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ANDREW BAYLY (National—Port Waikato): This is a very technical bill and I don't propose that we're going to spend a lot of time discussing it. But I think there's some elements of it that would be useful to just make sure that everyone is aware of what this bill is about.
My first question to the Minister—and I do acknowledge that he's in the chair and thank you for coming down this afternoon—I suppose the first question relates to the role of the Reserve Bank and the Financial Markets Authority (FMA) as a regulator for financial market infrastructures (FMIs) and there's–both organisations have a role in it, and that's quite a fundamental sort of question. I know there's been a lot of debate about it. I was just particularly interested in the Minister's view on what the roles of the Reserve Bank and FMA are, and how that's going to work, and how they're going to resolve differences over time.
Hon GRANT ROBERTSON (Minister of Finance): I thank the member for his question, and it is one that's been raised throughout the debate. Part of it relates to the way New Zealand organises itself, so obviously when we're dealing with prudential matters, that is primarily the responsibility of the Reserve Bank; when we're dealing with matters of conduct, that tends to be the responsibility of the Financial Markets Authority—although when it comes to banks in their banking role, that distinction is not quite as clear. But for the purposes of FMIs, what we're talking about here are two distinct parts of the regime.
When we're dealing, for example, with risk management issues around any FMI, whether it's got adequate financial resources to undertake the work that it's meant to undertake, that is primarily a prudential matter and would then be the responsibility of the Reserve Bank. If we're thinking about conduct such as effective disclosure, whether or not the right rules are in place, whether they're fair and transparent, that is properly part of the FMA's role.
The way that we deal with this generally, where there might be any overlaps, is through the Council of Financial Regulators—"CoFR", as it's known; it's actually an entity—CoFR—that I have been encouraging the regulators to use more often where there might be areas of disputed territorial ground. In fact, we've been looking at, through the Reserve Bank amendment process, giving some more statutory recognition to the Council of Financial Regulators—which includes also the Commerce Commission, along with the FMA and the Reserve Bank—because there will be, from time to time, issues of territorial responsibility.
However, in the case of this particular bill, I think that the responsibilities are well outlined, and both the Reserve Bank and the FMA are aware of where they are. It will be, obviously, for those who operate FMIs to be able to be aware of that—all of those people already interact with both the Reserve Bank and the FMA, so I don't think there'll be a major problem there. But the member is alluding to an interesting wider issue around the different roles of regulators in our financial system, and I'll more than happily engage with him on that in the future because I think there is something in that.
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ANDREW BAYLY (National—Port Waikato): I thank the Minister for that answer, which was very good. I suppose it gives rise to two issues. One is the capability of both the Financial Markets Authority (FMA) and the Reserve Bank. As we all know, this is a very detailed, technical issue that most people don't understand well. So first question, I suppose, is to what extent can the Minister assure us that (a) there is sufficient capability and capacity in both those organisations to deal in this very technical matter. And the second question relates to his answer just before, does that mean if I'm a financial market infrastructure (FMI) and I've got a dispute, can I go to the Council of Financial Regulators? Is that the independent? Is there a way for an FMI to appeal to seek redress to deal with that issue if that arises from time to time?
Hon GRANT ROBERTSON (Minister of Finance): Thank you for that, Madam Chair. I'll take some advice on the second point of the member. There isn't a direct route to the Council of Financial Regulators (CoFR), so that's the first thing I can say. But that, as I said, is a potential future role of CoFR. Its statutory recognition could potentially pick something up. In terms of what they do in terms of rights of appeal and so on, I will get some advice on that and come back to the member in short order.
On the member's first question, my answer is simply to say I think both the Reserve Bank and the Financial Markets Authority do a very good job on behalf of New Zealanders. We recently had the new funding agreement for the Reserve Bank, which I can't quite remember the member's position on, actually, but if I do recall there might have been some concerns raised by the member about the fact that the Reserve Bank's budget and staffing have increased. I believe one of the reasons for that was in order for them to be able to fulfil their roles under this very piece of legislation. So I can thank the member for his rapid conversion to the importance of this piece of legislation for them. Similarly, we've increased funding last Budget to the Financial Markets Authority. They both perform important roles.
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ANDREW BAYLY (National—Port Waikato): Thank you, Minister, for that response. I'd just like to straighten the record slightly: the issue around the funding of the Reserve Bank was that it's highly, highly unusual to see a 50 percent increase in the Budget without undue scrutiny. I think that was the issue that we were raising, because we are careful managers of the economy and we are also particularly concerned that we get value for money from our Public Service. That was the issue. It doesn't necessarily mean, or should imply, that we don't think this is an important role, but thank you for raising that issue, Minister. So I am looking forward to that answer that you said you would address.
I suppose the other issue deals with the designation. So, as I understand it, there are basically two courses, and it relates to whether you, as a financial market infrastructure (FMI), are systemically important, and then you obviously have tier 1 and tier 2. So, as I understand it, you can either elect an FMI—I can elect to become a systemically important one, and therefore tier 1—or the Minister and the regulators can impose that on the FMI. So I'd be interested to know what that process is and how he sees that working, and who will be the lead, particularly in the second aspect. Will it be the Reserve Bank in the lead of that or will it be the Financial Markets Authority?
Hon GRANT ROBERTSON (Minister of Finance): Just popping back to the member's earlier question that he asked, I'm informed that there are no appeal rights per se but that, within the legislation that we're passing today and within the framework of regulation that the two regulators use, they are obliged to take into account, for example, the impact of compliance costs, do assessments overall on the impact of the changes that are being made here. So, no, there's not a direct appeal arrangement possible, but I think the track record of both agencies would indicate that they are ones who will not be putting undue costs on those that come before them.
In terms of the second matter, as I'm sure the member is well aware, the flexibility that we've built into this means that, actually, both the Reserve Bank and the Financial Markets Authority are in a position to be able to do that. Primarily, it will be the Reserve Bank, I suspect, because, at that point, it is about the prudential importance of a financial market infrastructure (FMI) to the overall system.
Madam Chair, I don't propose to take long calls here, because, actually, this bill is largely agreed, but I do think, while we've joked around a little bit during the process of this bill about what FMIs are, if you think about the significance of payments systems to the way we go about commerce—and I mean commerce in all its senses; individuals' work all the way through to banks and beyond, to other financial institutions—those payments systems are genuinely important to the operation of our banking system and of financial stability. Therefore, the Reserve Bank is likely to identify those FMIs that it wants included. The ability in the law for people to self-identify is actually important, I think, for building confidence in the public, and I suspect, for those who are interested in this area, for some FMIs, there may be an incentive to do this because they want people to see them as important and systemically important. That will then be a decision for both the regulators to be able to take, but it will primarily be the Reserve Bank because of the prudential rules.
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ANDREW BAYLY (National—Port Waikato): Thank you. Thank you for the answers. I suppose it gives rise to two issues. The first one is, given the scale and significance for the financial markets of financial market infrastructures, whether, in fact, there should be a mechanism—and I'm just very keen to understand from the Minister why there is no direct mechanism for complaint. Because, whilst I have a great deal of respect for the Financial Markets Authority (FMA) and the Reserve Bank, I don't need to remind the Minister that there have been issues, for instance, of differences of opinion between the Reserve Bank and certain insurance companies, and that has led to a long-running issue that has only recently been dealt with. So there are, from time to time, quite significant issues that arise. So my question is: why not? Why not have the ability to have some appeal right, as happens in many institutions?
The second thing is I'd quite like to understand from the Minister what the expected criteria are if the Reserve Bank or the FMA designate someone in a certain tier, or systemically important—what are the criteria they're going to use? Other than, obviously, scale and history, are there any other criteria that have been designed, and when might we see those criteria?
Hon GRANT ROBERTSON (Minister of Finance): As the member will well be aware, the independence of the Reserve Bank would mean that they will go through that process. It is our job to set the framework. He has already identified the areas, in his own statement, around scale, influence on the financial system, and the importance that the regulators themselves put on those particular financial market infrastructures in their own work. So that will be their job; it is not, in my opinion, the job of politicians to create that. That's what we do when we give the regulators the powers that they have.
On the point of appeal—I was just, again, checking with officials—there isn't a large precedent around the world for the kind of appeal rights that the member is talking about. I think that is because there are regulatory review mechanisms and there are ways that this Parliament reviews its work; there are ways that we review the activities of the Financial Markets Authority and the Reserve Bank. So, I think, probably, it's simply not a system that has seen itself go through the courts. Bear in mind that the basis of this legislation comes from, for example, the International Monetary Fund and their appraisal that they did of our system three or four years ago, and we've used a lot of international norms—and so, I suspect, for the member's benefit, that is where this has come from. Obviously, we'll see how the regime works, and if there is a need to come back one day, I look forward to the member's member's bill to put in process something of this sort.
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DAMIEN SMITH (ACT): Thank you, Madam Chair. Thank you, Minister. Just on the time frame, because it relates to a couple of questions I have, I believe this began, what, 2015-16, as a process?
Hon Grant Robertson: Yeah.
DAMIEN SMITH: Yeah, and, obviously, the payment system's changed pretty dramatically since then—like, there's no regulation or registration requirements for something like Apple Pay, as an example. So do you think the bill addresses (a) access for new entrants, (b) that international entrants are regulated, and that the Financial Markets Authority and the Reserve Bank were, sort of, totally up to speed with that sort of dynamic?
Hon GRANT ROBERTSON (Minister of Finance): Yeah, I thank the member for his question. Just on the time frame, my history on this bill doesn't go back quite as far as 2015 or 2016, but I do know that Cabinet made its initial decisions in April 2017 and then there was a change of Government. Obviously, we took another look at it, in part because we were wanting to make sure that it was keeping up with changing processes. So, on December 2018, we made some further decisions. It took a little bit of time to get its place on the Order Paper, then COVID happened, and now we find ourselves here in March 2021. So the wheels of good legislation have turned slowly here; I do acknowledge that.
In terms of whether or not we're putting ourselves in a position of being able to cope with new and emerging forms of financial market infrastructures (FMIs), that is one of the essences of the bill: a flexible legislative environment that means that, actually, we can apply these to whatever FMI. So we're not deeply prescriptive here. We've just had that conversation with Mr Bayly around what we consider to be a systemically important FMI. We've given ourselves the flexibility to be able to have the regulator, effectively, decide that.
One of the issues, for example, is when you look at some of the potential provisions in here. It has been raised—it might've been raised in the select committee process: cryptocurrencies and how the exchange of cryptocurrencies potentially could work. We've tried to create a bill that can deal and cope with that if it's needed to, rather than dropping down to very, very detailed descriptions now. We're providing the regulators with the space and the power to be able to regulate those without having to prescribe in law individually how those particular FMIs might work. So I think it's a good bill in that regard, in that it gives the policy and regulatory space for new FMIs to be included within the framework.
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ANDREW BAYLY (National—Port Waikato): Thank you. So just in light of what we were talking about before, clause 78 sets out certain powers to maintain and protect financial market infrastructures (FMIs) and specifically the ability for regulators to issue directions to operators, and the removal of directors. It gives two scenarios when that can occur. One is when the FMI is distressed and the other one is when it's appropriate given the jurisdiction of the FMI. So I suppose, just in light of that appeal process, what are the specific times that a direction can be issued, which, as you will know, is very confrontational when standard FMIs' contingency plans are inadequate to deal with the situation?
So this becomes a point of judgment, so I come back to this earlier question. I know you gave me a response before, Minister, but there are times when it is an absolute point of judgment, and these organisations are not insignificant—when I talk about the FMIs, they're not insignificant. They're large financial institutions carrying a lot of risk. So again, I'm just highlighting, actually, that the bill already identifies one of the potential areas where we could have an issue. The other—I might let you discuss that.
Hon GRANT ROBERTSON (Minister of Finance): I take the member's point, and, again, this is probably the balance between Damien Smith's question and the question that the member is asking: how do we get sufficient flexibility to be able to deal with any unforeseen way in which there is an issue for a financial market infrastructure (FMI) versus giving a framework to the regulators, and I would note for the member that both the purposes and the principles of how a regulator behaves are outlined in the Act. So should there be a concern from an FMI, they do actually have something to point to, and it might be useful for the benefit of members to note that, as the member has noted, clauses 77 and 78 deal with the purpose, being maintaining continuity of activities, dealing with threats to stability, ensuring a wind-down of a systemically important FMI is orderly, and then the regulator is given a set of principles that they have to use, and these include the need for an FMI's rules to provide certainty and predictability, the need to protect the interests of an FMI's participants and creditors, and the importance of avoiding financial risk to the Crown.
So there is actually a set of principles under which the regulators have to operate, and I think that the way in which we have drafted this legislation is so that that is flexible enough but gives everyone good guidance as to how to operate.
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DAMIEN SMITH (ACT): Just to add, Minister, to the point about alignment, a lot of financial market infrastructures operate on a trans-Tasman basis, and obviously the Australians have got some pithy work done in this area. Do you think that this bill allows us to honestly say that those things have been aligned for those operators?
Hon GRANT ROBERTSON (Minister of Finance): I certainly don't have any advice to the contrary, and, again, we have sought through this legislation to align ourselves with international best practice across all of the different aspects of the bill. So obviously Australia is involved in those international organisations and discussions, and I have not had anything drawn to my attention. We have regular dialogue with our Australian colleagues; this has not been raised. I'm not aware of it being raised by the Reserve Bank's or Financial Markets Authority's equivalents, either. So to the extent that I'm aware of it I think we've got good international alignment, and I would certainly hope that that would mean we've got good trans-Tasman alignment.
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ANDREW BAYLY (National—Port Waikato): Thank you, Madam Chair. Just in that same vein, the bill provides for a financial market infrastructure (FMI) operator to be placed into statutory management under certain conditions. I suppose my question is: the bill goes on to allow for what is called the new operator scheme, which basically means that the business of the FMI can be transferred to a new operator—so I suppose it's a pretty Draconian measure that's the last resort—so I'd be keen to know from the Minister, you know, what are the parameters around that, on what basis and when it would take place, what would happen to the existing rights of the directors, and what would happen to the liabilities that were transferred? So they're quite big issues, because at that point, you're really talking about something quite significant.
Hon GRANT ROBERTSON (Minister of Finance): Thank you, Madam Chair. Look, I understand the point that the member's making, and I think the first issue to understand is that it is very much a last resort situation, and the bill, in fact, outlines the fact that you would take some time to get to this point. But what we've lacked from our legislative regime up to this point is the ability to deal with these in such a clear and consistent way.
So I note that—I think it's clauses 92 to 97 that run through the duties around statutory management. It includes dealing with problems as quickly and efficiently as reasonably practical, conducting it in a way that best protects the interests of the participant and the creditors, and the statutory manager is also required to consult the regulator and comply with the regulator's direction. So, again, you've got quite a clear set of principles by which someone would be operating in the unlikely event that we ended up here.
This also comes back to an earlier comment I made when we were discussing appeal rights: that there are legislatively prescribed things that, in this case, a statutory manager would have to have regard to when exercising their powers. That includes the importance of minimising costs and uncertainty and the importance of ensuring that any losses are allocated fairly and efficiently. The principles also include the importance of consulting the participants—the financial market infrastructure participants and indirect participants—on decisions wherever reasonably practicable.
So I feel like that actually does put some limits—for the member's word that he used within his question—around the work of a statutory manager. Quite clearly, it's a last resort option, but I think it's important that it's there so all participants have absolute clarity with what they're working with.
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ANDREW BAYLY (National—Port Waikato): Thank you, and I acknowledge the Minister's response. Thank you for that. I think of one of the issues with all bills that pass through the House: what happens with the regulations that follow that are not subject to parliamentary oversight? There is an issue around clause 31(2)(b), which is the scope of compliance costs, and it says that the regime will be largely determined by the standards set by the regulator under that provision, and the requirement to have a financial market infrastructure (FMI) contingency plan, in clause 48. So I suppose the big thing about this is the actual costs that will be levied on FMIs and to what extent we can be assured that they're going to be reasonable, constrained, but still meet the requirements of making sure that we've got an active, robust market.
Hon GRANT ROBERTSON (Minister of Finance): Thank you, Madam Chair. Yes, and that comes back to the impact assessments I mentioned earlier on. This is exactly why the regulator has to bear in mind, take into account, costs that will fall on people. Again, this is an example, in our system of Government, of where we have these regulatory bodies. They have a job to do. It is important, when they undertake that work, that they understand Parliament's intention. I think the bill does that. But we don't have a system whereby we go into each and every one of those regulations, and so this is a fairly standard approach, one where we have a model where the regulators are allowed to get on and do their job.
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DAMIEN SMITH (ACT): Yeah, I guess it's important to note that no financial market infrastructures actually failed during the global financial crisis and that this is more about the plumbing around that system. But there's a lot of oversight around the Financial Markets Authority and the Reserve Bank on the, sort of, doomsday scenarios of what happens if there's failure, what happens if there's—you know, these are not banking structures per se, but the banking industry has a good discipline in the sense that they're asked to report quarterly and annually on the state of their risk management. I just noticed in the bill—do you think it's a positive addition to maybe have a clause which actually finds the needs of those two regulators to get information back from the market place as opposed to just waiting for something drastic to happen?
Hon GRANT ROBERTSON (Minister of Finance): I think in general both the Reserve Bank and the Financial Markets Authority are forward-leaning into the organisations that they are required, on our behalf, to monitor and regulate. You know, I take the member's point, firstly that in financial market infrastructures we're dealing with a hypothetical, in a sense, because this has not occurred in New Zealand. But we were certainly given strong advice by the IMF when they came out and did their assessment that we needed regulations and laws because the significance of a failure would be so high that we actually should do this. So I think, on that point, I accept what the member's saying.
I don't know that a specific provision is required in the law to require them to seek information. I think the framework gives them the tools they need, and their mode of operation is to lean into the sectors that they monitor. I think the point the member might be making is this is different from a bank and it is not necessarily easy to see from the outside. I guess my response to that would be to say we need to let the Act operate and ensure that we're keeping an eye on that, and if we have a concern then perhaps we could come back to it. But I believe that we should have confidence in the regulators to do their job.
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DAMIEN SMITH (ACT): Thank you. Because they're non-cash payments, there is a scenario where these things can get too big to fail pretty quickly, and it affects the consumers and it affects the market, and that cuts across things like Afterpay, or something that goes large, privately funded over a short period of time across two jurisdictions. I just wanted to point out that with the plumbing sometimes there's a lot of stuff that gets pushed through it, and it would be good to know in advance as opposed to when it comes out the other end.
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CHAIRPERSON (Hon Jenny Salesa): The question is that the Minister's amendments set out on Supplementary Order Paper 19 be agreed to.
Amendments agreed to.
Parts 1 to 6, Schedules 1 and 2, and clauses 1 and 2, as amended, agreed to.
House resumed.
CHAIRPERSON (Hon Jenny Salesa): Madam Speaker, the committee has considered the Financial Market Infrastructures Bill and reports it with amendment. I move, That the report be adopted.
Motion agreed to.
Report adopted.
Financial Market Infrastructures Bill — In Committee
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