Unless you closely follow regulation (and arguably anyone in insurance should), you may have missed how regulators are widening their mandate even before fundamental decisions have been made - such as what the role of the Reserve Bank (RBNZ) should be, what its role in financial policy should be, and how it should be governed.
Those questions are part of what the current Reserve Bank Act Review is consulting on. Yet before submissions were due, in a most timely and clear way, bulletins were issued by the RBNZ and the Financial Markets Authority (FMA) announcing that the Council of Financial Regulators (CoFR) had a new vision to maximise “New Zealand’s sustainable economic wellbeing through responsive and coordinated financial system regulation.”
The CoFR members are the RBNZ, FMA, Ministry of Business, Innovation & Employment (MBIE), Treasury, and the newly added Commerce Commission. So, financial regulators and policy advisors to the Government who meet quarterly to collaborate and develop a collective view on long-term strategic priorities.
At one level, it makes perfect sense to have this sort of cross-agency coordination. What’s not so clear is what the vision means as “sustainable” can be understood in many different ways. Nor is it clear how, for instance, this relates to the legislated mandate of each of the regulators — or indeed how each regulator will apply the vision to their roles.
Hopefully, it creates no tensions for them, but that remains to be seen. Oddly though, the restructure of the CoFR was announced two days before submissions covering the structure of the CoFR closed.
The FMA is charged with promoting fair, efficient and transparent financial markets, the Commerce Commission (an independent, quasi-judicial body) is charged with promoting competition, and the RBNZ must currently promote a sound and efficient financial system (until the Act changes).
So, the question is whether the regulators and the advisors risk getting a little ahead of themselves. It has been clear from the RBNZ’s recent financial stability reports that it does see its role as much broader than soundness and efficiency and that it should expand to cover the domain of financial stability.
That extension will see risks such as climate change and cyber fall within the RBNZ’s eco-system. Major risks should be part of that, but broadening the scope must bring with it higher standards of governance than currently exist.
Back in the day, the original Act was so focused on establishing the RBNZ’s ability to formulate monetary policy independently, at arm’s length from politicians, that it became established wisdom that no-one should question its decisions.
We live in different times now. Some of the world’s biggest financial challenges will require public-private partnerships and regulators must play their part in supporting those arrangements. Regulatory independence requires greater accountability to others than oneself.
So, if the RBNZ’s purpose is to focus on financial stability, whether that also means sustainable economic wellbeing, there will still be a need for secondary objectives like soundness and efficiency. We would throw in another one: the need for regulatory efficiency. That is, the need to minimise regulatory burden and use regulatory resources cost-effectively.
We also support best practice governance. This would see the Governor of the Reserve Bank report to a board that is chaired by a non-executive member, with possibly all members being non-executives. There may be a case for the Governor to be on the board. It will be the board’s role to set the tone from the top, establish the strategy and measure management’s implementation of it.
The RBNZ should be independently monitored by the Treasury, but, if that occurs, then the Treasury cannot be represented on the board. Indeed, the role of the Treasury on the CoFR needs very careful management to ensure accountabilities are clear and any conflicts of interest are managed.
And in the spirit of greater accountability, its decisions should not only be clear and timely but supported by good evidence, including cost-effective analysis. They should also be subject to a Merits Review under certain circumstances.