RBNZ takes further steps to improve regulation and oversight

New Zealand’s central bank and financial regulators have taken another step in their efforts to improve regulation and supervision of the financial sector, they announced on August 14.

The Council of Financial Regulators (CoFR) announced a new “vision”, which takes a longer-term perspective on regulation, with an emphasis on social inclusion and climate change. 

The group, founded in 2011, is made up of the Reserve Bank, Financial Markets Authority, the Treasury, and the Ministry of Business, Innovation and Employment.

As of the announcement, the council also introduced a fifth member – the Consumer Commission. It is charged with enforcing legislation that promotes competition in New Zealand’s financial markets and fair consumer-credit contracts.

Both moves are part of an ongoing push for tougher regulation and supervision of the financial sector.

The new vision of “maximising New Zealand’s sustainable economic wellbeing through responsive and co-ordinated financial sector regulation” was adopted to provide more clarity on the group’s direction, an RBNZ spokeswoman tells Central Banking.

Based on our experiences, we wanted to bring together a more structured work plan and areas of focus going forward

RBNZ spokeswoman

“Based on our experiences, we wanted to bring together a more structured work plan and areas of focus going forward,” she says. “This will also help us provide more co-ordinated advice to ministers.”

The previous vision was “to contribute to the efficiency and effectiveness of New Zealand’s prudential and financial markets regulatory model, and to promote the stability of the New Zealand financial system by providing a forum to review industry trends and issues”.

Key changes

There are two key changes, the spokeswoman says. The first is sustainability, “to bring in the long horizon of our activities (inter-generational), as well as social inclusion and climate change issues”. The second is economic wellbeing, “to bring in capital allocation, market efficiency and innovation issues”.

Financial services conduct and culture, and insurance markets will join financial inclusion and climate change as initial priorities for the regulators.

In January, the council completed a review of New Zealand’s 16 life insurers. The agencies found “extensive weakness” in the life insurers’ systems, governance and risk management, as well as a lack of customer focus.

The review found little evidence that products were being designed and sold with customers in mind, and monitoring of the ongoing suitability of customers was being neglected. Sales incentives and customer service structures were also poorly prioritised.

RBNZ governor Adrian Orr said at the time: “The industry must act urgently and undergo major change to address these weaknesses, as their services are vulnerable to misconduct and the escalation of issues that have been seen in other countries.”

Tougher regulation and supervision

The latest move is part of a wider overhaul of the Reserve Bank Act.

On June 24, New Zealand’s Treasury opened a period of consultation on the second phase of the act’s re-evaluation, with a focus on toughening up the approach of agencies to financial regulation and supervision. The consultation was set to end on August 16.

Confidence in the central bank’s ability to effectively regulate the financial system was knocked when an independent review criticised aspects of its supervision of failed firm CBL Insurance.

The insurer, which had a market capitalisation of more than $500 million, was placed into full liquidation by the High Court of New Zealand in November 2018. The review said regulators should have been tougher with the firm.

Responding to the criticism, deputy governor Geoff Bascand said: “We acknowledge the review’s finding that our supervision was overly lenient towards CBL, and should have addressed concerns about its reserving and management more urgently.”

Further evidence of the central bank’s tougher stance is contained in its recent announcement to press ahead with sharply increasing the amount of capital that banks must hold, despite pushback from the industry.

The central bank wants to increase the Tier 1 capital ratio to 16% of risk-weighted assets for systemically important banks and to 15% for smaller institutions. Currently, the requirement stands at 8% of risk-weighted assets for all financial firms.