Introduction of the Reserve Bank of New Zealand Bill
Minister of Finance Grant Robertson introduced the Reserve Bank of New Zealand Bill (RBNZ Bill) to Parliament yesterday (28 July 2020). Referred to as the “Institutional Act”, the RBNZ Bill is the first of two bills resulting from the Phase 2 review of the Reserve Bank of New Zealand Act 1989. It sets out the future institutional and governance arrangements of Te Pūtea Matua (Reserve Bank). The second bill still to come, referred to as the ‘Deposit Takers Act', will build on the Government’s in-principle decisions on the regulation of banks and other deposit takers, as well as introducing a deposit guarantee scheme.
Who needs to read it?
It is important for registered banks and non-bank deposit takers (NBDT) to note new provisions that are introduced by the RBNZ Bill.
What does it cover?
The RBNZ Bill retains changes made through the Reserve Bank of New Zealand (Monetary Policy) Amendment Act 2018 but focuses on reforming overall governance and accountability arrangements of the Reserve Bank.
The new key provisions of the RBNZ Bill can be split into the following headings:
Setting objectives and functions
- Introduces a new financial stability objective for the Reserve Bank to protect and promote the stability of New Zealand’s financial system (Clause 9(1)(b) of the RBNZ Bill). This also complements the recently updated monetary policy objectives. The Reserve Bank will be held accountable by way of delivering financial stability reports no less than twice in every calendar year (Clause 167 of the RBNZ Bill).
- Sets out the Reserve Bank’s important functions of acting as central bank, prudential regulator and supervisor, which must be performed in line with the objectives.
- Reframes the Reserve Bank’s role as lender of last resort to entities approved by the Reserve Bank, as a part of its liquidity function (Clause 113(d)(i) of the RBNZ Bill).
Strengthening institutional arrangements
- Moves decision-making, powers and responsibilities of the Reserve Bank from the Governor to a new governance board appointed by the Minister of Finance (Subpart 4 of Part 1 of the RBNZ Bill).
- Requires the Minister of Finance to issue a Financial Policy Remit to the Reserve Bank which sets out matters the board must consider when making decisions in relation to financial stability and prudential standards (not operational decisions) and its implementation (Clause 47 of the RBNZ Bill).
- Establishes a more robust process for the Minister of Finance and the Reserve Bank to agree the Reserve Bank’s funding agreement.
- Makes changes to the funding model to promote transparency and allow for appropriate recovery of costs, through industry levies and fees.
- Ensures operational independence is balanced with appropriate accountability by allowing the Auditor-General and the Ombudsman to review the activities of the Reserve Bank. Also introduces a number of changes to update the Reserve Bank’s accountability and reporting frameworks to align with standards that apply to Crown entities.
- Gives a formal role to a Government department (i.e. Treasury) to monitor the Reserve Bank, including the power to seek information from, and review the operation of, the Reserve Bank.
Increasing co-ordination in regulation of financial sector
- Gives statutory recognition to the Council of Financial Regulators, who will facilitate co-operation and co-ordination between members to support effective and responsive regulation of New Zealand’s financial system.
- Provides the Reserve Bank with the function to co-operate and powers to share information (despite anything to the contrary in any contract, deed, or document) with other enforcement and regulatory agencies involved in regulating New Zealand’s financial system. However, it will need to ensure such information is appropriately managed during court proceedings.
Better accountability and transparency of the Reserve Bank’s financial risk management and use of foreign reserves
- Strengthens accountability over the Reserve Bank’s existing central bank functions and requires the Reserve Bank to publish a framework setting out its approach to managing financial risks.
- Requires clarity and transparency in the Reserve Bank’s management of foreign reserves, by requiring the Reserve Bank and the Minister to agree a Foreign Reserves Management and Co-ordination Framework.
Managing cash quality
- Expands the Reserve Bank’s functions in respect of cash, including supporting public confidence in banknotes by enabling the Reserve Bank to set standards for devices that check the authenticity and/or quality of banknotes.
The RBNZ Bill is expected to pass into law by September 2021 with a nine-month transition period until full commencement by July 2022.
The RBNZ Bill is a positive step forward in modernising New Zealand’s monetary and financial stability framework, and represents a significant enhancement to the Reserve Bank’s governance and accountability settings.
In respect of registered banks, insurers and other financial institutions, Part 2 of the RBNZ Bill provides for the Reserve Bank’s functions as the prudential regulator and supervisor, and what the Reserve Bank can look to be held accountable for. Even though the second bill (the ‘Deposit Takers Act') is still to come and will provide more details on the banks regulating of such players, the RBNZ's Bill only directly touches NBDT's in relation to levies payable to the Reserve Bank and its regulation.
While the RBNZ Bill gives an overview of what registered banks and New Zealander’s can expect from the Reserve Bank in the performance of their functions, it does not provide substantial detail on aspects of its interactions with relevant entities. Our view is that it will be important for persons, particularly registered banks, to take part in the development of the RBNZ Bill by way of submissions and help flesh out aspects of the Reserve Bank’s interactions with it. This view is also consistent with the Government’s encouragement for people to get involved in sharing their views as the RBNZ Bill progresses through Parliament.
If you have any questions in relation to how the RBNZ Bill may affect you or if you would like help in drafting submissions for the Select Committee stage, please contact one of our experts.