitlements without pre-funding superannuation. It has wrecked it for a decade.

A member points to the bill. If we had had more time on Part 2, we would not be having such a broad-ranging debate on the title, would we?

CHARLES CHAUVEL (Labour) : Mr Chairman—

Craig Foss: Turn that tie down, member!

CHARLES CHAUVEL: I am glad that members opposite, particularly Mr Foss, enjoy my tie, and long may that enjoyment last. This bill is about promoting financial stability and confidence in the banking system. As the chairman of the Finance and Expenditure Committee in the last year or so of the last Parliament, I was very proud to have contributed to that aim, along with one or two members opposite, in serving on that committee. I take a moment to remind members that Labour had actually established a work stream in this area to support some really active, quality regulation networks, to establish an environment that supported business growth and innovation, and ensure that New Zealand was a good place to invest and do business.

In particular, I recall three pieces of legislation that we saw through the Finance and Expenditure Committee, and those were the Financial Service Providers (Registration and Dispute Resolution) Act 2008, the Financial Advisers Act 2008, and the Reserve Bank Amendment Act 2008. The main requirements arising from that legislation, as many who are present in the Chamber tonight will know, were the registration of all financial service providers; to provide a means of identifying and monitoring financial service providers; to introduce prudential supervision by the Reserve Bank of non-bank deposit takers; to introduce regulation by the Securities Commission of financial advisers; to encourage professionalism and public confidence in the sector; and to provide for comprehensive consumer dispute resolution and redress mechanisms. They were important measures.

My colleague and friend David Cunliffe has just spoken about the banking inquiry, which was another measure that was spearheaded by Labour to really try to build some confidence in the system. I think it is fair to say that that inquiry demonstrates that Labour really is listening to New Zealanders’ concerns about the banking system in a fundamental way.

Paul Quinn: Is this what you learnt on the bus trip?

CHARLES CHAUVEL: That is why that inquiry was launched, along with the support of the Greens and the Progressive party, so that we could take a good look, I say to Mr Quinn, at what was really going on in our banking system onshore. The inquiry was one that, as Mr Cunliffe said, the Beehive was absolutely desperate to stop. It required National MPs, including Mr Foss over there, to vote against their own motion at the Finance and Expenditure Committee. It tried to shut down participation at that inquiry. I would like to join with Mr Cunliffe and ask the Minister of Finance to take a call and assure the Committee that neither he nor his staff or supporters made any calls to try to shut down that inquiry. But we will not hear from him. We know that. We have heard only one call on Part 1 so far. Never mind that this legislation is not being referred to a select committee and being put through the sort of scrutiny it should have. Just like in the banking inquiry, National has shown that when the chips are down it will always side with the interests of the big banks over the needs of hard-working Kiwis and working families, as well as small businesses that are starved of capital and made to pay ridiculous amounts of interest for that capital.

The inquiry received around 50 submissions, and a dozen substantive oral presentations of hearings, including those from Kiwibank and business groups like Federated Farmers, the Employers and Manufacturers Association, and the Manufacturers and Exporters Association. National’s attempt to suppress that inquiry absolutely failed. The key issues that emerged in that inquiry, and will not be addressed at all by this legislation, included strong evidence that consumers, businesses, and farmers have been overcharged by interest on short-term loans. There is a cross-subsidy between medium and long-term mortgages contributing to a new housing cycle that will be disastrous for this economy, and there are huge issues around the growing national debt.

Now 140 percent of GDP resulting largely from property loans channelled through the banking system was evidence that the Finance and Expenditure Committee also heard in its inquiry into the monetary system last year, and this Parliament still does not do anything about it in this legislation, or otherwise. It will be good to see the team from that banking inquiry doing follow-up research to report in late October. I think a high-quality report will no doubt be produced following some international peer review. That is the sort of quality process we will see from that review.

Hon BILL ENGLISH (Minister of Finance) : I will just comment on a couple of questions that have been raised. One has been the issue of reducing the coverage per depositor. Like a number of the other measures, this needs to be seen in the context of the Government making it clear that the changes in the deposit guarantee scheme signal clearly a reversion to normal market conditions at some time in the future. It is entirely reasonable that alongside increasing the pricing of the guarantee, the Government has moved to reduce the cap on the deposits that it covers. As the regulatory impact statement points out, this has the effect of reducing the Crown contingent liability and, of course, reducing somewhat the fiscal cost of a future default event. It also has the effect that some of the smaller institutions that may be dependent on a few large deposits will have their circumstances altered. That is why we have reduced the coverage—because the deposit guarantee scheme is transiting towards normal market conditions.

Someone raised the issue of the BB ratings and the cost to small institutions of getting those ratings. That is not a function of the guarantee. The fact that non-bank deposit taking institutions will need to get a credit rating is a product of the new regulations that are coming through consequent on legislation that was actually passed last year. So the guarantee itself does not cause these institutions to get a credit rating; they have to do that in the next 6 months, anyway. In October next year the extended guarantee will pick up and use those credit ratings for the purposes that Parliament intended them for—that is, to signal to investors with more clarity the trade-off between risk and return in relation to putting deposits or other investments into these institutions.

Hon LIANNE DALZIEL (Labour—Christchurch East) : I want to focus on the fact that the statement that the Minister of Finance made in announcing the extension to the retail deposit guarantee included a list of all the changes that will take effect after 12 October 2010: the fees to be paid will be changed to reflect the institution’s risk profile, eligible bank deposits will be covered up to a maximum of $500,000 per depositor per institution, eligible non-bank deposits will be covered up to a maximum of $250,000 per depositor per institution, and deposit-taking institutions with a credit rating of BB or higher can apply to participate in the extended scheme. Then it stated that collective investment schemes will not be eligible for the new scheme.

I have looked through the regulatory impact statement and I cannot find a detailed analysis of why the decision was made that collective schemes will not be eligible for the new scheme. Under the existing scheme, collective investment schemes such as portfolio investment entities, unit trusts, and superannuation schemes are able to claim on the guarantee, provided that they invest exclusively in New Zealand Government securities, or debt securities issued by institutions covered by the Crown guarantee; they do not increase their investments in guaranteed institutions that are not registered banks beyond the level that existed as at 12 October 2008; and their rules ensure that any money paid under the guarantee will be distributed only to retail members. I thought those were a relatively tight set of criteria.

I did not download the number of schemes that have been approved, but on 25 August, when the extension was first announced, I had a look at the website and I seem to recall that a number of portfolio investment entities had been accepted and were guaranteed under the existing scheme. I would really like to understand the thinking behind the decision to leave out collective investment schemes altogether. There is not even the opt-in option any more but simply a decision that they will not be eligible. What was the thinking behind that decision? I am relatively sure that some of those schemes are currently under the guarantee. I think those institutions themselves would be somewhat concerned that there is not the detailed analysis that there is of some of the other examples that I have already used in my contribution to the debate.

It is quite a serious issue, because, as some of my colleagues have raised, the real risk is having too great an influence on investment decisions and distorting the market, as it were, in this whole area. I have been making the comment for a number of years now that we cannot get rid of risk, and that there will always be risk in this financial area, because otherwise there is no return. Then we introduced the retail deposit guarantee scheme, which somewhat diminished the argument I was always making. But the scheme is only a temporary measure and it is for an extreme situation. So it does raise for me the question of why it was decided that collective investment schemes would be left out. Has there been consultation with the operators of the different schemes? And what has been the response? I have looked through all of the issues raised in annex 3 and there does not appear to be any specific reference to collective investment schemes. I may be wrong. If the Minister would like to take a call on that, it would be very useful.

Hon BILL ENGLISH (Minister of Finance) : The member raised a reasonable issue. Retaining the collective investment schemes, as the regulatory impact statement points out, would not cause particular issues. There are reasons to exclude them. The investments in collective investment schemes are not actually deposits, and only a limited range of collective investment schemes are covered under the existing scheme. Like the other decisions that have been made in the detail of the scheme, in each case where there is some judgment to be made, the Government has made a judgment in favour of moving towards tighter and more limited coverage.

• Debate interrupted.