Although strictly speaking it's outside the RBNZ's mandate, Governor Adrian Orr introducing a much greater focus on consumer outcomes to the central bank is welcome, Gareth Vaughan says

Adrian Orr cartoon by Jacky Carpenter. © interest.co.nz

By Gareth Vaughan

From having the top button of his shirt undone at press conferences, to giving one-on-one media interviews, offering greetings in Maori, Fijian and sign language, and the plain English Official Cash Rate review statement, subtle changes have been highly visible to central bank watchers since Adrian Orr became Reserve Bank Governor in late March.

But what may demonstrate the biggest attitudinal change slipped out in an answer Orr gave at Thursday's Financial Stability Report press conference. With the Reserve Bank and Financial Markets Authority (FMA) probe into bank conduct and culture a key focus, the line in bold below is what really caught my attention.

"It's a continuous challenge forever in this industry, chasing the short-term profit in a competitive environment. The marginal or final loan is the one that tips over. And then we all start again trying to get a longer term horizon around the responsible lending. The consumer at the end is really what we're about, and what we'll be talking to the banks a lot about through this conduct review," Orr said.

The Reserve Bank's primary responsibilities are formulating and implementing monetary policy and promoting a sound and efficient financial system. Thus the regular set piece announcements from it are the issuing of its Monetary Policy Statements and Financial Stability Reports (FSR).

In terms of financial stability, the emphasis has been on strong and stable banks, not protecting consumers. For example, with the much misunderstood restrictions on high loan-to-value ratio (LVRs) residential mortgage lending implemented by the Reserve Bank, the primary goal is to improve the resilience of the financial system to any major housing market correction.

Therefore the Reserve Bank's aim has been to reduce the likelihood mortgage borrowers will default, which in turn reduces the magnitude of losses banks would sustain in said housing market correction. Thus in last November's FSR the Reserve Bank noted the share of banks’ mortgage portfolios with LVRs above 80% had dropped to under 8% from 21% when the policy was introduced in 2013.

Whether the LVR restrictions were locking first home buyers out of the housing market as vested interests in the market claimed, wasn't really the point. The point was the big picture stuff, i.e. protecting the entire financial system rather than individual would-be house buyers.

I use this example because it nicely encapsulates where the Reserve Bank's focus has been over the years. It certainly hasn't been on "the consumer at the end" as Orr suggested on Thursday.

Here's another example.

In 2015 when Australian authorities were probing high credit card interest rates, my colleague Jenée Tibshraeny tried to find someone, anyone, in a position of power in New Zealand to take an interest in credit card interest rates here that were at similar levels to Australia. This is what a Reserve Bank spokesman told Jenée;

“The Reserve Bank of New Zealand regulates banks, insurers, and non-bank deposit takers (NBDTs) at a systemic level - i.e. to make sure the financial system remains sound." 

“We don’t regulate from an individual customer protection perspective and don’t have comment to offer about pricing of products and services offered by banks, insurers and NBDTs," a Reserve Bank spokesman said in 2015.

No concern for "the consumer at the end" there then.

Over the years the Reserve Bank has tended to stick to its knitting, something that I admit has frustrated me at times as a journalist. Witness another example. Insurer Youi.

The appalling behaviour of Youi emerged through a painstaking investigation by freelance journalist Diana Clement published by interest.co.nz in 2016 here and hereYoui was ultimately fined $320,000 for misleading consumers with ambush sales tactics after the Commerce Commission filed charges relating to misrepresentations made to consumers. 

As Clement herself put it; "In my 30 years as a journalist, 20 of those writing about financial services, the Youi prosecution is the worst case of mis-selling to consumers I have ever encountered. I have to say, hand on heart, that I have never come across a company whose sales methods were so inappropriate for the product that they are selling." 

Indeed Youi's behaviour stands alongside some of the dire examples of bad conduct exposed in Australia's Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry.

So what did the Reserve Bank have to say about it? Remembering it is prudential regulator for insurers, as it is for banks, with responsibilities for soundness and stability but not conduct, which is the domain of the FMA. 

"While the issues raised and allegations made in the article by Diana Clement are important and serious, relationships between insurers and customers are governed by consumer protections laws and not by the Reserve Bank or the Insurance (Prudential Supervision) Act 2010. The Reserve Bank’s focus is on systemic issues and maintaining the stability of the financial system, rather than on the way that institutions and customers interact with each other," a Reserve Bank spokesman said in 2016.

"The Insurance (Prudential Supervision) Act 2010 doesn’t give the Reserve Bank powers to regulate for or supervise the way that an insurer interacts with its customers. The Commerce Commission, which your article notes is already involved, is the correct agency for these issues."

If behaviour by a financial services provider as ghastly as Youi's emerges now, I imagine an Orr-led Reserve Bank having a bit more to say than that.

Indeed, the Reserve Bank under Orr has waded in to a conduct and culture review of banks and life insurers in partnership with the FMA off the back of the Australian Royal Commission.

There is an argument that Orr and the Reserve Bank are acting outside their mandate, should stick to their financial stability knitting and leave conduct issues to the FMA. The other side of the coin is if conduct and culture at a bank is really bad, then it could flow through to risk taking and management accountability, potentially becoming a prudential issue. Basically if you don't fix a major culture problem inside a bank, ultimately everything else could start to go wrong.

Personally I welcome the Reserve Bank thinking of consumers, be they borrowers, savers or insurance policyholders. By taking an interest in consumer outcomes Orr is humanising the Reserve Bank, and making it more relevant to the general public.

However, if this is the path the Reserve Bank wants to go down, and has government support to do so, then perhaps phase 2 of the Government's Reserve Bank Act review is a good opportunity to enshrine this more consumer outcomes focused role into the Reserve Bank Act. The terms of reference for Phase 2 are due to be published during June.

*This article was first published in our email for paying subscribers early on Friday morning. See here for more details and how to subscribe. 

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7 Comments

NZ has been through an era over the last 20 years or so where the government, government departments, public institutions have all stood for the large corporate agenda - of exploiting and using citizens and consumers for the greater good. The greater good of course being profitability for large business and shareholders.
The swing back to small locally owned businesses and small NZ banking is to be welcomed, but how can they stand in the face of such fierce large scale opposition?

Personally, I think the RBNZ should stick to what it has been doing as it has worked well for New Zealand. During the GFC not one bank needed to be bailed out. And despite the OBR, does anyone honestly think that the government would not bail out one of the big four if they went under? I assume governments like winning elections and I am certain no government would survive a bank failure where 20% of households took a haircut or lost their savings completely.

Despite the anti-bank rhetoric, the banks are doing a very good or excellent job. Loans are been made to individuals and business and people are saving. The rise in house prices is not the banks' fault but rather a multiple of factors including restrictions on supply and our perverse taxation regime.

A stable financial system is in the best of consumers, society, and the economy as a whole and the RBNZ has ensured that. A mixed focus might place that at risk. The Royal Commission in Australia has descended into anecdotes and conspiracy theories which will mean any recommendations will be pointless and could harm the system as a whole.

Maybe it would be better to break up the RBNZ into 2 or 3 pieces as was suggested by Geoff Mortlock here a few weeks ago rather than a unilateral change by Mr. Orr.

I am yet to see any reason to suggest that Mr. Orr should change the focus of the RBNZ.

If banks took responsibility for making their own property valuations as they used to do, then they would not have been giving out jumbo loans on hyperinflated house prices.
There was a day when your bank manager had a good personal look at the GV, the address, and the property and made a reasonable judgment themselves despite any inflated ‘price’. And solicitors used to do this job well also.
Banks also used to send their own valuer to your new build, releasing the progress payments, according to good old fashioned real judgments - from thei own staff.
Now banks will often lend based on the sale/purchase agreements - which just keeps the prices inflating with less realistic authentication of a more realistic price.

Despite the anti-bank rhetoric, the banks are doing a very good or excellent job. Loans are been made to individuals and business and people are saving. The rise in house prices is not the banks' fault but rather a multiple of factors including restrictions on supply and our perverse taxation regime

Sounds like a BBQ yarn to me. In the case of Australia, there is actual data-based evidence that shows credit growth as the greatest driver in house prices.

https://www.youtube.com/watch?v=UpWoqWZUBbI

I hope protecting "the consumer at the end" includes protecting depositors, who are otherwise exposed to ruin caused by lax lending and control fraud which has been revealed in Australia by the Royal Commission, perpetrated by the same banks as operate in NZ..

@MortgageBelt 100% correct 1st comment
Hmmmm, Static wage growth……. Static wage growth in a large part, is a result of supply chain / purchasing departments or managers from these large corporates exploiting their market share and purchasing power.
“It’s all good” it’s business 101 after all, but the impact on a small nation like NZ is detrimental.
Over the last 12 years, the large corporates we deal with of which 2 control 80% of the market have on each contract renewal date reduced the revenue / charging structure that is allowable to do business with them. So, over the last 12 years the revenue per sales unit has reduced.
Ok so find a cheaper supplier of products or more efficient method of production to keep up.
That’s fine, but a very large percentage of the product we sell is labour. So we have in fact become extremely efficient to counter these continual revenue reductions. I have travelled to the US and Aus to view companies from the same industry to see how great and productive they are only to find that in fact we are more productive and efficient than they are. Then I ask myself we’ll how do they survive? They survive because the same companies that screw us here are paying them more over there, why? How can that be?
It’s because those larger countries are harder for the corporates to manage unlike little old NZ, competition is greater in the larger countries, as a supplier you can say “forget it, it’s not worth doing business with you I’ll go to your competitor” etc. In NZ so many duopolies and the like have been allowed to flourish that telling them to “go jump” is financial suicide.
It must be a dream job for supply chain or purchasing managers coming to NZ as the market is so small and manageable from the large corporate position.
So here we have it, yawn….. another small businessperson (30 staff) having a whinge, blah blah blah.
I don’t know if I’m alone but, I believe a lot of issues in the economy stem from the exploitation of business’s like mine (labour based / Labour selling business’s) and yet business’s like mine sell one of NZs most valuable products, Kiwi labour.
Think about it, $1 worth of labour sold, the government gets GST, Paye, ACC, Kiwisaver contribution (gives you financial guys something to do). Plus, fringe benefits for the economy like a person selling labour is not on a benefit, a person engaged in a happy (profitable) work environment is not a burden on the health system and has positive engagement with society etc, and to top it all off, what’s left of the $1 once the government has taken it’s several cuts is spent in NZ by the happy employee….. more GST etc created……
Paye tax is created from thin air, and it’s non-polluting!
GST added to labour sales, created from thin air!
Jobs created from thin air!
Training, mentoring, providing career paths and giving youth purpose.
We reduce pollution because the things we service & repair don’t need to be replaced and thrown into land fill when damaged.
So with all of these positives why does the government do nothing to protect the largest employer of kiwis (SMEs) from the exploitation tactics of the large corporate that stand over so many of New Zealand’s SMEs? Does the government not get that by suppressing small business’s the large corporate are in fact starving the NZ Govt of revenue and diverting it off shore via their profits and of course “head office management fees” etc?

I think it's too late fo any meaningful reform. The asset bubbles are to well formed while wages have stagnated we live in a 2 tier establishment, the weathly having assets the workers trapped.
I put fertiliser on this week, the driver hasn't had a pay rise for 6 years. Yet when I hang out with my farming friends the car park alone is impressive, representing millions of dollars, houses with all the extras and a life style only dreamed about by their parents, all built on capital gain.