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Lianne Dalziel - Speech to NZ Fixed Income Forum

25 May 2006 Speech Notes

Speech to New Zealand Fixed Income Forum

Thank you for the opportunity to speak to this forum. I have been asked to address the government's perspective on forging closer ties with the international financial community, especially Australia. This is an extremely timely request as I joined the Hon Michael Cullen at his bilateral with Hon Peter Costello earlier this year, given the importance of the Single Economic Market in terms of the agenda for the meeting and the role of the Commerce portfolio in terms of delivering on significant aspects of the SEM agenda.

The Single Economic Market is also an important aspect of the New Zealand's economic transformation agenda, which recognises the reality of our place in the world. As Michael Cullen said in the Budget Speech last week:

"Economic transformation must build on an understanding of the need for continuous change and adaptation. A small and relatively isolated developed nation in the South-West Pacific – the most isolated developed nation in the world – has to build its prosperity on its flexibility and adaptiveness, its responsiveness to changing market conditions and demands."

In terms of New Zealand's relationship to the international investment world the key to me has always been that we don't look too different from other investment destinations when the institutional investors are looking around and I think that the changes this government has introduced in terms of securities markets legislation, takeover rules and restrictions on insider trading have improved New Zealand's reputation considerably.

The fact that the head of our Securities Commission chairs the Executive Committee of IOSCO says that New Zealand punches above its weight in this arena as we do in so many others. I am also aware that as newer trading partners develop their own institutional and regulatory frameworks they do look to New Zealand for leadership and guidance and I believe this is a tremendous advantage that we have. When we take up the opportunity to offer that advice, we improve understanding of our market in the minds of those who invest here and help shape the markets we invest in. The benefits may be intangible but they are real.

New Zealand's relationship with Australia however, is the most enduring of our economic relationships in terms of the 20-year history of the Closer Economic Relationship Treaty and the most important in terms of Australia being our largest trading partner. Our trans-Tasman relationship is clearly an important element of our overall strategy to increase our international competitiveness, which will be achieved through innovation, higher productivity and economic growth.

There is sometimes a misconception, outside government circles, that the Single Economic Market agenda means New Zealand adopting Australian laws and regulations. Those of you who have heard me speak on this will know that is not true. Harmonising our rules is certainly a goal of the Single Economic Market, but that does not mean a single approach is required.

Sometimes harmonisation will result in one adopting the other's regulatory framework; sometimes a new joint framework will be adopted and shared; and on other occasions a decision will be made on either or both sides of the Tasman that compliance in one jurisdiction is automatically compliance in the other. They all have merit in terms of approach.

At the highest level, the Single Economic Market agenda recognises the strategic importance of Australia economically to New Zealand, however, whenever external stakeholders talk about it they seem to have in mind objectives like a single currency or a single tax regime.
I have no problem discussing these matters – but prefer to debate what's actually possible, because it is pointless wasting time about what could be, if it is not going to happen. Unless the Australian government were to put the question of an ANZAC dollar on the table, then the only single currency they are interested in is the Australian currency. So that means the question is would New Zealand adopt the Australian currency? Call me old-fashioned, but I don't think that's an argument with even a hint of a winning edge here in New Zealand.

There are also such fundamental differences in our tax policies that I see a single tax system as an unachievable goal too. Ironically it is the people, who do know better, who use public ignorance to restrict the debate to headline tax rates with no reference to other features of each other's policies that would be unacceptable to the other – e.g. universal superannuation in New Zealand and capital gains tax in Australia.

So that is what the Single Economic Market agenda is not about. What it is about is a commitment by the two governments to continue to look for ways to reduce barriers to trade in goods, services, labour and capital and to improve the efficiency and competitiveness of New Zealand and Australian businesses. It is about looking for areas where government and industry in our two countries can work more closely together to improve the bilateral business environment, to improve our global competitiveness, and to manage external risks.

The Single Economic Market agenda also creates an opportunity for New Zealand and Australia to look outward together. That is, to take advantage of our close economic relationship to work cooperatively to influence or address international trends which represent significant challenges to both our economies. These include issues such as:

• international regulatory convergence
• global skills shortages
• competition for foreign investment
The work we are doing under the Single Economic Market agenda has four broad themes:

• reducing the impact of borders — focusing on reducing formal barriers and streamlining border clearance processes;
• improving the business environment through regulatory coordination — focused on reducing behind the border barriers to trade by streamlining trans-Tasman regulatory frameworks;
• improving regulatory effectiveness — focusing on finding ways for regulators on both sides of the Tasman to operate more efficiently and effectively; and
• supporting business opportunities through industry policy — focusing on facilitating connections between businesses to take advantage of increasing openness in trans-Tasman markets.

We have already made good progress in a range of areas of regulation affecting financial markets in Australia and New Zealand. In February this year the Australian Treasurer and I signed a revised Memorandum of Understanding on Coordination of Business Law between Australia and New Zealand. This followed the first five-year review of the previous MOU signed in 2000 and is aimed at reducing unnecessary compliance and transaction costs arising out of trans-Tasman differences in business laws. Over the coming years as these costs are reduced, it will become less expensive for New Zealand businesses to access and operate in the Australian market, and vice versa.

The work programme includes regulation of financial intermediaries, disclosure regimes in securities law, competition law, insolvency law, intellectual property, insurance regulation - just to mention a few areas. We intend to move on the mutual banning of company directors this year – which ties in well with trans-Tasman company registration, which I anticipate will happen in the next 12 months or so and also with the second agreement Peter Costello and I signed. This agreement underpins a regime for mutual recognition of securities offerings between the two countries.

I regard this as one of the major achievements under the MOU; where issuers opt into the regime they will be able to offer their securities in both countries using one prospectus. The regime will promote investment between Australia and New Zealand, enhance competition in capital markets, reduce costs for business, and increase the choice for investors.

The Business Law Co-ordination MOU recognises that different approaches can achieve the goal of increased coordination in business law. It takes into account that one approach would not be suitable for every area and that coordination is a multi-faceted concept. It does not, as I have said, necessarily mean the adoption of identical laws, but rather finding a way to deal with any differences so they do not create barriers to trade and investment. In each case, both governments need to ensure that the benefits of co-ordination outweigh the costs and risks associated with the method adopted.

On the trans-Tasman front, we have also done a lot of work around accounting standards. The Trans-Tasman Accounting Standards Advisory Group was set up in early 2004 to advise the two governments on strategies to establish a single set of trans-Tasman accounting standards within the context of both countries adopting International Financial Reporting Standards. The advisory group also advises on ways of maximising the two countries’ influence on IFRS.

A single set of accounting standards would result in a significant reduction in compliance and administration costs for trans-Tasman businesses. By bringing together the key organisations involved in standards setting and approval, with a common objective, we have moved a long way towards our aim already. Its major achievements in the first two years have been:

• cross-appointments between the oversight and standards making bodies;
• a co-operation protocol between the standards making bodies; and
• a dialogue with other Asia-Oceania jurisdictions by Australia and New Zealand jointly hosting a regional forum on IFRS.

Another important part of the Single Economic Market that you have asked me to comment on is banking supervision. This is of course outside my portfolio responsibilities and falls squarely in Dr Cullen's arena. That being said I believe that the process whereby decisions would be made beyond those already signalled is the same.

There are major areas where we already have close ties with Australia, however there is room to do more, but we need to ensure that in each case we are using the right tool for the job.

Trans-Tasman regulatory cooperation falls into three broad categories:

• unilateral coordination of laws – New Zealand has done this in some of our securities law reforms, such as our insider trading reforms;
• bilateral undertakings that are not legally binding – for example the MOU on business law coordination; and
• bilateral legally binding commitments – such as the agreement on mutual recognition of securities offerings.

Within these categories there are a range of forms of cooperation, and any particular cooperation initiative will be likely to use a range of tools. Regulatory cooperation is important because:

• to a significant extent the costs of having to comply with different regulatory requirements are borne by firms who have business in both countries;
• the effects of activities in one country are increasingly spilling over into the other, so we need to be able to take effective enforcement action across borders; and
• there is a very high level of trans-Tasman regulatory integration, which has resulted from both unilateral coordination of laws (one country ‘borrowing’ from the other) and bilateral arrangements.

It is important to consider why we are looking for more for regulatory cooperation between New Zealand and Australia.

It ranges from the reduction of compliance costs and trade barriers, through to ensuring that there is effective ‘regulatory reach’ (e.g., providing for effective enforcement in one country for breaches of the law in the other), and onto achieving economies of scale and scope in carrying out increasingly complex and resource intensive regulatory functions.

So, taking into account the broad agenda of areas for coordination, the reasons why we coordinate and the range of tools we can use to coordinate, we need to have a framework we can use for thinking about these issues. How do we choose the right tool for the job?

You have asked me to talk about the pros and cons of a single trans-Tasman financial regulator. Before I get to that, let me just state where we are at. Last year, the two governments agreed to establish a Trans-Tasman Council on Banking Supervision. The terms of reference for the council provide for it to have an advisory and guidance role and to work to enhance cooperation between the supervisors. Following the first report of the Council, the Australian and New Zealand Governments have agreed to legislate changes recommended by the Council.

These changes will require the banking supervisors to support each other and consider the impact of their actions on financial system stability in the other country. APRA and the RBNZ will also be required to consult each other on these matters.

The proposals reflect the high degree of commercial interdependence of the Australian and New Zealand banking markets and will facilitate the development of the Single Economic Market objective. In addition, the regulators will be able to give banks some more flexibility in how they structure their businesses within the trans-Tasman markets, which is expected to bring compliance cost reductions and efficiency benefits.

The Council will now be looking at improved cooperation on crisis management and promoting seamless service provision for customers. So why would we want a single trans-Tasman financial regulator. As with any of the ways of developing closer ties, we need to think very carefully about the risks and opportunities and the cost/benefit ratio. It would be a big step to take, and a strong case would have to be made.

I don’t see a Single Economic Market objective as prescribing a particular set of institutional arrangements to govern trans-Tasman markets. Rather, it is about identifying innovative and low cost actions that could minimise the effects that arise from different, conflicting or duplicate regulations or institutions.

First we need to think about the objective we are trying to reach? I have come to the conclusion in developing the focus of the Quality Regulation Taskforce that sometimes we go straight to the answer without asking the right questions before we get there. So question number one is 'what is the objective?' Question number two is 'what are the options?' Question number three is "what are the risks and consequences associated with each of the options?" Question number four is 'what are the cost-benefits of each of the options?' Question number five is 'what do the key stakeholders think?' And then we make a decision – it's called regulatory impact analysis. And I think we should all do it.

With the question you have asked it is important to remember that joint institutions are a means to an end, rather than an end themselves. If we are able to achieve the objective of a particular initiative through another means, a single institution may not be the best approach.
An enforcement cooperation between two regulators with a mutual recognition agreement may produce exactly the same result and yet involve none of the costs of a joint institution. This was the decision when the Council on Banking Supervision was set up. The option of a joint regulator for prudential supervision was considered then, but there was uncertainty about the benefits.

Currently, the regulators in the financial sector are using many forms of coordination:
• MOUs between regulators
• cross membership
• regular meetings.

All of these tools are appropriate at the moment, and a case would have to be made to go to the next step of a single regulator.

So in summary – yes, it is possible to set up a joint trans-Tasman financial regulator, but how would that advance the position we have now? And while there is a trend towards convergence of regulation internationally, the systems and structures for regulatory institutions vary widely – for example, the mega-regulator approach of the United Kingdom, with its Financial Services Authority, to the dual regulator approach of Australia, with APRA and ASIC as prudential and market conduct regulators.

Here in New Zealand, we are currently carrying out a Review of Financial Products and Providers and a review of our institutional arrangements for regulation of the financial sector. As part of these reviews, we are looking at what we can do unilaterally to remove any impediments to trans-Tasman business activity. On the completion of the reviews, we aim to have a consistent and effective regulatory framework for the non-bank financial sector, appropriate for New Zealand conditions – and it is the last point that is important even in the context of the Single Economic Market agenda - because I do not look across the Tasman and think "gee I wish we had what they have" in this regard.
While we continue to aim for a seamless trans-Tasman business environment, we have to keep in mind the firms who operate in the domestic market only. One of the themes that came through in the submissions on the review of the MOU was that care should be taken not to impose unnecessary regulatory burdens on businesses, which do not undertake international trade (and on small and medium sized businesses). As Small Business Minister, that’s important to me as well.

We need to ensure that our strategy increases, not limits, choices for New Zealand firms and investors in the global marketplace, not just a trans-Tasman environment. We will also be aiming for our regulation to be cost effective for a New Zealand setting, having regard to any characteristics unique to New Zealand. In a wider global environment we need to be aware of international best practice and the need to integrate the New Zealand and trans-Tasman markets into the overall global market. I will repeat Michael Cullen's words, because they are important:

"Economic transformation must build on an understanding of the need for continuous change and adaptation. A small and relatively isolated developed nation in the South-West Pacific – the most isolated developed nation in the world – has to build its prosperity on its flexibility and adaptiveness, its responsiveness to changing market conditions and demands."

The government is keen to hear your views on the work we are doing and what more we can do, particularly together. It is essential that government and business have an effective partnership in order to take on the world.


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