RBNZ shouldn’t protect consumers, former governors say
Three former Reserve Bank governors don’t think consumer protection should be added to the central bank’s objectives.
That's despite Australia’s banking regulator having an explicit role in protecting consumers’ interests, something the government is considering in its review of the central bank's legislation.
The Australian Prudential Regulation Authority’s website explains that its legislation means it is "tasked with protecting the interests of depositors, policyholders and superannuation fund members.”
Former RBNZ governor Graeme Wheeler makes short work of his answer to the question: Should ‘consumer protection’ be added to the Reserve Bank’s objectives?
“Never,” Wheeler says in his submission to phase two of the review of the Reserve Bank Act, and leaves it at that.
Grant Spencer, who was acting governor for about six months between Wheeler leaving and current governor Adrian Orr, provides some explanation for his view that “consumer protection should not be included as an objective of policy, neither primary or secondary.”
Spencer says in his submission that “a shift of emphasis from systemic stability to the safety of individual institutions and investors could be interpreted as justification for a non-failure regulatory regime.
“It is important to avoid any such ambiguity in financial policy which could undermine financial incentives and reduce the long-term safety and efficiency of the system,” he says.
“Adoption of a consumer protection objective would be inconsistent with New Zealand’s twin peaks model and generate coordination issues with the Financial Markets Authority.”
That “twin peaks” model has it that the Reserve Bank is the prudential supervisor while the FMA supervises securities and market conduct.
But Australia has other, very similar regulators whose ambit covers financial services. The Australian Securities and Investments Commission's role is to enforce and regulate company and financial services laws to protect Australian consumers, investors and creditors and is the equivalent of the FMA. The Australian Competition and Consumer Commission is the equivalent of our Commerce Commission and administers competition law and the equivalent of New Zealand’s Fair Trading Act.
Clearly, both the RBNZ and the FMA have joined forces in reaction to Australia’s royal commission into financial services in trying to ensure New Zealand doesn’t suffer from the problems the commission unearthed across the Tasman.
Don Brash, the first RBNZ governor under the current Act didn’t mention consumer protection in his submission but he takes a similar view.
“I don’t think it is the Reserve Bank’s role to protect consumers. It is a highly competitive banking market and, to the extent that consumers need protecting, that is mainly the FMA’s role,” Brash told BusinessDesk.
ConsumerNZ chief executive Sue Chetwin disagrees with the central bankers, pointing to the joint FMA and RBNZ banking review which she says “has helped to highlight the risks to consumers from existing gaps in the regulatory oversight of the banking industry.
“We consider changes are needed to address these gaps and improve consumer protection,” Chetwin says.
“Providing the Reserve Bank with a specific consumer protection objective, as proposed in the consultation paper, should be explored further.”
The Institute of Finance Professionals New Zealand concurs with Chetwin and says that if some form of depositor protection is introduced – as looks likely – “this would require the Reserve Bank to increase its focus on the consumers of financial products and services.”
INFINZ says that arguably consumer protection is already an implicit central bank objective.
Chetwin also gets some backup for her viewpoint from Chapman Tripp, the only law firm to make a submission.
“We note that there is an element of ‘consumer protection’ already built into the existing key financial policy objectives of the Reserve Bank,” Chapman Tripp says.
“Maintaining a sound and efficient financial system naturally results in a level of consumer protection,” it says, but then parts company with Chetwin.
“However, we do not think it is appropriate that ‘consumer protection’ is specifically added to the Reserve Bank’s high-level financial policy objectives as a standalone objective. Consumer protection is achieved through a number of regulatory channels and we believe this should remain the case.”
That doesn’t rule out regulators cooperating and ‘consumer protection’ could be added as one of the Reserve Bank’s lower-level objectives, the law firm says.
“It will be important to avoid adversely impacting on the current ‘twin peaks’ model, so careful thought will need to be given to the appropriate objective definition,” Chapman Tripp says.
Just about all the key business groups agree with the former governors that consumer protection shouldn’t be a Reserve Bank objective.
Business NZ says consumer protection and other objectives, such as promoting competition, “are better dealt with through specific legislative mechanisms such as the Commerce Commission, Fair Trading Act etc.”
Federated Farmers says the Reserve Bank “should not be trying to promote competition or consumer protection or to grow particular sectors of the economy. These other objectives can be politically sensitive and are better addressed through existing legislation.”
The New Zealand Bankers' Association agrees that such matters are the responsibility of other agencies and regulatory mechanisms.
“Giving the RBNZ additional policy objectives which are similar to those of other agencies may complicate the regulatory landscape and result in overlap with the objectives of other regulators,” it says.
Westpac goes even further and says that giving the Reserve Bank a consumer protection function “would have the potential to distract from, or even conflict with, the central objective of financial stability.
“For example, a focus on consumer protection may require a shorter-term outlook compared to financial stability. For this reason, consumer protection is best left to other regulators.”
The New Zealand Initiative agrees, saying that a consumer protection objective “would muddy the waters with the FMA’s regulatory responsibilities for conduct by financial markets participants.”
Public confidence “is an outcome of good financial regulation, not an objective. It is very important to be specific about what aspect of public confidence is sought,” it says.
“Public confidence that risk investments are not risky is not a good thing. Regulators need to endlessly exhort investors to understand that higher returns mean higher risks. Caveat emptor is critical for economic efficiency.”