“Whichever is less”

I’ve done a few posts over the last couple of months about the lawfulness of the Minister of Finance’s decision to appoint an acting Governor of the Reserve Bank for six months after the expiry, just a couple of days after the election,  of Graeme Wheeler’s term.  As a reminder, I had several times argued that making a substantive five year appointment, to commence just after the election would be inappropriate –  indeed, as Treasury officials advised, it would also be inconsistent with the long-established conventions that govern behaviour in the period close to a general election.  As a further reminder, I have no particular concerns about Grant Spencer; if the appointment is lawful I’m sure he will mind the store capably until a permanent appointment is made by the incoming government.

This post was written on the day the acting appointment was announced, this one following responses to my OIA requests for information relevant to the appointment, and this one from last week on an appeal to the Ombudsman, on the grounds that the public interest (including because of the extent of the powers that rests with any appointee) should lead to the release of any legal advice the Minister, the Board, and officials received on the legality of the appointment.

And there I would have left it, with perhaps a repeat post the day Spencer took office.  My main concerns were about (a) the lack of transparency about an unusual appointment (even if it is lawful), and (b) about the importance of laws being followed, even if the legally questionable appointment was, on the face of it, quite a pragmatic response to the clash of dates (election, and end of Governor’s term).   But they weren’t necessarily points of general interest.

But then a reader got in touch.  The reader wasn’t sure, reading the legislation, whether or not Spencer’s appointment looked lawful, but pointed out that the Reserve Bank Act vests all the powers of the Bank in the Governor personally.  Thus, if there were doubts about the validity of the appointment of a Governor (or in this case an acting Governor), that would appear to raise doubts about the validiity, and potential enforceability, of any actions taken by the Bank during the term of the acting Governor.  That got my attention.

After all, the Governor wields a great deal of power.  He sets the OCR, he sets much of prudential regulatory policy, he authorises enforcement actions against regulated entities, and the Bank –  under his authority –  undertakes large volumes (and values) of financial transactions in domestic and international financial markets.  All delegations to staff are delegations directly from the Governor.   And those are just the routine activities of the Bank.  But a big part of why we have a Reserve Bank is about crisis management –  whether in foreign exchange markets, the economy more generally, or some or all parts of the financial system.   Many of the crisis powers rest with the Minister of Finance.   But many of the operational bits rest with the Bank, in which, as already noted, all powers are vested in the Governor.  That is what a single decisionmaker structure means.  It was a deliberate and conscious choice by Parliament.   Of course, in any particular six month period –  the term of the acting Governor – one hopes the crisis management powers aren’t needed at all.  But crises can flare up quickly, and the last thing one wants is doubts about the powers of the Bank, or the authority of those purporting to exercise such powers, in the middle of a crisis.  Let alone legal action afterwards seeking to invalidate some or all interventions by our central bank.

So I want to go slowly and carefully through the reasons why I think

a) it is not lawful for the Minister of Finance to appoint an acting Governor when the full term of a previous Governor has expired, and

b) why any defects in the appointment of a Governor/acting Governor appear to raise serious doubts about the validity and enforceability of any actions take by the Reserve Bank during the term of any acting Governor.

And I will suggest two possible practical solutions.

The Reserve Bank Act clearly allows for an acting Governor in some circumstances.

Section 47 of the Act allows for the case where the Governor is absent or incapacitated.   If the Governor is on holiday, or indeed seriously ill, the deputy chief executive can act automatically.  But if both the Governor and the deputy chief executive are absent or incapacitated, an acting Governor must be appointed by the Minister on the recommendation of the Board.    There is no limit to the term of such an appointment, although by implication –  since it is to cover an absence of an appointed Governor –  it could last no longer than the expiry of the Governor’s own term.    This section of the Act has never been used, and is not relevant to the current appointment.

Section 48 of the Act covers a vacancy in the office of Governor.    The key bits read as follows

If the office of Governor becomes vacant, the Minister shall, on the recommendation of the Board, appoint….[a person] to act as Governor for a period not exceeding 6 months or for the remainder of the Governor’s term, whichever is less.

The critical phrase here appears to be “whichever is less”.      When Don Brash resigned as Governor in April 2002, there was about sixteen months to run on his term.  The then Minister appointed Rod Carr to act as Governor.    He could be appointed for as long as six months, because there was still sixteen months to run on “the Governor’s term”.  By contrast, on 26 September this year there will be no days left on the Governor’s term.  Graeme Wheeler’s term will have expired at midnight the previous day.   So an acting Governor can only be appointed for…….. zero days, since there are no days left on “the Governor’s term”.  In other words, the Act simply does not appear to allow an acting Governor appointment along the lines of the (purported) Spencer appointment.

This is all consistent with the fact that the Act makes no provision for a Policy Targets Agreement with an acting Governor (it isn’t needed within a Governor’s term, since there is already a PTA in place), even though the PTA is central to the monetary policy parts of the Act,  and that the Act requires all new appointments of a Governor to begin with a five year term.   The Minister and the Board can’t just appoint someone for a succession of short terms –  no matter how well-intentioned the reason –  and thus compromise the effective independence of that person.

It is also, perhaps, worth noting that the previous (1964) Reserve Bank Act –  the one in place when the policy and drafting decisions on the current law were being made  –  also made no provision for the appointment of an acting Governor after the completion of a Governor’s term  (section 18 here ).  Under that legislation there could be an acting Governor only during the term of an appointed Governor (if the Governor and Deputy Governor were absent or incapacitated).  And Governors had to be appointed for five year terms.

In other words, the drafting looks conscious and deliberate.   The 1989 Act explicitly added provisions allowing for an acting Governor when the Governor resigned or died, leaving a vacancy during his term.  But the Bank’s legislation has never, in at least 50 years, allowed for an acting Governor to be appointed to commence after the end of the previous Governor’s term.  But that is what the Minister of Finance, on the recommendation of the Reserve Bank Board, purports to have done (the Minister having received no advice from the Board on the legality of such an appointment).

Does it all matter?    Sometimes laws contain provisions stating that any problems in the appointment of an officeholder, or doubts about the validity of the appointment, don’t affect the validity of enforceability of the actions/decisions taken by that person.

In fact, the Reserve Bank Act has one of those provisions.    For the Board.  Under section 54(4)

The validity of any act of the Board is not affected by—

(a) any vacancy in its membership; or
(b) any defect in the appointment of a director; or
(c) the fact that any non-executive director is disqualified from appointment under section 58.

But there is simply nothing comparable for the Governor.

Curiously, there is protection for the Deputy Chief Executive when exercising delegated authority from the Governor.   Under section 51

The fact that the Deputy Chief Executive exercises any powers or functions of the Governor shall be conclusive proof of the authority to do so, and no person shall be concerned to inquire whether the occasion for doing so has arisen or has ceased.

But there is nothing like it for the Governor, or any acting Governor.  There is simply a requirement on the Board and the Minister to make a proper appointment, and to have that person in place once the previous Governor’s term ends (and presumably an expectation that Governor appointments are sufficiently high profile, and as all powers of the Bank rest with the Governor, no questions should ever arise about the authority of the Governor him or her self to make decisions.

(Again, it is perhaps worth noting that there are also no such protections in the 1964 Act – the one in place when the 1989 Act was being drafted.  The drafters presumably made conscious choices about what to add and what not to.)

Perhaps some legal expert has an authoritative interpretation of these statutory provisions suggesting that

  • an appointment like that of Spencer is legal, and
  • even if there are any doubts, nonetheless there would be no basis to question the legality of the actions of the Bank during his term as “acting Governor”.

If so, surely they now owe it to us to release that advice, or even a summary of the argumentation that led the Minister to conclude that, under the existing statutory provisions, he could appoint Spencer as acting Governor.  Failure to do so appears to leave real doubt about the authority for any actions the Bank takes, or purports to take, during Spencer’s term.     It isn’t a remotely satisfactory situation for such a powerful agency, especially when –  since many routine decisions could simply be deferred –  a big part of the Bank’s responsibility is crisis management.  That uncertainty should unsettle financial market participants here and abroad, it should unsettle Parliament’s Finance and Expenditure Committee (charged with monitioring the Bank), it should unsettle entities regulated by the Bank, and –  given the pervasive reach of many of the Bank’s powers –  it should unsettle citizens more generally.  It simply isn’t a satisfactory situation.

But it is a relatively easily remediable one.    The first option would have been simply to have offered Graeme Wheeler a six month extension on his term.  There are no restrictions on the term of any reappointment of the Governor.  It is a common way to deal with difficulties –  whether logistic or political/constitutional –  in appointing a new chief executive.     Had this option been taken there would have been no doubts about the invalidity of any of the Bank’s actions during that term.   We don’t know whether the Board/Minister refused to countenance another six months of Wheeler, or whether Wheeler simply wanted to be out as sooon as possible.  Given the legislative restrictions, and the election-related constraints, neither would –  on the face of it – seem to have been a particular responsible, public-spirited stance.  Presumably the Wheeler extension option is no longer available, but if it is it should be revisited urgently.

The second option would be for Parliament to act.  With the agreement of the Opposition parties it would be easy and quick to pass a single substantive clause amendment allowing for the appointment of an acting Governor to cover the period 26 September 2017 to 25 March 2018 (the period envisaged for the Spencer acting appointment).   In this case, the acting appointment is a pragmatic solution, but done without legal authority.  So don’t rush to change the legislation permanently –  it looks likely to be back in the House next year whoever wins the election –  but the acting “appointment” itself could easily be validated. It might be a little embarrasing to do so, but it would be a one day wonder, and a small price to avoid any doubts about Bank actions during the acting Governor period.

Of course, the other way would be to appoint Spencer to a five year term as Governor, on the implied expectation that he would resign after six months.   But that is how we got into this situation in the first place.  The conventions around election periods strongly discourage making substantive appointments to powerful public offices, when the appointee would take up the position close to, or shortly after, a forthcoming election.

(This is one of those issues on which I would really like to be wrong.   But I’m increasingly uncomfortable that an error was made by the Minister of Finance and the Bank’s Board.)

2 thoughts on ““Whichever is less”

  1. I see a couple of other solutions : –
    1) Reappoint Wheeler, he resigns on day one, Spencer appointed as acting Governor for six months.
    2) Appoint Spencer as Govenor, he gives six months notice on day one.

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    • 1) would certainly work. 2) would in practice – it was really the last quasi-option i mentioned – although it most likely would not be legal to make the appointment as Governor conditional on such a resignation being submitted

      Like

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