Reserve Bank Governor responds to New Zealand bank regulation concerns

An article by Adrian Orr, Governor of the Reserve Bank of New Zealand (RBNZ), was recently published on the RBNZ’s website. The article is a response to public concern relating to the issues raised by the Australian Royal Commission into Misconduct in Banking, Superannuation and Financial Services Industry (Royal Commission).

Who needs to read it? Why?

The article is aimed at the general public and provides high level guidance to those unfamiliar with how registered banks are regulated in New Zealand. But it will also be of great interest to all registered banks and other financial service providers.

The article provides insight into the RBNZ’s current thinking with regards to New Zealand’s banking sector, which shines a light on whether a royal commission into banking and financial services providers will be necessary in New Zealand.

What does it cover?

In the article, the Governor acknowledges that although New Zealand’s financial system has been robust over recent decades, it is not immune to threats due to the dominance of banks in our financial system and their concentrated foreign, particularly Australian, ownership.

In light of this, he sets out how New Zealand registered banks are regulated in relation to the types of issues raised by the Royal Commission in Australia. He makes the following points:

  • banks to abide by New Zealand’s laws: when a bank registers to operate in New Zealand it must abide by New Zealand’s laws and regulations. Locally incorporated banks will have local directors who are bound by domestic law and are liable for the bank’s decision making. The article also emphasises that the risks for foreign-owned banks in New Zealand will be different from their home base and that all New Zealand registered banks are required to be well capitalised;
  • regulation informed by New Zealand’s circumstances: while international standards such as the international monetary fund’s Financial Sector Assessment Programme form the basis of the RBNZ’s requirements; these will always be tailored to suit New Zealand specific risks and circumstances. Similarly, foreign regulations and requirements are often taken into account and respected, but are supplemented by additional requirements including New Zealand’s directors' attestations and specific New Zealand legal, capital and prudential requirements; and
  • soundness and efficiency as priorities: when the RBNZ regulates any licensed entity it will balance soundness and efficiency to ensure the financial system is safe from failure but also dynamic and competitive. The article states that the challenge is to ensure fairness amongst all players based on their specific risk characteristics.

The Governor’s view is that overall the New Zealand public is generally well serviced by domestically-owned and foreign banks and that we are fortunate to have a sound and broadly efficient banking system.

Our view

The tone of the Governor’s article indicates that despite the issues identified in Australia with respect to the conduct of banks and other financial service providers, RBNZ does not consider the establishment of a royal commission in New Zealand is the solution.

Instead, we expect to see the RBNZ and the Financial Markets Authority (FMA) continue with the various steps they have already taken to ensure that the culture within New Zealand’s financial services sectors is appropriate and to ensure that the conduct highlighted in Australia is not happening here.  The RBNZ and FMA have so far indicated that they are happy to work with financial service providers to strengthen compliance, culture and behaviour. We encourage all financial service providers to engage with regulators early.

Whether this approach continues to be sustained will depend on several factors. Important will be the quality of the responses of registered banks and life insurers to the letters recently issued to them by the FMA and RBNZ.  But in addition, there is a political element, which will depend on what further developments there are in Australia, and whether the concerns there gain traction with the New Zealand public, media and politicians.

What’s next?

RBNZ is looking to release its latest six-monthly Financial Stability Report on 30 May 2018, which will discuss the condition of New Zealand’s financial system.

The RBNZ will also soon be launching its Bank Financial Strength Dashboard, which is intended to be a new innovative way of increasing transparency in the banking sector.

If you have any questions in relation to the article or the RBNZ’s approach to regulation please contact one of our experts.

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