Misconduct

This week we’ve had the unseemly sight of leading public servants engaged in rank populism, publically demanding private companies prove their innocence of non-specific charges – and not in a court of law, but to the satisfaction of the “prosecutors” themselves, Adrian Orr and Rob Everett (with apparent encouragement from the Minister of Finance).  In the new Governor’s case, it wasn’t as if he’d even managed to keep to the same line from one week to the next: in interviews a couple of weeks ago he wanted us all to know that New Zealand was different and there wasn’t anything to worry about, but by this week he’d jumped on board –  perhaps not wanting to be left out –  with the chief executive of the Financial Markets Authority and was “demanding” answers from banks.

In the Governor’s case, the legislation he works under appears to give him no basis for such actions or demands –  his banking supervision powers are about the maintenance of a “sound and efficient” financial system, not about market conduct.   And independent central bankers –  overmighty citizens at present, with all that power in one man’s hand –  are well advised to stick to their knitting, the powers and responsibilities Parliament has specifically delegated to them.  Cheap populism is a dangerous path to take in pursuit of some faux legitimacy.    I’m much less familiar with the FMA’s statutory powers, but it is pretty unseemly to have public servants leaping into the public domain demanding that private companies justify themselves (with no specific charges or allegations) to them.   We are suppposed to be ruled by laws not by men, and just because Australian-owned banks aren’t overly popular in some quarters doesn’t exempt them from those precepts and protections.

Of course, the Governor and the FMA chief executive playing populism sets up its own equally unappealing set of responses.  The Bankers’ Association has published an open letter they sent back to Orr and Everett which is full of shameless pandering.  There was this

“Ultimately decisions about regulatory responses rightfully rest with you, and you have our commitment that we will support any response”

But

(a) none of this has anything to do with the Reserve Bank and the legislation it operates under,

(b) the FMA does not set its own regulations, but operates under legislation passed by Parliament and regulations promulgated by ministers,

(c) Royal Commissions, a la Australia, are entirely a matter for elected politicians, and

(c) no serious person is going to commit to support just any regulatory response, with no idea what form such responses might take.

There was also this

Proactive agenda of regulators: The New Zealand regulatory framework enables regulators to act dynamically and quickly before issues become significant, compared to the slower, less agile pace witnessed in Australia……We have also seen that foresign and adaptability in RBNZ’s use of loan-to-value lending restrictions, which proved effective in managing the escalating housing market and the associated economic risk.

Let me throw up now.

I’m still in the camp that thinks it inherently unlikely that matrix-managed subsidiaries of Australian parents are doing things that much differently here than in Australia (and, after all, the BNZ’s new chief executive has been part of the NAB Executive Leadership team for the last few years).  But evidence would be a good basis for regulators (those with suitable powers and responsibilities) to start inquiries, not highly-publicised populist fishing expeditions, and the associated slurs.  And evidence needs to go a bit beyond a suggestion that a bank might have suggested their Kiwisaver product to go along with your mortgage or cheque account –  akin to a burger chain encouraging you to consider fries with your burger.  If we must have populism, leave it to the politicians.  We can toss them out.

As I noted the other day, it isn’t as if the Reserve Bank and the FMA have been particularly good at dealing with specific conduct issues, on which they have detailed evidence.    The Reserve Bank’s misconduct –  and the passivity of the FMA –  doesn’t affect tens of thousands of people, but it doesn’t make it any more acceptable.  Perhaps it is a straw in the wind of the way many New Zealand institutions choose to operate?

After writing that post, into my email inbox popped the newsletter of that worthy NGO Transparency International.   Their website proclaims this mission

“A world with trusted integrity systems in which government, politics, business, civil society and the daily lives of people are free of corruption.”

The longserving chair of Transparency’s New Zealand arm is Suzanne Snively.  In this month’s newsletter she writes

The point of transparency and accountability is to strive to do the right thing in all activities.

New Zealand banks and insurance companies have been quick to distance themselves from the evidence found by the hearings before the Royal Commission.

The challenge is that New Zealand’s largest four registered banks – ANZ, ASB, BNZ and Westpac, are subsidiaries of Australia’s four largest banks. AMP is one of New Zealand’s largest insurance companies.

It is naive to believe that the New Zealand system is different without solid evidence. It is not enough to have the industry self-disclose. This after all, is what happened prior to the current Australian inquiry. Only through the process of independent scrutiny have we learnt what really is going on.

and

Based on evidence before the Commission that has to date been made public, much of the misconduct could be regarded as corruption. Corruption is the abuse of entrusted power for private gain.

The best antidote for corruption is the existence of strong integrity systems within organisations. An integrity system refers to the features of the entity’s structure that contribute to its transparency and accountability.

In high integrity organisations, transparency and accountability starts at the top, led by good governance supported by management policy and practice…….

New Zealand can own the leadership position and model good behaviour to the rest of the world.

Those are fine words.  So it is perhaps unfortunate that Ms Snively was closely involved in the abuse (misconduct at least) that I outlined the other day.

Back in the late 80s and early 90s, she was a Board member of the Reserve Bank.   Until the current Reserve Bank Act came into effect in early 1990, the Board was (in effect) the Reserve Bank –  all power and responsibility rested with them, and they delegated any powers they chose to the Governor.  After that, (in law) the Board assumed the current monitoring and accountability role.

The Bank’s Board had an active involvement in the reform of the Bank’s staff superannuation scheme (minutes from that era record substantive ongoing engagement).  Under the trust deed of the scheme, Board consent was required for any changes to the rules.   And a majority of the trustees of the superannuation scheme were either Board members themselves or appointed by the Board.  The then Governor was a trustee (ex officio), and so was Ms Snively.

And this  (extracted from the earlier post) was what happened in 1998, with Ms Snively serving as a Board member and trustee.

Suppose that the rules of a superannuation scheme explicitly required that any rules changes that could have an adverse effect on the interest of any member in that scheme could only be made with the unanimous consent of such members.

Suppose too that nonetheless the trustees of such a scheme went ahead and changed the rules of a defined benefit scheme in a way that allowed the employer to arbitrarily (ie no constraints at all) reduce the rate at which pension benefits were calculated (including in respect of periods of employment, and employee contributions, prior to the rule change).  No consent from potentially affected members was sought for this change.

Suppose that in making this change, they had the endorsement/consent of the board of directors of the employer, and of the chief executive of the organisation.

Suppose too that that new power was actually exercised by the employer, in a way which led to longstanding employees later retiring with pensions considerably lower than they would otherwise have been.  That represented a substantial wealth transfer (probably millions of dollars) to the employer.

It was an egregious abuse of power, and a betrayal of the trust responsibilities to members that all trustees had.

This wasn’t the only shady item during Ms Snively’s term as a government-appointed Board member, and as a trustee.   In 1991, a rule change was made to the scheme (not much more than a single line in a big package of changes).  It was done very late in the piece, with no consultation with members.   To this day, people argue whether it made anyone worse off, but under the law –  the Superannuation Schemes Act –  any rule changes were required to be advised in writing to members.  That simply wasn’t done.  It was an offence under the Act –  for which, fortunately for the trustees of the day, including Ms Snively, the statute of limitations has long since expired.  This point isn’t contentious: today’s trustees a few years ago issued a formal apology to members for that breach.

There is also reason to doubt that the rule change itself was ever properly made (consciously approved by the Board and trustees).  In fact, one trustee from that period has sworn an affadavit that he had no knowledge of the change (although he signed each page of the fairly-lengthy revised deed), suggesting questionable behaviour by Reserve Bank senior management.

Good governance when Ms Snively was on the Board and the trustees also appears to have involved the same law firm  (same lawyer) advising the trustees as was advising the Reserve Bank itself, despite the manifold potential for conflicts between the interests of members and those of the Bank.

These particular episodes occurred a long time ago (although, to the extent there was misconduct, the effects are still felt today –  that is nature of locked-in long-term retirement savings vehicles, one of the reasons there is a case for regulation).  And Ms Snively hasn’t been on the Board or a trustee for a long time.   But I understand that these issues were brought to her attention a few years ago, and she apparently displayed no interest in either getting to the bottom of them, or exerting the sort of moral suasion one might expect from someone who is head of Transparency International.

And it isn’t as if she is now completely detached from all things to do with the Reserve Bank.  A few months ago the new government appointed Ms Snively to head an Independent Expert Advisory Panel, listing as the first item that qualified her her former role as a director of the Reserve Bank.  She continues to play, apparently, a lead role in advising the government on the reform of the Reserve Bank Act, including the (rather large) chunks governing the Bank’s financial regulatory powers.

No doubt she has no legal powers or entitlements at this stage.  But part of leadership is a willingness to take a stand, to seek to exert some moral authority.  And particularly when you yourself are directly complicit in some institutional misconduct from years ago, all while now leading the cause of integrity in public life, one might have hoped –  perhaps might still hope? –  for more.  Integrity sometimes involves going the second mile; it isn’t just a matter of systems, processes, and bureaucratic procedures, or the attempted cover of “oh, I’ve moved on”.

Much the same might be said of today’s Reserve Bank Board.  They appoint a majority of the trustees, they appoint the chair of trustees, they have to give consent to any rule changes.  Until 2013 the then chair of the Board served as a trustee.  They are fully aware of all these issues, and until very recently the Governor himself served as a trustee.  But the Board seem to have seen their role as providing cover for the Governor, rather than ensuring that the right thing is done, and that past abuses are corrected, not kicked for touch, hoping the injured parties would just go away.   That sounds like the sort of misconduct –  not illegal, but not the sort of approach we should expect from ministerial-appointed people, explicitly there to hold management to account –  the authorities might make a start on.  There is, after all, something concrete to go on there, even if it doesn’t make such good headlines.

6 thoughts on “Misconduct

  1. hmmm; given headlines, could argue the executives of the NZ banks should’ve set up independent reviews ahead of the current regulator requests; seems that might indicate a willingness to exert moral authority; after all, it wasn’t that long ago a prominent global financier told the world “bankers do God’s work”

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  2. You raise a number of interesting issues Michael.

    Having read a lot of what’s come out from the Royal Commission in Australia, I can’t help but think that a lot of what’s gone on over there has happened here – perhaps less so on the mis-selling of products and inappropriate fees as the FMA appears to have been fairly vigilant. But we have the same institutions, the same management teams – who often transfer back and forth across the Tasman – operating in a similar regulatory environment, with similar documentation requirements and they share the same motivations. It’s hard to see that our outcomes can be a lot different.

    One area that concerns me is loan documentation and willingness to lend. It’s apparent from the Royal Commission that banks have been sloppy in ensuring income verification. They’ve been willing to assign arbitrarily low expenditure figures to borrowers. They’ve allowed many people to access interest-only loans and they’ve allowed borrowers to take on remarkable leverage.

    Now banks are tightening up across all of these metrics. It’s hard to see how this wont have a big dampening effect on income. My own back of the envelope calculations are that the average dairy farmer moving from IO to a P&I loan on 20-years amortisation will face a payment shock of around $50k. That equates to about a 0.2pp of GDP hit. Add in developers and households and we could easily see the economy faced with a 0.5pp payment shock and that’s without any downstream impact.

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  3. Jeff Morris first blew the whistle on CBA back in 2008, about the very behaviours the RC is examining now in 2018. Nothing has changed. The bank simply sailed on knowing it was being protected
    https://www.jeffmorris.com.au/

    The point is, this has been in the public domain for 10 years. The FMA has known all about it for that length of time. The question I would pose is: has the FMA ever got off its backside and gone and had a look

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