Day: May 23, 2018

Conduct among the regulators

Michael Reddell FMA, Reserve Bank

As we know, the Reserve Bank and the Financial Markets Authority have been playing the populist politicians, “demanding” that banks (in particular) prove that they are not guilty of the sort of misconduct coming to light in the Australian Royal Commission.  The Governor had told us he thought New Zealand banks were different, until either he saw which way the political winds were blowing, or saw the FMA getting on the bandwagon and didn’t want to be left behind.  But proving your own innocence is simply not something anyone in a free society should be required to do.

But what about the regulatory agencies themselves?  They don’t deal directly with the general public very much, but if they are mounting their bully pulpits and demanding banks (private businesses) prove themselves, we might first reasonably expect the highest possible standards from them.  After all, the FMA and the Reserve Bank are public institutions; they work for us.

How can you say to your brother, ‘Brother, let me take the speck out of your eye,’ when you yourself fail to see the plank in your own eye? You hypocrite, first take the plank out of your eye, and then you will see clearly to remove the speck from your brother’s eye.

How, for example, do the boards of these institutions handle conflicts of interest?   This is a particularly significant issue for the FMA, where the Board has direct responsibility for all the agency’s decisionmaking (the administration of things like the Financial Markets Conduct Act and associated rules and regulations).  They make decisions directly affecting specific businesses, and interests.

It is less of a direct issue at the Reserve Bank, where the Board itself has few powers.  But Board members are still privy to considerable amounts of inside information, and have preferential access to the ear of the Governor.  The Bank runs a commercial business (NZClear), and has significant property interests (the building on The Terrace) and major commercial contracts around notes and coins.

A few months ago when the Independent Expert Advisory Panel reviewing the Reserve Bank Act reported, they included in their report this reference

114. The Board has a code of conduct. The Panel recommends that this be reviewed in light of the legislative changes.

So I asked for it, lodging a simple request

Please supply me with a copy of the code of conduct.

And the Bank responded quite quickly.   There was, I was told,

no Board document of that name, but the Charter outlines conduct expected of Directors.

The text of the “Charter” is at that previous link.   I’ve written about the so-called charter previously.  But one thing I didn’t notice then –  and recall, they say this document describes expected behaviours of directors –  is that there was nothing dealing with possible conflicts of interests, and how those should be handled.    That seems more than a little surprising.

I’ve previously had minutes of Board meetings released to me under the Official Information Act, and there was no sign in any of them that conflicts of interest are appropriately disclosed, and handled, or rules meaning that no member with a conflict is able to participate in matters relevant to that discussion. For example, one Board member is also a director of an insurance company, and the Bank is prudential regulator of insurers.  The Board, and the Bank, can’t control who ministers appoint to the Board, but they have clear responsibility to manage any conflicts.

I’m not suggesting actual impropriety –  I assume they must (surely?) have some unwritten practices –  but I wonder how they would prove their innocence to some crusading bureaucrat or politician?  Paper trails matter and, as I’ve noted previously, the Board has form in that area, being in clear breach of the Public Records Act in the way it conducts its regular business.  For a government agency, that is pretty clear misconduct.

What of the FMA Board?  They get marks for this explicit statement on their website

The FMA Board recognises conflicts of interest as serious governance issues. The FMA maintains a Board Conflicts Policy which manages how interests are to be disclosed, registered and properly managed in relation to any matter that the FMA is considering.

So I asked specifically for this document, which they released in full a few days ago.

FMA Board Conflicts Policy

For the most part, it looks pretty good. They seem to define conflicts reasonably broadly (at least in some respects), and recognise that such conflicts might arise from the interests and activities of spouses, partners, and children.   There is active requirement to disclose, and an encouragement to be open and broad in applying the policy –  members are even referred to a relevant Supreme Court case.

6. A Member who is interested in a matter:
(a) must not vote or take part in any discussion or decision of the Board or any Committee relating to the matter or otherwise participate in any activity of FMA that relates to the matter;
(b) must not sign any document relating to the entry into of a transaction or the initiation of the matter; and
(c) is to be disregarded for the purpose for forming a quorum for that part of a meeting of the Board or Committee during which a discussion or decision relating to the matter occurs or is made.

And they are required to advise the Minister of any breach of the policy.   I was quite impressed.  Until I came to this, near the end.

The Chairperson may, by prior written notice to the Board permit one or more Members to remain involved in a matter to which they have an interest if the Chairperson is satisfied that it is in the public interest to do so. Such permission may be subject to any condition which the chairperson considers necessary. All such permissions must be disclosed in FMA’s annual report.

Not even a majority of the Board has to agree, just the chair.  How can it ever be appropriate for someone with a conflict of interest to be, or remain, involved in the FMA’s determination of a matter in which they have an interest?  The Board has a range of members, and presumably can call on outside expertise on any matter on which it needs advice.  It seems almost unconceivable that there could be a circumstance in which a person’s contribution was so unique and irreplaceable that they should remain involved despite having declared and established a conflict of interest.    It is, perhaps, some small comfort that any such occasions have to be disclosed in the Annual Report (I didn’t see any in the latest Annual Report) –  but the Annual Report comes out with a considerable lag (and probably isn’t widely read).  Since making this sort of exception isn’t a breach of the rules, it doesn’t even need to be disclosed to the Minister at the time.

That rule, set up by the Board to govern its own conduct, falls well short of the sort of expectations we should have for a powerful public agency.  It should be clear and straightforward: if you have a conflict, you take no further involvement, and go out of your way to stay clear of this issue.  At very least, it is potential misconduct –  inappropriate conduct –  by the Board of the FMA, an institution content to demand that banks prove their innocence.

I could go on.  Compliance with the letter and the spirit of the Official Information Act is one of those standards of conduct we might expect from our regulatory agencies.  The Reserve Bank falls a long way short of the mark on that one (they are, for example, still fighting to keep secret their analysis, from last November, of the extent to which Kiwibuil might crowd out other construction).

And then there were some of the issues I wrote about a couple of weeks ago, whether neither the Bank nor the FMA could reasonably be considered to have met the sort of standard they expect –  under law, or not –  from others.

Wasteful and ill-disciplined councils

Michael Reddell Wellington

Mostly this blog is focused on national policy issues and national economic developments.  But local government matters too.  Often the choices local government make affect us at least as much as questionable central government choices do, and  –  so it seems –  they are typically based on less-robust analysis, and with less transparency and serious accountability.  The cavalier approach towards the use of our money –  from people who would not be so rash in their private lives, with their own money –  would almost beggar belief.   “Almost” except that public choice literature has been analysing for decades the incentives, and absence of constraints, that lead to such behaviour.

In the headlines this week have been the efforts of the Auckland Council.  The Mayor, it appears, commissioned a $1 million report on a possible new ($1.5 billion) sports stadium, which his own fellow councillors have not been allowed copies of.  The Mayor and his office –  again – defy for months the provisions of the Local Government Official Information and Meetings Act (the local government equivalent of the OIA).   The first element of the purpose statement in the LGOIMA is

The purposes of this Act are—

(a) to increase progressively the availability to the public of official information held by local authorities, and to promote the open and public transaction of business at meetings of local authorities, in order—

(i) to enable more effective participation by the public in the actions and decisions of local authorities; and

(ii)to promote the accountability of local authority members and officials,—

and thereby to enhance respect for the law and to promote good local government in New Zealand:

Something that too many mayors, councillors, and local government bureaucrats seem to treat with contempt.

The Wellington City Council is at least as bad as any of them.  On the LGOIMA, I gather that requesters have still not been able to get from the council documents relating to the subsidy the residents of Wellington are paying to Singapore Airlines (now to provide additional flights between Wellington and Melbourne).   It is as if councillors  –  and their staff –  believe we work for them, not the other way round.

On spending, we don’t have anything quite as expensive as a $1.5 billion stadium –  not happening for now, but presumably only a matter of time.  But that is about $1000 per Aucklander.    Here, we’ve had the desperate desire of councillors to kick in $100 million or so to extend (privately-owned) Wellington airport’s runway (a project fortunately stymied, at least for now, by the courts), $90 million to refurbish and strengthen the Wellington Town Hall, $165 million for a convention centre and film museum.  Not one of those projects would be likely to survive the scrutiny of a proper cost-benefit analysis, but that, of course, doesn’t deter our council.

And the waste –  and the arrogance – flows all the way down to individual neighbourhoods.  I live in Island Bay, a pleasant seaside community of about 8000, where the residents as a group tend to vote for big-government parties (around 60 per cent of the party vote in last year’s election went to Labour and the Greens).  We had the misfortune to be the test-bed for the Council’s cycleway policy (which I wrote about here).

The plan was for a cheap cycleway all the way from Island Bay to the city.  Never mind that the supporting analysis never stacked up, or that hilly Wellington is one of the least propitious places for cycleways anywhere.  Years later, we have a deeply unpopular cycleway to nowhere (running a couple of kilometres along one of the safer wider roads in Wellington, before petering out just as things start to get tricky for the few potential cyclists).  The Council spent $1.7 million putting the thing in –  originally they thought to spend less than that getting the whole way into the city –  and is about to spend another $4 million to change the scheme, and in doing so they still avoid responding to the clearly expressed preferences of residents in a fairly well-designed and run “vote” organised by the residents’ association.   $700 per resident –  almost as bad as a sports stadium on Auckland’s waterfront, and a great deal of aggravation later – all to impose something that local residents simply don’t want, and wouldn’t choose to spend their money on.  But councillors have a dream……while we have a nightmare (expensive, unattractive, and dangerous).  One might suppose that on an issue that affects no one outside the local neighbourhood, majority local preferences should be an absolute basis for not proceeding, not wasting public money.  As it is, there is next to no effective accountability, since Island Bay is subsumed in a larger ward and of the local councillors who voted for the scheme, one resigned shortly afterwards to become an MP in rock-solid Labour seat, and the other has announced he is moving to Christchurch and will be standing down at the next election.  The Residents’ Association is reduced to taking costly and risky legal action against their own council.

But today I wanted to highlight another small Wellington City Council excess.  It is of no wider interest, except as symptomatic of the way our money is wasted by councillors up and down the country.  As I said, Island Bay is a pleasant seaside place.  Just to the left of the photo, fishing boats lie at rest, and the eponymous island guards the entrance.  There is a pleasant sandy beach, good for swimming (if somewhat bracing).   There weren’t a lot of people around when I took this photo on a cool late-autumn morning, but on summer afternoons the beach is often crowded and finding somewhere to park can be a challenge.

island bay

And so what is the Wellington City Council in the process of doing?  Why, removing probably half a dozen carparks  on the main road (you can see where the dark new seal is by the van) –  and others on the side street –  as part of putting in a new roundabout.  This little project is said to be costing $400000.  There was, it appears, no consultation with either residents or beach users.

Both roads are wide, and neither is particularly busy (I walk down there most days).  There is no obvious problem, no apparent record of accidents, but that doesn’t stop the Council frittering away public money.  I guess we should be grateful for small mercies: a few years ago when the sea wall was damaged in a storm, some councillors wanted to rip up the road (past the new roundabout) altogether and let the sea “take back its own”.  Fortunately, they lost that battle.

Each individual project like this doesn’t sound like much.  But they add up, and before you know where you are, hundreds of millions of hard-pressed ratepayer’s money is being lavished on the big stuff with little rigour, less transparency, and not much accountability.   It is a shame there is no way to have councillors put rather more of their own money on the line: perhaps for each new initiative they vote for councillors could consider making a personal contribution equal to, say, ten times the average per capita cost of the project in question.   When the mayor, Justin Lester writes a personal cheque for $4000 as a contribution to the convention centre, and another for $2500 for the town hall refurbishment or the runway extension, I’d start taking the views that underpin his wastefulness (with other people’s money) a little more seriously.  Of course, even then it might just be considered a campaign expense on a journey towards Parliament.  Instead, we go on with citizens being plundered to pursue the whims of councillors and specific vested interests.