By Geof Mortlock*
In New Zealand, there has never been an independent review of our financial sector regulatory framework. This, despite the appalling failures of finance companies, the occasional bank and insurer failures, the poor ratings our regulatory arrangements receive from the International Monetary Fund and the ample evidence of deficiency by our financial sector regulators.
In contrast, Australia has undertaken a number of independent reviews of its financial system, including in 1979 (the ‘Campbell Review’), 1997 (the ‘Wallis Report’), 2014 (the ‘Financial System Inquiry’), and this year (the Royal Commission).
The Australian independent reviews have led to many desirable improvements to the architecture and resultant performance of financial regulators in Australia. One of the most important was the removal of all prudential supervision functions from the Reserve Bank of Australia and the establishment of a new, separate Australian Prudential Regulation Authority (APRA). Despite recent regulatory failures, as revealed by the Royal Commission, Australia’s financial system is better regulated today than it would have been in the absence of these reviews. Australia is better off because of this.
Why successive New Zealand governments have failed to take the initiative in launching comprehensive independent reviews of New Zealand’s financial system and its regulatory frameworks is puzzling. It begs the question whether successive ministers of finance have been asleep at the wheel in their respective terms in office in this regard. At least this government has made a constructive move by launching a review of the Reserve Bank – albeit not an independent review, and certainly not a comprehensive one.
Australian capability reviews of financial regulators
One of the important initiatives to emerge from the Australian Financial System Inquiry in 2014, and reinforced by the Australian Royal Commission this year, is a requirement for financial regulatory agencies to be subject to regular performance assessments (‘capability reviews’, as termed in the Royal Commission report). The Financial System Inquiry in 2014 recommended that the financial regulators undergo periodic capability reviews to ensure that they have the skills and culture to be effective in an environment of rapid change. The Royal Commission this year reiterated the point and recommended that the capability reviews be held every five years. The Australian government has accepted this recommendation.
Capability review of ASIC
In July 2015, the Australian securities regulator, ASIC, became the first regulator to undergo a capability review. The ultimate goal of the ASIC Capability Review was to ensure that ASIC had the skills and culture to effectively fulfil the enhanced role which the FSI had laid out for ASIC in its report. The Review was led by an Expert Panel and supported by a team of public and private sector personnel. The Review was required to consider how ASIC uses its resources and powers to deliver its statutory objectives and assess ASIC’s ability to perform as a capable and transparent regulator. The Capability Review was asked to examine, and make recommendations on how efficiently and effectively ASIC operates to achieve its strategic objectives, including:
- identification and analysis of immediate and forward-looking priorities or risks;
- resource prioritisation and responsiveness to emerging issues;
- the skills, capabilities and culture of ASIC; and
- organisational governance and accountability arrangements.
The ASIC Capability Review made a number of key findings and recommendations, including the need to strengthen ASIC governance, to become less reactive and more proactive, and the need to adopt a more forward-looking approach to regulation. Significant changes were made to ASIC’s governance, culture and regulatory approach in response to the Review. Further changes are in the pipeline.
Capability review of APRA
In February this year, the Australian Treasurer announced a capability review of the Australian Prudential Regulation Authority (APRA). The review will provide a forward-looking assessment of APRA's ability to respond to an environment of growing complexity and emerging risks in the Australian financial sector. The Review commenced in March 2019 and is to report to the Australian Government by 30 June 2019.
The objectives of the APRA Capability Review are to:
- Assess APRA’s capability to deliver upon its statutory mandate under the APRA Act and relevant industry acts.
- Undertake a forward-looking assessment of APRA’s ability to respond to an environment of growing complexity and emerging risks for APRA’s regulated sectors.
- Identify recommendations to enhance APRA’s future capability, having regard to the changing operating environment and any relevant organisational initiatives which are already underway.
As part of its work the Panel has been asked to evaluate the extent to which the following factors (among others) support APRA to deliver its statutory mandate:
- a well-considered and clear strategy that takes into account the future operating environment;
- decision-making that balances financial safety and financial stability, and considerations of efficiency, competition, contestability and competitive neutrality;
- a culture that supports supervisory and enforcement actions in support of strategic objectives;
- robust internal governance arrangements, supported by fit-for-purpose internal reporting, performance monitoring, and audit and assurance activities;
- appropriate resource allocation;
- staff with the necessary expertise supported by appropriate tools; and
- sound process and outcomes realised across APRA’s core supervision, policy and resolution functions.
It will be interesting to see what the findings are from this review process.
The need for independent capability reviews in New Zealand
I believe New Zealand should adopt a similar approach to that now established in Australia, with the New Zealand financial sector regulators (mainly the Reserve Bank and the Financial Markets Authority) being subject to independent performance assessments and capability reviews every five years. This would greatly help to strengthen the accountability of our regulatory agencies and bring objective, external, expert scrutiny of the adequacy of their capability and performance. In the longer term, it could be expected to strengthen the quality of financial sector regulation in New Zealand.
The capability reviews/performance assessments would be commissioned by the government of the day. The terms of reference for such reviews would be published. The reviews would be conducted by a panel of independent experts, including at least one from outside New Zealand. The panel would be required to consult widely in conducting the review. It would be required to identify key findings and make recommendations to address any deficiencies found. The reports would be published and hence fully transparent. The government would appropriately be required to publish a response to the reports within a specified time (e.g. 3 months), including setting out any directions it makes to the regulatory agencies to address recommendations made by the review panel. The Treasury would appropriately be tasked to report publicly on the progress being made by the regulatory agencies in implementing the required changes.
These capability reviews should become a regular feature of the New Zealand financial regulatory landscape. They would become an important channel for strengthening the assessment of regulators and creating the incentives for enhanced regulatory capability and performance. Provided that the government of the day takes the findings and recommendations seriously, and requires the regulators to act on them, this could be expected to make a substantial contribution to ongoing improvements to the quality of financial sector regulation in New Zealand, and to a sound and efficient financial system.
The same model of capability reviews could usefully be applied to other regulatory agencies and government agencies in New Zealand outside the financial sector to sharpen accountability, transparency and performance across the government sector.
Let’s hope that the present Minister of Finance takes a more proactive and alert approach to this matter than did his predecessors. Now is the opportunity to do so.
*Geof Mortlock is a Wellington-based international financial consultant who undertakes regular consulting work for the International Monetary Fund, World Bank, Toronto Centre and may other organisations. He draws on a long career in bank regulation and financial stability/central banking, including years at a senior level in the Reserve Bank of New Zealand and Australian Prudential Regulation Authority. He has participated in senior-level committees of the Financial Stability Board and Basel Committee in Switzerland. See www.mortlock.co.nz