Speech to Southland Chamber of Commerce

Invercargill Public Library
Invercargill

Thank you for the invitation to speak to you today. When I was in Invercargill in September I spoke to the Southland branch of the Institute of Financial Advisers and outlined the work that was being done in a review of financial intermediaries. I also touched on another review – of financial products and providers – which was running concurrently. Last month I announced the first raft of decisions arising out of both reviews, which we have now combined, because of their obvious interrelationships.

We commenced the Reviews with a range of objectives: to strengthen the financial sector, improve the effectiveness and consistency of regulation, reduce compliance burdens in some areas and provide a greater basis for public confidence in the financial system. Plus bring NZ closer into line with international best practice. I believe we have got the balance right, with a much more lighthanded regulatory framework than other jurisdictions, but with sufficient strength to meet the objectives.

I'd like to take the opportunity today to update you briefly on the decisions that have come out of the reviews and am happy to address any questions you may have about them. May I say at the outset that the detail is still being drafted by officials in close consultation with stakeholders. There has been a flurry of speculation in the press about some of the finer points of the proposed legislation. I am very happy to see the issues being raised and debated.
We rely on discussion and rigorous analysis to inform the process of drafting quality legislation, and it is critical to getting this right. I want to ensure there is no misunderstanding, no duplication and no unintended consequences.

However, it is important that I clarify some key concerns early on in the piece. I know Andrew Leys will have already heard me say this to the New Zealand Association of Credit Unions at their AGM just over a week ago, but I intend to repeat it at every opportunity to allay any concerns you might have and clear up any misconceptions.

There is no intention that different sectors who may be captured by the new rules will be subject to duplicated regimes. We will work closely with all sectors to ensure that we get it right.

The proposed definition of "financial advice” involves the giving of opinions, recommendations, and guidance on the buying, selling and holding of financial products or investment and savings decisions, given to a member of the public, in the course of the adviser’s business.

Financial Advisers know who they are and the professional organisations that many of them already belong to know who they are. And the government's announcements have been widely welcomed by them because they want to further professionalise the industry. It is at the margins that the detail will matter and that is why we will be working closely with all the relevant stakeholders.

The Reviews cover a broad range of topics, so rather than attempting to cover all the points and noting some of the debate in the local media about the Southland Building Society's plans I thought I would talk about the new supervisory model to increase investor confidence in the non-bank deposit taking sector, which covers finance companies, building societies and credit unions.

The model maintains the frontline supervisory role of the trustee which will be licensed in future; it provides for licensing and prudential supervision to be undertaken by the Reserve Bank; and credit ratings to provide for an independent source of comparison that the investor can rely on to assess risk.

I note with interest that some NBDT sector participants, such as your very own Southland Building Society, are assessing their new options in light of the Cabinet decisions. It is entirely appropriate that SBS considers its options given the proposed new regulatory framework. Indeed I would encourage all non-bank deposit taking institutions to similarly engage with the new proposals and determine their optimal commercial response.

That said, some of the key details are still being worked through by the RBNZ so it would be premature to draw any binding conclusions at this stage. I can assure the industry there will be ample time for deposit takers to determine their best response once final decisions re. minimum capital requirements, credit rating thresholds etc. are announced in the next couple of months.

If the SBS determines to seek registration as a registered bank, I’m sure the Reserve Bank would welcome their application.

In future, regardless of which regulatory framework is chosen, (NBDTs or Registered Bank) prudential capital adequacy standards and public disclosure responsibilities will be a common requirement for all retail deposit takers.

This reflects the importance of capital adequacy (howsoever defined) as the fundamental measure of the strength and durability of financial institutions and the importance of disclosure in enhancing market discipline and investor awareness. We make no apology for a regulatory regime that has been designed to improve investor confidence in, and international best practice compliance, of New Zealand’s financial environment.

We should not forget that the objective of the regulation is to improve the regulatory environment of the financial sector to the benefit of consumers and the vast majority of participants, as well as the nation as a whole. A stronger, more transparent financial sector is in everyone’s interest, lest we forget the cautionary tales of Western Bay Finance, Provincial Finance etc.

I'd like to address a couple of points that were raised by participants at the NZACU meeting in Wellington that I mentioned earlier.

One issue is that of credit ratings for small NBDTs and I will tell you that I am taking a very close interest in this particular issue. Under the new regime the Reserve Bank is to be the prudential regulator so this part of the work stream has now transferred to Dr Cullen as Finance Minister and minister with responsibility for the Reserve Bank. However, I have strong opinions on this matter and am determined to be kept in the loop. Cabinet has recognised that there are issues around the costs especially for small NBDTs. These might include exemptions for small NBDTs, the application of credit ratings to groups of NBDTs, or the possibility of negotating reduced fees on a collective basis with ratings agencies. Officials are due to report back on this at the end of this month.

While there is still work to be finalised, I am confident that the landscape for both credit unions and investors alike will be enhanced by the new regime.

The government remains committed to a competitive and open financial sector, and sees credit unions as playing a vital role within that wider objective.

We will continue to strive for a world class financial system that allocates resources efficiently and encourages the participation of well informed investors, just as it supports New Zealand’s economic productivity.

The development of a more consistent regulatory framework for financial services coupled with the advent of KiwiSaver are significant pillars of this vision, notwithstanding that they also represent some of the most significant changes in the financial sector for many years. I am grateful for all the contributions that businesses have made to these initiatives in recent years, and look forward to resolving any future issues in a similarly cooperative and collaborative manner.

And, speaking of KiwiSaver: I hope none of you have missed the fact that this initiative of the government which aims to improve the savings habit of all New Zealanders was launched earlier this week. I have been encouraged to see the amount of positive comment and coverage it has received not just in the media, but in the workplace and in the street.

So, hopefully KiwiSaver needs little introduction to this audience. Certainly, Andrew ( Leys: the SCC Chair) is very familiar given his invaluable contribution to the original savings product working group that laid much of the ground work for the scheme. I acknowledge Andrew's concerns about employer compulsion, but I don't accept them. Several of our leading businesses have embraced it, paying the full four per cent employer contribution from day one because they want the best for their staff and for New Zealand. The New Zealand Stock Exchange is one of them and the chief executive Mark Weldon is on record as saying the net cost in dollar terms will be far outweighed by the value it brings to talent recruitment and retention. NZX is not alone in recognising this. The same benefits apply to small and medium-sized businesses as to the big companies such as Air New Zealand.

I firmly believe that KiwiSaver will bring about a positive sea change in the nation’s savings behaviour and that this policy will in future years be viewed as a significant piece of progressive legislation that we can all be proud of. The introduction of employer contributions will add further impetus to this trend.

Can I summarise by saying that both KiwiSaver and the decisions regarding the non-bank finance sector reflect the importance that the Labour-led government places on improving New Zealand’s savings and investment environment.

The promotion of a stronger savings culture and the encouragement of greater levels of investment are key themes driving our agenda to transform the economy.

The contribution of savings and investment to a more productive economy, a deeper domestic capital base and a more prosperous and secure retirement future for New Zealanders is something we all acknowledge.

So, thank you again, for your time today. I am sure you will have questions.