Submission on the Financial Markets Amendment Bill

Submission on the Financial Markets (Conduct of Institutions) (Duty to Provide Financial Services)Amendment Bill

We are pleased to share our submission on the Financial Markets (Conduct of Institutions) (Duty to Provide Financial Services) Amendment Bill

Key points of our submission

An essential element of good government is ensuring that commercial enterprises are able to efficiently provide goods and services that citizens can use to create wellbeing for themselves, their whānau, their communities and their regions. The efficient provision of financial services is essential for this aspect of Aotearoa New Zealand’s market-based economy.

This Bill imposes new prohibitions on decision-making by a financial institution in its normal business operations unless the institution can provide a valid and verifiable commercial reason or can demonstrate its decision is required or permitted by another enactment.

We submit that this imposition will increase the costs of providing financial services. We further submit that the Bill fails to recognise the importance of environmental, social, or governance considerations, and therefore of climate-related reporting standards, in identifying and managing commercial opportunities and risks.

WEAll therefore recommends that the Bill should not proceed. The remainder of this submission expands on the reasons behind our recommendation.

The Role of Financial Institutions

To introduce our submission, we note that financial institutions are private enterprises acting as intermediaries between lenders and borrowers. Financial institutions compete with each other to attract savings from lenders and to attract borrowers with sound proposals for investment. Financial institutions are accountable to their shareholders who have strong incentives to monitor commercial performance.

It hardly needs saying that the activities of financial institutions are vitally important for our economy. Financial institutions evaluate the commercial opportunities and risks associated with requests for loans, and they make decisions that will reward the savers who provide them with funds.

Evaluating commercial opportunities and risks is a specialist and knowledge-intensive skill that financial institutions are careful to foster and reward as the basis for their competitive performance.

Consequently, governments must be very cautious in interfering with the decision-making of financial institutions, least the interference increases the costs of providing financial services, diminishes the contribution of knowledge-intensive skills in decision-making, and/or lowers the return tocustomers who lend their savings to institutions. The government must also have regard to the country’s international reputation for financial propriety when making such an intervention.

Section 4 of this Bill inserts two new sections after section 446J of the Financial Markets (Conduct of Institutions) Amendment Act 2022. It prohibits certain decisions by financial institutions unless a financial institution can provide a valid and verifiable commercial reason or can demonstrate its decision is required or permitted by another enactment. We address these features in the following two sections.

Prohibited Reasons

The Bill introduces four reasons that would be prohibited in the different provision of financial services to different consumers. The first refers to the Human Rights Act 1993. WEAll Aotearoa supports that reference, but notes that this clause adds nothing to the Act.

The second prohibited reason is “any direct or indirect environmental, social, or governance consideration”. We note that the use of “direct or indirect” makes this a broad prohibition that will introduce uncertainty into the work of financial institutions.

In the commercial world, the use of ESG considerations has become an important and very common tool in evaluating opportunities and risks. To give a simple illustration, the opportunities and risks associated with a proposed investment are likely to be strongly influenced by the degree of relevant experience and expertise available in the governance structure for the proposed investment.

The third prohibited reason is “any climate-related reporting standard issued by the External Reporting Board”. Members of the Select Committee will be aware that the ERB aims to provide “a consistent framework for entities to consider the climate-related risks and climate-related opportunities that climate change presents for their activities over the short, medium and long term” (NZ CS 1, paragraph 1). Note the reference to risks and opportunities. It means that these climate-related reporting standards are essential for the work of financial intermediaries.

The fourth prohibited reason is “the industry in which the consumer operates”. Because the evaluation of opportunities and risks requires specialist skills, it is not unusual for financial institutions to specialise in theindustries they cover. Even for general financial intermediaries, standard considerations of portfolio balance may lead an institution to reduce new loans for certain industries for a period of time. Because the financial sector is broad with a large number of institutions, these rational decisions by individual institutions should not be penalised.

In summary, the prohibitions in the Bill (other than the prohibition based on an existing statute in the Human Rights Act) would deny important tools to financial institutions that are needed to identify and manage risks and opportunities.

This would lead to bad outcomes for consumers (who might receive loans for projects that have not been properly considered for their ESG and climate-related risks and opportunities). It would also lead to bad outcomes for savers (who would receive a lower rate of return on their funds).

Valid and Verifiable Commercial Reasons

The Bill makes two exemptions: if a financial institution can provide a valid and verifiable commercial reason; or if the institution can demonstrate its decision is required or permitted by another enactment. The second exemption is straightforward, but the first is not. The Bill provides no guidance on what is considered to be a valid commercial reason, and it provides no standard for evaluating whether a commercial reason is verifiable.

Thus, when a financial institution decides to decline a request for financial services, or when it decides to offer services at a higher interest rate than required for other borrowers, it must have regard to how it can verify the commercial reasons for its decision and how it can demonstrate that those commercial reasons are valid.

This is a major intrusion on the day-to-day practice of financial institutions. It must increase costs for those institutions. This is particularly severe for an individual providing financial services, who is liable upon conviction to imprisonment for up to three months. The higher costs will be borne by the users of financial services in New Zealand, undermining the competitiveness of our exports in global markets.

In summary, the exemptions in the Bill would introduce a higher level of uncertainty in the day-to-day operations of financial institutions. Again, this would lead to bad outcomes for consumers (who would have to pay higher fees reflecting the higher costs to financial institutions) and bad outcomes for savers (who would receive a lower rate of return on their funds as a result of a less efficient financial sector).

Conclusion

WEAll Aotearoa thanks the Finance and Expenditure Committee for the opportunity to submit on the Financial Markets (Conduct of Institutions) Amendment (Duty to Provide Financial Services) Amendment Bill.

We recommend that the Select Committee report back to Parliament that this Bill should not proceed.

WEAll Aotearoa advises that we wish to make an oral submission.