RBNZ may regulate financial services

The Reserve Bank may take over prudential regulation of the insurance, finance company, and superannuation markets. The change is under consideration as part of the Review of Financial Products and Providers (RFPP).

Friday, January 6th 2006, 6:33AM

by Rob Hosking

That review has only just begun, but moving the insurance, finance company and superannuation markets under the Reserve Bank has already been considered, and agreed to in principle, by the Cabinet last month.

The review has already concluded; “There should be greater prudential regulation of non-bank deposit taking institutions (mainly credit unions, building societies and some finance companies) and some categories of insurers and superannuation schemes.”

The change would involve moving the current agencies within the Ministry of Economic Development – the Insurance and Superannuation Unit (which includes the Government Actuary) and the Registrar of Friendly Societies and Credit Unions across to the Reserve Bank.

At present the Reserve Bank looks after prudential regulation of banks, as well as its more highly published role in managing monetary policy.

Officials considered having separate regulators for banks and non-banks but have rejected the idea.

As well as economies of scale in New Zealand’s small size, they point to the United Kingdom, where, they advised ministers, there has been “substantial benefit in consolidating all prudential supervision into one regulator and a major reason for this is the emergence of conglomerates (e.g. institutions that provide both banking and insurance products.)”

And although such conglomerates are not a feature of the New Zealand market, “there are similarities in the skill bases/knowledge required for prudential regulation of different financial institutions…those synergies are particularly strong between deposit taking institutions (banks, building societies, credit unions) but arguably less so between deposit taking institutions and insurance and superannuation.”

One option considered was a “mega regulator” which would have included prudential regulation and the kind of market conduct regulation recently subject to examination by the Task Force on Financial Intermediates.

This was rejected though: the two were seen as being very different.

“Market conduct regulations focuses on product disclosure and the behaviour of providers of financial services…. the skills required in this area are largely legal and accounting. By contrast, prudential regulations is more preventative; focused on the analysis of risks to an institution’s financial position and providing appropriate incentives for institutions to manage those risks. The skills in this area are more financial and economic.”

Officials are to report back on this, along with another, related issue carefully blanked out of the released Cabinet paper, by November next year.

Any changes will be implemented in 2008.

Rob Hosking is a Wellington-based freelance writer specialising in political, economic and IT related issues.

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