Cullen: Financial Services Institute
Hon Dr Michael Cullen
Deputy Prime Minister, Attorney-General, Minister of Finance, Minister for Tertiary Education, Leader of the House
8 November 2006 Speech Notes
Embargoed until: 7.40pm
Speech to annual dinner of the Financial Services Institute of Australasia
Rangitoto Ballroom, Langham Hotel, Auckland
Can I first thank Steve for those warm words of introduction.
It is a great pleasure for me to be here with you this evening and I would like to thank Ray for inviting me to address you.
In the initial invitation, Ray suggested that I perhaps address the key issues that I believe face the financial system and therefore those of you working in the sector.
I will start by outlining to you the long-term fiscal framework within which this government has over the past seven years conducted all of its policies and then outline our economic transformation agenda and why I believe that these two issues are so critical.
I will also discuss the aims of the government’s current regulatory reviews affecting financial services and touch on the expected impact of recent legislative reforms such as KiwiSaver and how these issues fit into the broad picture of promoting stability and success across our financial sector and broader economy.
* The importance of a stable macroeconomic environment
Many of you will know that each year I issue a Fiscal Strategy Report.
The report sets out the government’s long-term fiscal targets and explains how short-term fiscal intentions are consistent with those long-term aims.
This government, for example, is committed to ensuring that gross public debt levels are at around 20 per cent of gross domestic product in the medium-term and to ensuring also that our on-going revenues are sufficiently above our operating expenses each year to deliver a surplus large enough to fund key infrastructure investments, strengthen the Crown’s financial position, and so enhancing the economy’s growth potential.
That means we run an operating surplus large enough to fund, each year, a significant investment in the New Zealand Superannuation Fund as well as in education, housing and health infrastructure that will help underpin growth and prosperity for future generations.
We have learnt from bitter experience as a country that fiscal policy does not exist in isolation from the wider macroeconomic environment.
As a small trading nation that has an independent central bank tasked with maintaining price stability, responsible governments must always be super-sensitive to ensure that their short-term policy decisions, which of course includes their spending and taxation decisions, do not complicate the job of Kiwi dollar-sensitive exporters to expand their sales, nor complicate the job of the independent central bank to anchor inflationary expectations.
What all of this means in practical terms is that we have to grin and bare the inevitable rocks that are thrown at us from our opponents when they noisily demand unrealistic, indiscriminate lolly scrambles every time that the Treasury announces that the government is running an operating surplus.
What it also means is that when we undertake a significant policy initiative, such as the Business Tax Review, we endeavour to make room for growth-enhancing tax reforms within a stable framework constrained by long-term fiscal objectives.
That, by definition, means that the timing of the implementation of each and every policy initiative must by design take into account the conditions prevailing in the macro-economic environment in which we live and in which we do business.
The economy, for example, is currently close to a number of constraints.
That manifests itself in our very large current account deficit with the rest of the world, our relatively high local currency and the relatively high rates of capacity utilisation affecting many firms and enterprises.
The entire economy benefits, therefore, from the current strength of the public finances as credit rating agencies note from time to time.
Our long term fiscal strategy allows businesses to invest, plan and operate in the assured knowledge that this Labour-led government does not make short-term populist decisions and irresponsibly loosen fiscal policy every time a surplus is reported, oblivious to the likely impact that could have on every business’s and household’s borrowing costs.
We have deliberately allowed the automatic stabilisers to operate – so we build surpluses in good times and don't unduly add to stimulus in the economy, banking revenue for the long term as well through debt reduction and contributions to the super fund. It is responsible government.
A small trading economy like New Zealand does not need unnecessary shocks to its financial market system.
Life is exciting enough without them!
The reputation of New Zealand as an investment destination, and the reputation of our financial markets in turn, benefit a great deal from the stable, predictable and I hope boring fiscal stance that provides a constant framework of constraint on the behaviour of politicians.
* The importance of raising our economic performance over time
And the reputation of New Zealand as an investment destination is also enhanced by the government’s commitment to implement policies that accelerate the transformation of the productive capacity of the economy. We want to loosen the constraints to the economy growing faster on a sustainable basis.
We are focused on strengthening the drivers of a stronger performance in the economy over the next twenty and thirty years, and beyond.
There are five broad areas for action we have identified as essential to get the growth we need over the long term to help us step up the OECD ladder:
- Growing globally competitive firms – New Zealand does not have enough firms with a global reach or competitive advantage;
- World-class infrastructure – New Zealand's historic underinvestment in infrastructure needs to be addressed;
- Innovation and productive workplaces, underpinned by high standards in education, skills and research to boost the productivity growth of New Zealand firms and industries;
- Environmental sustainability – including more efficient resource use and better management of risk;
- An internationally competitive city – greater Auckland needs to strengthen its role as New Zealand's primary gateway to the world.
We all know that to accelerate economic transformation we need an economy that is high value and high income, innovative and export-led.
We have made significant progress in advancing the key drivers of that transformation process.
The Business Tax Review is a critical part of that same agenda, as are the regulatory reviews and upcoming reforms that will affect, for example, financial service providers.
While the government must focus its diverse roles to help create the right environment to facilitate these reforms over time, it are of course thousands of small firms that must do the business - by raising their potential output and by setting, and then meeting, more and more ambitious targets in a process that raises the overall attractiveness of New Zealand as a place to do business with.
The reputation of New Zealand as an investment destination, and the reputation of our financial markets in turn, benefit a great deal from having a government that pursues policies designed to strengthen the enablers of growth.
* Recent legislative reforms include KiwiSaver
One of my roles as the Minister of Finance is to facilitate the government’s Economic Transformation agenda by ensuring the foundations for these policies are in place. I have already talked about the importance of being sensitive to macroeconomic conditions when making policy decisions - having strong capital markets is also intimately connected to the economic transformation agenda.
The government recognises the value that financial intermediaries can add to New Zealanders’ saving and investment behaviour. Even Treasury in its post-election briefing conceded that policies should err toward encouraging an increase in private saving.
Under the KiwiSaver legislation enacted recently, due to come into effect next July, new employees will receive an information pack which suggests that employees should seek financial advice if they want additional information and encourages employees to seek advice from a professional financial adviser rather than their employer.
It is important that potential retail investors have financial intermediaries who have the skills and experience needed to provide reliable information to help employees make rational decisions.
The government has high hopes that KiwiSaver, combined with other initiatives, will over time contribute to a measurable strengthening in the nation’s savings culture and performance. It can only happen with a reliable financial services industry.
* Encouraging confidence and participation in the financial sector
Since we came into office in 1999, the government has also been engaged in a significant financial services reform programme designed to encourage greater confidence and participation in the financial sector.
I think you all appreciate that in this finance minister you have someone who is particularly keen to see more New Zealanders saving and investing.
This will not happen unless the financial markets, institutions and intermediaries are appropriately regulated so that investors are not exposed to unmanageable risks.
In considering regulatory changes in this area, we have been sensitive from the start to fully take into account the real and potential implications arising out of the ongoing globalisation of capital markets.
No capital market can ignore the need to achieve global standards and norms if it is to best compete for, and attract, investment capital.
I do not need to tell you that in recent years we have all seen an increasing emphasis on international standards in the regulation of financial markets and, while it may not always be appropriate for a small market like ours to adopt all of these standards when designing regulatory reform here, we do need to look to incorporating those where appropriate.
In particular, given our economy’s very strong links to the Australian economy, we are especially conscious of the importance of keeping a close eye on developments in Australia.
Although I am sure you are aware of much of the detail of the reviews that are currently being undertaken in the financial services area, I thought I would quickly run over some of the key reviews, commenting on some of the major aspects of these and update you on current progress to date.
The Review of Financial Intermediaries is proposing a co-regulatory model between industry-led Approved Professional Bodies and the Securities Commission.
It is proposed that financial intermediaries will be subject to enhanced disclosure obligations when providing financial advice with obligations dependent upon the class of financial intermediary.
Of interest to me is that the co-regulator model proposed for the regulation of financial intermediaries should also help to keep compliance costs down. Instead of creating a new regulator, with all the funding and levies that would no doubt generate, we are proposing instead to leverage off the Securities Commission’s existing expertise and knowledge of the market, coupled with professional bodies’ industry knowledge and experience.
Submissions have now closed on the review and the Ministry of Economic Development is currently analysing the submissions and comments in response to their earlier discussion document and consultation process.
I anticipate that legislation on co-regulation may be introduced in 2007, with implementing legislation possibly enacted in 2007/2008.
The Ministry of Economic Development will take an open and consultative approach to encourage key stakeholders to participate in the design and legislative process.
Of course it will also be important, when the time comes for finalising the details of the regime around financial intermediaries, to take into account the decisions coming out of The Review of Financial Products and Providers.
The Review of Financial Products and Providers rolls into one a review of the Securities Act; ongoing work on insurance and superannuation regulation; and it considers the regulation of non-bank financial institutions such as finance companies, credit unions and building societies.
Much of the work is about streamlining and making consistent the host of regulations that have grown up over a long period of time around New Zealand’s financial sector.
When completed, the Review will, we anticipate, deliver an effective and consistent framework for the regulation of non-bank financial providers and products that promotes confidence and participation in financial markets by investors and institutions.
In summary, at the conclusion of the Review, we expect:
- A more formalised prudential supervision regime for some insurers and non-bank financial institutions;
- Improvements in the regulatory framework for securities’ offerings, managed funds and superannuation;
- A reduction in compliance costs in some areas such as for securities’ offerings;
- The Securities Commission will undertake some supervision of trustees and statutory supervisors and that all financial services providers will be accounted for in the country’s updated regulations and law.
The discussion documents for this review are currently available on MED’s website and the closing date for submissions is December 1st.
At this stage, I expect that legislation arising out of the review may be introduced during 2007/08 and enacted in 2008.
I am confident these reviews will deliver an improved regulatory framework that will allow more New Zealanders to have access to quality financial advice and financial products so they can make the best decisions about saving for their future.
I would like to take the opportunity to thank many of you
here for your input on these reviews so far and encourage
you also to continue to provide feedback through the
submission and select committee process ahead. It is vital
that we get it right and we will, with your assistance and
These reviews, of course, follow on from, the introduction of the Takeovers Code and the enactment of the Securities Markets and Institutions legislation as well as the Securities Legislation Act.
Can I thank you again for inviting me to be here tonight, a very important date in the annual calendar for this crucial sector.