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Consultation

Questions and answers: Review of the Reserve Bank Act - July 2020

Purpose and background

What is the rationale for the Review and what does it cover?

In November 2017, the government announced a two-phased Review of the Reserve Bank of New Zealand Act 1989 (the Reserve Bank Act). The goal of the Review is to modernise New Zealand’s monetary and financial stability policy frameworks and the Reserve Bank’s governance and accountability settings. The Review is being conducted in two phases. Phase 1 (which is now complete) focused on improving the Reserve Bank’s monetary policy framework.

Phase 2 is a wide ranging review of the Reserve Bank’s financial stability role and broader governance arrangements. The terms of reference for Phase 2 were released on 7 June 2018. Much has changed in the international financial environment and with financial system regulation since the Reserve Bank Act of New Zealand 1989 was passed. The scope for Phase 2 will enable the Review to ensure the Reserve Bank Act is fit for purpose and aligned with what the government considers will provide a strong, flexible, and enduring regulatory framework that enjoys broad public and industry support.

Everyone benefits from a sound and resilient financial system. The Review will ensure that the framework within which the banking sector is regulated and supervised enables the Reserve Bank to perform its role effectively. The Review also considers the legislative basis for managing and resolving bank distress.

Who is conducting the Review?

A Review team jointly resourced by the Treasury and the Reserve Bank are undertaking the work. The Review team is governed by a steering committee jointly chaired by the Treasury and the Reserve Bank.

An Independent Expert Advisory Panel (the Panel) advises on key issues to support the work of the Review team and the steering committee. The Panel includes Suzanne Snively (Chair), Malcolm Edey, Girol Karacaoglu, Barbara Chapman and Belinda Moffat.

Why is the Reserve Bank Act of New Zealand 1989 being split into the Reserve Bank of New Zealand Bill and a planned Deposit Takers Act?

The changes to the legislative framework will be made through enacting two separate pieces of legislation to replace the Reserve Bank of New Zealand Act 1989 – the Reserve Bank New Zealand Bill and a future Deposit Takers Act.

Splitting the legislation relating to the establishment and governance of the central bank from the legislation relating to prudential powers over deposit-takers is common internationally (e.g.  the UK and Australia do this) and should aid clarity.  It also aids the review process, since the Reserve Bank of New Zealand Bill can be introduced first, so the new governance arrangements for the Reserve Bank will be in place when it starts using the new prudential powers that will be enacted in the Deposit Takers Act.

The Reserve Bank of New Zealand Bill sets out the overall governance and accountability framework for the Reserve Bank across all its functions.  It will also provide for the Reserve Bank's central banking functions and incorporate the framework for monetary policy.

The planned Deposit Takers Act will integrate the two different legislative frameworks for deposit taking institutions (banks and non-bank deposit takers) and establish the deposit insurance scheme.  This will be a flexible framework to allow for the regulation and supervision of different types of deposit takers in a way that is proportionate to the risks that deposit taking entities pose to the financial system.

In the period between the enactment of the Reserve Bank of New Zealand Bill and the Deposit Takers Act, the current regulatory framework for banks will continue under the 1989 Act, which will be renamed the Banking (Prudential Supervision) Act 1989.

What are the next steps in the Review? When will legislation be enacted?

The Reserve Bank of New Zealand Bill, which will implement the institutional reforms to the Reserve Bank, was introduced in July 2020. The Bill is expected to be referred for select committee consideration in late 2020 and, subject to progress through Parliament as projected, will be enacted in the second half of 2021. The reforms are expected to then come into force in mid-2022.

Prudential regulation and the design of the depositor insurance scheme are being consulted on in the third phase of consultation on the Review, known as C3, with consultation timeframes extended until 23 October 2020 because of the response to COVID-19. Final policy decisions are expected to be made in the first half of 2021, with the legislation to be introduced in late 2021. The subsequent legislative process will include several further opportunities for external input, as shown in the diagram below.

Timeline of the Reserve Bank of New Zealand Act Review - July 2020

View in full size: https://treasury.govt.nz/sites/default/files/2020-07/qanda-consultation3-july2020.png

What decisions has Cabinet made in relation to the governance of the Reserve Bank?

The Government has now introduced the Reserve Bank of New Zealand Bill, which modernises the governance and accountability arrangements for the Reserve Bank. Key changes progressed in the Bill include:

  • The establishment of a governance Board that will be responsible for the functions of the Reserve Bank, except those undertaken by the Monetary Policy Committee.
  • Providing the Reserve Bank with an overarching financial stability objective, in addition to its economic objectives.  The Reserve Bank’s main objectives, set out in the Bill, will be:
    • the economic objectives of achieving and maintaining stability in the general level of prices over the medium term and supporting maximum sustainable employment; and
    • the financial stability objective of protecting and promoting the stability of New Zealand’s financial system.
  • The Minister of Finance will be required to issue a Financial Policy Remit, providing matters that the Board should have regard to when setting its strategic objectives in relation to financial stability and making significant policy decisions about how to pursue this objective.
  • Accountability will be enhanced through greater alignment of reporting and monitoring requirements with State Sector practice.
  • Coordination and cooperation among regulatory agencies will be enhanced through mandating the role of the Council of Financial Regulators and by improving the ability of the Reserve Bank to share information.

We anticipate that the Bill will be referred for Select Committee consideration in late 2020.

There is more detail on this in the December 2019 Review Update and Q&A released at that time.

What decisions have been taken by Cabinet in relation to the Deposit Takers Act?

Cabinet also made additional in-principle decisions in regards to the regulation of deposit takers, in December, including the design of the deposit insurance scheme. These decisions include that:

  • Non-bank deposit-takers and banks will be subject to a single prudential regime, which will allow tailoring of requirements to different entities as appropriate.
  • Standards (rules set by the Reserve Bank but subject to parliamentary review) will be the primary tool for imposing regulatory requirements on deposit-takers.
  • Accountability requirements on directors of deposit-takers will be increased.
  • The Reserve Bank’s supervision and enforcement powers will be strengthened, including an on-site inspection power and a more graduated enforcement and penalty framework.
  • The crisis resolution framework will be enhanced and clarified.
  • Deposits at licensed deposit-takers will be insured up to a limit of $50,000 per depositor, per institution.

There is more detail on this in the December 2019 Review Update and the Q&A released at that time. 

Reserve Bank of New Zealand Bill

When will the RBNZ Bill become law?

We are working on the basis that the legislation will be passed in the second half of 2021 and come into force in mid-2022. This will provide time for the new board to be appointed and for the Bank to transition to the new governance and accountability frameworks set out in the Bill.

When will the new Board be appointed?

Subject to progress through Parliament, the Bill will be passed and become an Act at Royal Assent in the second half of 2021. In that case, the new Act will then commence on 1 July 2022, at which point the new board will take on its governance responsibilities and the current board will be disestablished.

Work will start on the required composition of the new board after the election period, in order to allow the agreed appointments process to start in early 2021.

What will happen to the existing board?

Subject to the anticipated timeline being met, the new Act will commence on 1 July  2022, and at that time the current board will be disestablished.

Until its disestablishment, the current board will continue to focus on its critical roles of reviewing the performance of the Reserve Bank and its office holders and providing advice to the Governor on the performance of the Reserve Bank’s functions. The Bill provides for the current board to deliver a final annual report on the performance of the Bank prior to commencement of the new legislation.

Will there be another chance to comment on the RBNZ Bill?

The public will be able to comment further on the Bill during the select committee process.

What are the main features of the planned new Board?

As proposed in the Bill, the Board will have the following features:

  • the Board will be fully non-executive
  • the Board will be comprised of five to nine members
  • Board members would be able to serve a maximum of 10 years or three terms that total no more than 10 years
  • Board members must have skills and experience relevant to the position ̶ for example, skills and experience in banking, insurance, finance, prudential policy, prudential regulation and supervision, or governance; and
  • a person will be disqualified from being on the Board where the person is employed by, or is a director of, a regulated entity, or is a member of the Monetary Policy Committee, in addition to the usual statutory disqualification grounds for Crown entity members.

How will board members be appointed and removed?

The Bill proposes the current process for the appointment of Board members by the Minister will continue to apply, with the processes to be reviewed after three years. In addition, the Minister will be required to consult with other political parties in Parliament prior to recommending the appointment of a Board member. Board members may only be removed from office by the Governor-General, on the advice of the Minister.  The grounds for removal will align with the concept of 'just cause' set out in the Crown Entities Act 2004.  This is a high bar, and will protect the independence of the Reserve Bank.

How will the Governor be appointed and removed?

The Minister will continue to appoint the Governor from candidates recommended by the Board.  The Board will be required to ensure that candidates for governor have the right skills and expertise for the role. 

The Governor may only be removed from office by the Governor-General on the advice of the Minister, which may be on recommendation of the Board.  The grounds for removal will be set out in the legislation. 

How will the Reserve Bank be monitored?

The responsibility for monitoring the Reserve Bank will be shifted to the Treasury, reflecting the shift from a monitoring board to a governance board, and aligning with normal Crown entity practice. This change, together with provision for broader oversight by the Office of the Ombudsman and the Auditor-General, will strengthen the monitoring of the Reserve Bank and provide greater assurance in relation to its ongoing performance.

Are there any changes to the Monetary Policy Committee or any other changes to monetary policy?

Minor changes include that the number of terms an internal Monetary Policy Committee (MPC) member may serve will be increased to a maximum of three five-year terms. The statutory position of Deputy Governor will be removed.  Under the current legislation, the Deputy Governor is a member of the MPC and acts as chairperson where the Governor is absent.  Under the new arrangements, the Board would be required to nominate an alternative chair of the MPC.  This person would have to be an internal member of the MPC.  The statutory position of the Deputy Governor on the MPC will be replaced with an internal position. 

Otherwise, the Bill carries over the changes made to the monetary policy framework in 2018 as part of Phase 1 of the Review of the Reserve Bank, including providing the Bank with a new employment objective and the creation of the Monetary Policy Committee.

What decisions have been taken by Cabinet in relation to the Deposit Takers Act?

Cabinet made additional in-principle decisions in regards to the regulation of deposit takers in December 2019, including the design of the deposit insurance scheme. These decisions include that:

  • Non-bank deposit-takers and banks will be subject to a single prudential regime, which will allow tailoring of requirements to different entities as appropriate
  • Standards (rules set by the Reserve Bank but subject to parliamentary review) will be the primary tool for imposing regulatory requirements on deposit-takers
  • Accountability requirements on directors of deposit-takers will be increased
  • The Reserve Bank’s supervision and enforcement powers will be strengthened, including an on-site inspection power and a more graduated enforcement and penalty framework
  • The crisis resolution framework will be enhanced and clarified
  • Deposits at licensed deposit-takers will be insured up to a limit of $50,000 per depositor, per institution.

There is more detail on this in the December 2019 Review Update and the Q&A released at that time. 

What does the third consultation (C3) cover?

  • The purposes of the Deposit Takers Act – the proposed purposes of the legislation and the specification of the Reserve Bank’s decision-making principles
  • The regulatory perimeter – the definition of a ‘deposit-taker’ and the consequential treatment of entities that sit on the boundary of that definition
  • Standards and licensing – the permitted scope and process requirements for prudential standards and the licensing requirements for deposit takers
  • Liability and accountability – the liability of entities and individuals for breaches of the Deposit Takers Act and the proposed accountability framework for the directors of deposit taking entities
  • Supervision and enforcement powers – the supervision powers of the Reserve Bank and the enforcement tools available to it to effect corrective action
  • Resolution and crisis management - the design of some key elements of the new framework, the framework for implementation of the new bail-in powers and the application to deposit takers of CIMA statutory management as identified in the Corporations (Investigations and Management) Act 1989<
  • Depositor protection – the design of the deposit insurance scheme, including: the scope of insured products; the functions and governance of the insurer and how the deposit insurer will be funded. The option of giving depositors preference, or priority, over other unsecured creditors, is also discussed.

Why was the third round of consultation extended?

Considering the extraordinary challenges presented by COVID-19 to New Zealand’s financial system, the Government extended the third round of consultation for Phase 2 of the Review of the Reserve Bank of New Zealand Act 1989 by six months from the original deadline for submissions. The Government recognised that the attention of regulatory agencies, as well as industry and other stakeholders, was best focussed on addressing the immediate challenges created by COVID-19.

Submissions will now close on 23 October 2020. Final policy decisions are expected to be made in the first half of 2021, with the legislation to be introduced in late 2021.

The consultation process

How can I contribute?

As noted above, the final round of consultation on prudential matters and depositor protection has been extended until 23 October 2020.

All written feedback should be emailed to [email protected]. Alternatively, responses can be sent to the address below:

Phase 2 of the Reserve Bank Act Review
The Treasury
PO Box 3724
Wellington 6140

There will also be opportunities to review the Reserve Bank of New Zealand Bill at the select committee stage, which is expected to start in late 2020.

Will my correspondence be made public?

A submitter may request that their correspondence be anonymised, and for all or part of their correspondence to be withheld from publication. The Review team will consider all requests to withhold information but reserves the right to release any information in compliance with the requirements of the Official Information Act 1982.

What information will be made available?

Background and supporting papers, including more detailed information on some of the topics being consulted on, are also available in addition to the main consultation documents.

In the spirit of conducting the Review in an open and transparent manner, the Review team intends to proactively release additional information relating to Phase 2. This information includes:

  • papers and presentations provided to the Panel
  • minutes of Panel meetings
  • reports to the Minister of Finance
  • Cabinet papers
  • stakeholder submissions.

Further information about Phase 2 can be found at Reserve Bank Act Review.

Last updated: 
Tuesday, 28 July 2020