Academic journal article The Reserve Bank of New Zealand Bulletin

Financial System Regulation in New Zealand

Academic journal article The Reserve Bank of New Zealand Bulletin

Financial System Regulation in New Zealand

Article excerpt

Alan Bollard, Governor, and Tim Ng, Manager, Financial System Policy, Reserve Bank of New Zealand. Speech presented to the Finance Sector Ombudsman Conference, 25 July 2003, Wellington, New Zealand

This paper discusses the Reserve Bank's role in the regulation of the financial system. It begins by outlining the importance of the "infrastructure" supporting financial activity--that is, the framework of applicable statutory law, administered policy, contracts, codes of conduct, corporate governance, and dispute resolution processes. Then, we discuss the Reserve Bank's objectives and our approach to the exercise of our powers. As the Reserve Bank is one of a number of financial regulators in New Zealand, we touch on how our responsibilities fit into the overall regulatory system applying to the financial sector. We make some observations about the special character of the New Zealand financial system, how it is changing, and the implications for financial regulators. Finally, we discuss some current policy work at the Reserve Bank on these issues.

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Infrastructure for a sound and efficient financial system

Financial firms accept funds from customers and investors, and transform those funds into financial products carrying a range of risk, return and liquidity characteristics. These products are then offered for sale into the marketplace. Given that financial products are obligations

to deliver value in the future, the importance of a sound, robust and transparent framework of rules governing those obligations cannot be overstated. In order for the financial system to perform effectively, the rules must appropriately define the meaning of the obligations, their proper execution, and their enforcement.

At the highest level, rules may be set by statute. In New Zealand, a number of pieces of legislation govern the financial system. The activities of particular kinds of financial institutions may be regulated--for example, by the Reserve Bank of New Zealand Act for banks and by the Life insurance Act for life insurers. As corporate businesses, financial institutions are also subject to the various statutes defining general business law, such as the Companies Act, the Commerce Act and the Fair Trading Act.

The manner in which financial products may be offered may also be regulated. For example, the Securities Act specifies disclosure and prospectus issuance requirements for securities offered to the public, and the Credit Contracts Act places certain restrictions on advertising content related to consumer loans.

Rules may also be made by government agencies, in cases where they have been empowered by legislation or Ministerial directive. Examples include the rulemaking powers given to the Reserve Bank by the Reserve Bank of New Zealand Act, and to the Ministry of Economic Development by the Securities Act.

Outside the realm of rule-making by Parliament and by government agencies, financial institutions have the ability to enter into contracts with their customers, setting and agreeing to abide by rules defining their rights and obligations with respect to those customers. Financial institutions may also bind their own behaviour through industry-agreed codes of conduct and guidelines for market practices. Finally, as a matter of good corporate governance, individual institutions will typically make internal rules to ensure that the institution's obligations are exhaustively identified and discharged.

All these different means of making rules have a role to play in increasing affected parties' mutual understanding and acceptance of respective rights and obligations. Such mutual understanding is a crucial component of the actual process of adding and selling value in a financial service.

For any particular kind of financial activity, the particular rulemaking device chosen to set parameters around conduct should suit the circumstances, considering the risk and value at stake and the costs and risks of the rule-making device itself. …

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