Purpose and background
What is the rationale for the Review?
Last year the government announced a two-phased review of the Reserve Bank of New Zealand Act 1989 (the ‘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.
With respect to the framework for financial stability – which encompasses the second phase of the Review (Phase 2) – much has changed in the international financial environment and with financial system regulation since the Act was first passed. The scope for Phase 2 will enable the Review to ensure the 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 will also be considering the legislative basis for managing and resolving bank distress.
What is the difference between Phase 1 and Phase 2?
Phase 1 is implementing changes to the objectives of monetary policy to give due consideration to maximising employment alongside price stability and making provision for a committee decision-making model for monetary policy. Phase 1 decisions were announced on 26 March 2018.
Phase 2 will be a wide ranging review of the Reserve Bank’s financial stability role and broader governance reform. The terms of reference for Phase 2 were released on 7 June 2018.
Who will carry out Phase 2 of the Review?
A Review team jointly resourced by the Treasury and the Reserve Bank will complete the work. The Review team is governed by a steering committee jointly chaired by the Treasury and the Reserve Bank.
What is the role of the Independent Expert Advisory Panel in Phase 2?
The Independent Expert Advisory Panel (the Panel) will continue to play an important role in Phase 2 and will advise on key issues to support the work of the Review team and the steering committee. For Phase 2, the Panel consists of Suzanne Snively (Chair), Malcolm Edey, and Girol Karacaoglu (the original members of the Phase 1 panel) along with Barbara Chapman, Belinda Moffat, and John Sproat (Cabinet agreed to add these three members to broaden expertise on the Panel).
What was the process to determine the scope of Phase 2?
The Treasury, the Reserve Bank, and the Panel, developed a well-founded set of questions and considerations. Public submissions were invited and received and key stakeholders and industry commentators were consulted. The International Monetary Fund’s 2016-17 Financial Sector Assessment Programme recommendations provides a starting point for several aspects of the Review.
What will be out of scope for Phase 2?
There are various aspects of the Reserve Bank’s financial system-related functions and responsibilities that will be out of scope for Phase 2. These include the separate legislation underpinning the current prudential frameworks for the insurance and non-bank deposit-taking sectors, and the proposed legislation for the oversight of financial market infrastructures – except where consequential changes are necessary or could encourage alignment across each regime, where appropriate. The Reserve Bank’s role as an AML/CFT supervisor is also out of scope. Phase 2 will also not consider any fundamental change to the current home-host arrangements with Australia.
The first round of consultation
What topics are included in the first round of consultation?
The key topics included in the first round of consultation are list below:
- What high-level financial policy objectives should the Reserve Bank have?
- Who does the Reserve Bank regulate and how should the regulatory perimeter be set?
- Should there be depositor protection in New Zealand?
- Should prudential regulation and supervision be separated from the Reserve Bank?
- How should the Reserve Bank be governed?
Why are there multiple consultations and how were the topics for the first round of consultation selected?
The terms of reference for Phase 2 are broad and comprehensive, and there are interdependencies between the topics. Given the scope and interdependencies, it would be difficult to consult on all topics at the same time, so the consultation has been split into three rounds. The first round of consultation covers topics that will be crucial in shaping the Review’s overall outcomes and recommendations, and will form the basis of subsequent rounds of consultation.
For example, one of the topics considered in the first round of consultation is the high-level financial policy objectives that are set out in the Act. These legislative objectives:
- define the Reserve Bank’s purpose as a regulatory authority
- guide the Reserve Bank’s financial policy decisions and provide the focus for the work of Reserve Bank staff and its resourcing
- provide the context for other lower-level (operational) objectives directed at specific financial sectors or purposes
- provide a benchmark for holding the Reserve Bank to account for the performance of its financial system responsibilities.
Given the importance of the Reserve Bank’s legislative objectives, deciding what these objectives should be is a key focus of the Review at an early stage.
When will the other topics in the terms of reference be addressed?
Once the first round of consultation is complete – and using the information and feedback it provides – a second round of consultation planned for 2019 will consider other issues covered by the terms of reference, such as the:
- legal basis for bank regulation
- approach to supervision and enforcement of bank regulation
- macro-prudential policy
- crisis management, and
- the Reserve Bank’s resourcing and funding.
The second consultation will also seek feedback on the preferred options developed as a result of the first consultation. A third and final consultation later in 2019 will seek feedback on the preferred options developed from the second consultation. After that, final recommendations will be developed.
Why are there no preferred options or recommendations in the consultation document?
It was decided not to present preferred options until the Review team had consulted on a broader range of options for reform. Therefore, the first round of consultation seeks to present for comment a balanced view of options for each topic. The Review team will incorporate feedback received from consultation to inform preferred options which will in turn be consulted on in subsequent rounds of consultation.
Is the government considering separating out the prudential regulation functions from the Reserve Bank?
The government is not planning to go down the separation path at this stage. However, stakeholder consultation during the scoping of Phase 2 did reveal strong interest in this issue and supported its further consideration during the Review. Therefore, the rationale for retaining prudential regulation and supervision inside the Reserve Bank is included as part of the first round of consultation on Phase 2 issues. This process will enable further submissions to be made on the issue.
What is the difference between deposit insurance and depositor protection?
New Zealand does not have a formal system for protecting depositors against the risk of losing their deposits if a registered bank or NBDT fails. The objective of depositor protection is to provide depositors with partial or full protection from the risk of losing some or all of their money if the bank holding their deposits fails. Deposit insurance is one mechanism that can provide depositors with protection from loss up to a guaranteed limit, although there are other partial protection mechanisms that can also be used to reduce depositors’ risk of loss (such as giving protected depositors a preference in the hierarchy of creditors). The first round of consultation seeks feedback on a range of options that could be used to protect depositors in New Zealand.
What is the regulatory perimeter and why is it important?
The ‘perimeter’ for prudential regulation is the boundary between entities required to operate according to certain prudential rules and requirements and those that are not. The regulatory perimeter is important because certain businesses and sectors may not fit within the current regulatory perimeter while also presenting risks to financial stability. The first round of consultation asks whether the current perimeter is appropriately targeted and capable of adapting to emerging risks.
Will the Review consider the Reserve Bank’s role in addressing the risks presented by climate change?
The risks that climate change poses to financial stability over the long term is a growing question internationally and is increasingly receiving central bank attention in other jurisdictions. The Review presents a timely opportunity to consider the role of the Reserve Bank (in its role as prudential regulator and supervisor) in assessing and responding to the risks to New Zealand’s financial stability posed by climate change. Options in this area will be included in the second consultation.
The Australian Royal Commission
Is the Review going to consider conduct issues raised by the Australian Royal Commission?
Not directly. New Zealand has a form of ‘twin peaks’ model of financial sector regulation involving the Financial Markets Authority (FMA) as the markets and conduct regulator and the Reserve Bank as the prudential regulator. The terms of reference for Phase 2 focuses on the Act and the Reserve Bank’s role as prudential regulator.
The issues raised by the Australian Royal Commission are relevant to both conduct and prudential regulation and New Zealand agencies are conducting their own review into the issues. For example, issues concerning organisational culture are relevant to the incentives placed on regulated institutions which can impact both financial market conduct and prudential outcomes. The Review team will monitor developments and actions by Australian and New Zealand agencies.
How are the Reserve Bank and other agencies considering the issues raised by the Australian Royal Commission?
Ministers and officials are taking seriously the issues raised through the public hearings to the Australian Royal Commission and are considering how its findings might relate to the New Zealand financial sector.
The Reserve Bank and the FMA are jointly reviewing conduct and culture of retail banks and life insurers to test whether similar issues are present in New Zealand and to ensure continued confidence in New Zealand financial institutions. The FMA and RBNZ expect to publicly report their findings later this year.
MBIE is currently reviewing and, where necessary, improving, New Zealand’s laws governing financial advice, responsible lending, and insurance. These changes will help address the sorts of misconduct that have been identified in Australia.
The consultation process
How will the consultation process be run?
The consultation process includes briefings by the Review team for financial institutions and media in Wellington and Auckland. The team has offered briefings to government agencies in New Zealand and overseas, as well as sectoral groups representing banking, broader financial, general business, Māori, trade union and women’s interests, and it will meet with interested individual academics and economists.
How can I contribute?
The Review team welcomes written submissions on all of the matters raised in the main consultation document. An online form to assist with providing written comments is available at Public Consultation.
Alternatively, the public could respond to a set of less technical questions contained in a short booklet summarising the five key topics covered by the first round of consultation. This avenue has been especially designed to help general members of the public contribute to the review; it is expected to take less than 20 minutes to complete.
Stakeholders will also be able to provide feedback through consultation meetings that the Review team will hold with sectoral groups.
All written responses should be emailed to [email protected]. Alternatively, responses can be sent to the address below:
Phase 2 of the Reserve Bank Act Review
PO Box 3724
The deadline for submissions is 25 January 2019.
Will my submission be made public?
All submissions are subject to the Official Information Act 1982. Following the completion of the consultation process, the intention is to publish all submissions as well as a report summarising the key messages and emerging themes. A submitter may request that their submission be anonymised, and for all or part of their submission 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?
In addition to the main consultation document, the following information will be made available:
- Background papers including more detailed information on some of the topics being consulted on.
- A high level summary booklet that captures the key issues being raised in the first round of consultation , and raises some high-level questions. Members of the public are welcome to make a consultation submission by answering these questions.
In the spirit of conducting the Review in an open and transparent manner, the Review team intends to proactively release information relating to Phase 2. This information includes:
- presentations provided by the Review team to stakeholders
- 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 Phase 2 of the Reserve Bank Act Review.
How long will the Review take?
It is intended that all rounds of consultation are completed by the end of 2019 with decisions on any legislative changes made in 2020. It is envisaged that most of the major legislative amendments could be advanced within the current Parliamentary term.