A week from now Graeme Wheeler will be clearing his desk on his last day as Governor of the Reserve Bank.  I’ll have some more to say about his stewardship of the role, either on that last day or perhaps when the Reserve Bank’s Annual Report and the Board’s Annual Report are published –  on past practice they should be released any day now, and I suspect Wheeler will want to publish before he leaves office.

But by next Tuesday also, most of the votes in this year’s election will have been counted.  Who knows how quickly, or slowly, but we’ll be on course for the formation of a government for the next three years.  Either way, change seems likely for the Reserve Bank –  and not just the unlawful term of an “acting Governor” , and in time the appointment of a new substantive Governor.

On the National Party side, you’ll recall that the Minister of Finance had Treasury hire former State Services Commissioner (and former Treasury deputy secretary) Iain Rennie to provide some analysis and advice on possible changes to the governance of the Reserve Bank.  Having had drafts reviewed by various experts, the report was completed months ago, but hasn’t yet seen the light of day.  Treasury has been blocking the release of even drafts of the report, or comments on the draft by reviewers, and nothing is heard from the Minister of Finance.    Presumably Rennie didn’t conclude that everything was just fine and no changes were required.  Had he done so, there would have been no reason not to publish, and it might even have been a small piece of useful ammunition against the sorts of reforms opposition parties are campaigning on.

The interesting question is (a) how far has Rennie gone in his recommendations, and (b) whether a re-elected National government (perhaps reliant on New Zealand First –  long critical of the Reserve Bank) would implement them?   I heard the other day a hypothesis that the report isn’t being released because it calls for reform so radical that the Reserve Bank would be split in two (a monetary policy and macro agency, like the Reserve Bank of Australia, and a prudential regulatory agency (like APRA).   There are pros and cons to such a structural split, but I haven’t for a long time heard anyone here seriously propose it as an option (and particularly not since the UK government brought all those functions back under one roof).    Time will tell, but I would hope Rennie would recommend things like (ideas previously proposed here, and practices in the UK):

• moving (in law) to committee-based decisionmaking,
• having external members appointed directly by the Minister,
• separate committees for monetary policy and the prudential regulatory functions,
• a mandated greater degree of transparency, and
• (something Joyce asked for advice on) making Treasury primarily responsible for the legislation under which the Reserve Bank operates.

As I say, time will tell.  But if National is back in office, they will presumably want to move quite quickly on appointing a permanent Governor (the Board, which is driving the process, meets again later this week), and whoever takes the role would presumably want to know what legislative arrangements they would be operating under.

But what if Labour leads the next government?  They will have access to the Rennie report, although I had heard that Grant Robertson was quite dismissive when that report was initially commissioned.  Perhaps more importantly, they have campaigned on some quite significant changes to the monetary policy side of the Reserve Bank, notably:

• a statutory Monetary Policy Committee, comprising insiders and outsiders, but with all the other members appointed by the Governor himself (and a non-voting Treasury representative),
• adding a goal of full employment to the Bank’s monetary policy objectives, and
• requiring publication of the minutes of the Monetary Policy Committee fairly shortly after any particular interest rate decision.

I’ve written about those proposals on various occasions previously (including here and, more recently, here).  In general, I’m sympathetic, but think the governance reforms are excessively timid (and haven’t yet tackled some important issues).

Unsurprisingly, Reserve Bank reform hasn’t a big part of the election campaign. But they were a big part of Alex Tarrant’s interview with Grant Robertson last week.  In fact, Robertson’s comments in that interview are by far the fullest I’ve seen since the day the policy was released some months ago.  In summary, they only increase my unease and concerns about possible lost opportunities.

Tarrant asked first about the pool of possible people to serve on such a committee

One concern is whether we’d have the depth of talent of candidates for such an outfit not connected to the large banks or businesses.

I’ve never found that a particularly persuasive concern.  We manage to run a country with a huge number of public sector board and committees, some on very technical manners and others not.  We have a Cabinet after all.   And will fill all those posts: the appointees aren’t always exceptional, but then again neither (in this case) are the Governors.

Robertson put his response this way

Robertson reckons we do. “We’ll be looking towards people with monetary policy expertise, in academia. We know that there are people who have served boards before, who have a strength and a knowledge and an understanding of monetary policy,” he says.
“The two ideas we’ve got [for Monetary Policy] are linked, in the sense that we do want to broaden the objectives of the Bank, and so therefore we’ll be looking for people who can bring some knowledge and expertise in the wider macro economy – the way in which employment is going.

Here is, I think, one of the areas in which he is risking making a mistake.  Perhaps he could find a decent academic with professional strengths in monetary policy, but there aren’t many of them here, and it isn’t the skill-set that is really most needed.  The technical expertise will always reside primarily inside the Bank.  What they should be looking for in outsiders to serve on a Monetary Policy Committee is a range of skills, but most of all a cast of mind that will mean those externals don’t just become a front for management.  The role needs people who will ask hard questions –  some of them technical perhaps, but many no more technical than one would might expect from a good Board director.

Tarrant didn’t raise the issue of who appoints the external members.   Robertson’s announced policy had been that the Governor himself would appoint the externals, and control when/if they could speak externally.  That would be a serious mistake, and is not a model followed by any of the central banks I’m aware of.   Monetary policy is a major aspect of short-term stabilisation policy (ie economic policy), and the decisionmakers should be appointed directly by the Minister of Finance (who is, after all, the only person we voters can hold to account).   When I raised this issue with him, he expressed concern that it wouldn’t be a “good look” for him to be grabbing the appointment powers to himself.  Frankly, I disagree; it would simply be moving towards standard international practice.   As I’ve noted previously, if he wants a Labour precedent, when Tony Blair and Gordon Brown took office in 1997 they reformed the Bank of England, made it operationally independent, established a (statutory) Monetary Policy Committe, and to this day most of the members are appointed directly by the Chancellor of Exchequer.    Allowing the Governor to appoint his or her own externals (and a minority of voters at that) is a recipe for maintaining the status quo, not changing it.  (After all, the Governor already appoints a couple of external advisers to help him on monetary policy, including (somewhat inappropriately) at present the Prime Minister’s brother.)

Tarrant moves on to the proposed addition of an employment/unemployment objective for monetary policy.  We still don’t have many specifics from Labour on how they propose to operationalise this change –  a change I generally support.  Robertson has talked of getting unemployment down to 4 per cent, but the state of knowledge isn’t such that it would make sense to add a numerical target to a new Policy Targets Agreement.    We don’t know what the long-run sustainable rate of unemployment (given eg deographics, labour market institutions, welfare provisions is) but we should want the Reserve Bank to be finding out.  By “finding out” I don’t just mean doing a lot of formal research –  although that would no doubt be part of the process –  but running policy in such a way that reveals, through developments in inflation, when we’ve got unemployment as low as it can sustainably go (ie without other micro reforms).

It looks as though there is quite a bit of work still to do to get this part of the package right.  My tuppenceworth is that appointing the right person/people is probably the most important element of the proposed reorientation: you want people making these decisions who realise that the whole point of discretionary monetary policy has always been to get and keep unemployment as low as possible consistent with maintaining price stability.    And I’ve previously suggested some specific statutory amendments that would help shift the orientation of the Bank:

• require the Bank to publish updated estimates of the long-run sustainable rate of unemployment (or the NAIRU) at least once a year in the Monetary Policy Statement,  and
• require that in each statutorily-required Monetary Policy Statement, the Bank explain the reasons why, in its view, actual unemployment deviates (or is projected to deviate) from the NAIRU, and the steps (if any) the Bank proposes to take to close the gap.

If appointing the right people is critical, what does Robertson have to say about that?

He expresses a modicum of concern that the new [not legally binding] Policy Targets Agreement between the Minister of Finance and Grant Spencer, notionally to come into effect next week, was done without any consultation with him.  But his concern comes to not much

Robertson was concerned that he wasn’t consulted when Steven Joyce signed the Policy Targets Agreement with interim governor Grant Spencer for the six-month period following the election. As it happens, he agrees with six months of the status quo. But, “when you’re in that period, immediately before the election, I do believe that it would have been better to have had some input from the Opposition in that.”

And, actually, in normal circumstances under the current law an incoming government would inherit a Policy Targets Agreement (and a Governor) with no automatic right to change that PTA (although new Ministers often ask nicely, and Governors have usually agreed).

Robertson should have been more concerned about the permanent appointments that have been made at the Reserve Bank in recent months, by the outgoing Governor, that risk boxing in a new Governor (and a new government).    Robertson’s governance model envisages that the members of the internal Governing Committee would become voting members of the Monetary Policy Committee.  But instead of making just an acting appointment to the (Deputy Governor level) role of Head of Financial Stability –  to cover the period while the current incumbent serves as “acting Governor –  a permanent appointment has already been made.   That role was filled by shifting Deputy Governor Geoff Bascand into the role, but then a permanent appointment has also been made –  of someone with no obvious value to add to things monetary policy or prudential –  as Bascand’s successor as Head of Operations.  Surely these permanent appointments should have been left to the new Governor, especially with the prospect of legislative change in the wind whoever leads the next government?   Allowing a new CEO to apppoint his own top team, when vacancies exist around the changeover, would seem at very least a common courtesy.   And people will exercise the monetary policy votes, not algorithms, so appointing the right people matters.

Strangely, Robertson doesn’t even seem that interested in the appointment of the new Governor, which the (current government appointed) Board has had underway for months.   Applications for the job closed weeks before the Labour Party started its dramatic rise in the polls.  And yet

So, is he happy with the current set-up where the Finance Minister can veto a board recommendation, but has no other power over the process?
“I’m not proposing any change to that,” he says. “I respect the independence, it’s a very important relationship.” One reason he has been talking about Labour’s designs is to give a heads up to anyone that applies for the job about where he’s coming from.

He keeps going on about “respecting” Reserve Bank independence, but that operational independence –  the responsibility to set the OCR independently of direct political involvement –  is a totally different matter from appointing the individual who, on current law, will have by far the largest policy influence on the short-term direction of the New Zealand economy.  He/she will determine what weight the Bank gives, for example, to the proposed employment objective.  And in almost every other advanced economy, the Minister of Finance or head of government has a key role initiating the appointment of the central bank Governor.  It is the way normal countries do things (perhaps with some role for non-binding parliamentary confirmation hearings).  It is what Philip Hammond or Scott Morrison do.  It is what Barack Obama did and (okay…) what Donald Trump shortly will do.    Our law should be changed.  Perhaps require the Minister to consult the Board –  although few if any of them have expertise in public policy or economic management –  but put the power, and the responsibility, squarely with the Minister of Finance.

I’m frankly not sure why Labour is so reluctant.  They are presented with the ideal opportunity here.  When, for example, Gordon Brown reformed the Bank of England he was faced with an experienced incumbent Governor, and a very strong internal deputy –  and yet they went ahead with reforms that markedly reduced the power of the Bank, and introduced powerful externals not under the thumb of the Governor.  Here, if Labour takes office they will do with a vacancy in the role of Governor.  Changing the law regarding the appojntment wouldn’t be a slap in the face to anyone (other than perhaps the Board, who are mostly a pretty faceless and unaccountable lot).  I’ve argued that, given the vacancy, one of the first steps of a new government should be a short amending bill to put the appointment power back in the hands of the Minister.  At present, he is on track for being presented with a status quo candidate (the Board has pretty consistently defended the status quo) when Labour (and the Greens and New Zealand First) are campaigning on changing the status quo.

What makes me say that?  Well, Robertson actually.    Because in the interview he says

How about the job description for the next Governor – is he OK with that? “Yes, but, as I say, the reason we gave the speech was to make sure that people were aware that, should we be elected, this is the direction we’re going in. The job description is what it is, as it stands today.”

It is frankly incredible.  The job description –  which I wrote about here –  was decided by the Board, all of whom were appointed by the National government.  The members aren’t openly partisan, but they were people National was comfortable with (when Labour was in power, they also had competent people on the Board, but the complexion was a bit different).   And the job description is framed under the Act as it stands (and quite rightly so –  it is all the Board can do).  But Labour is campaigning on material changes to the Reserve Bank Act, to its policy responsibilities, and to the personal powers of the Governor.  Surely it would seem likely that a subtly different set of skills would be appropriate under the current Act/PTA, than under whatever Labour and its allies are proposing?   Surely, at least to some extent, different sorts of people would be interested in the role (there are, for example, some people who would be resolutely opposed to any suggestion of adding an unemployment target, and might find it very hard to work under such a regime).   Even if Labour wasn’t going to adopt my suggestion of amending the Act to take the appointment into the Minister’s hands directly, they should be thinking of sitting down with the Board as soon as they take office, outlining their plans and visions, and inviting the Board to re-open the selection process, now that potential candidates are better placed to know what might be expected of them?

I was also interested in this comment from Robertson

Grant Spencer’s 1-3% target with a 2% mid-point will remain in place over the six months post-election. “We’ve got to take some time to get ourselves in and then have the discussions we want.”

I can understand where he is coming from, but…..parliamentary terms are only three years, and what he is effectively saying here is although he wants the Bank to focus on unemployment as well as inflation he is not going to anything about it until one-sixth of his first term is already over.   It wasn’t what Ruth Richardson did in 1990, Winston Peters in 1996, or Michael Cullen in 1999.  And even if he can’t amend the Act immediately to establish the employment objective –  and getting the details right does matter –  it would be quite within his powers to seek an amendment to the Policy Targets Agreement (which, in this case is non-binding anyway) to capture those unemployment concerns straightaway.  Given Labour’s clearly stated intention to legislate in this area, it also might not be unreasonable to at least consider use of a section 12 override (although this would probably run head-on into the concerns about the legality of the Spencer term and the supposed PTA).

And, then, finally, there is the large gap in all these reform proposals.  Tarrant didn’t ask about it and Robertson has never substantively addressed it.  The Reserve Bank has huge discretionary policymaking powers, especially over banks, which are (in law) exercised personally by the Governor, with no adequate accountability framework (nothing like the Policy Targets Agreement for example).  Any exercise that opens up the governance of the Reserve Bank –  as is likely under any government emerging after the election –  has to find a solution to those issues as well.  There are questions around which powers should be with the Minister and which with the Bank, and for those exercised by the Bank whether a committee (and if so of what sort) or an individual should (in law) wield them.   There are, probably second-order, issues around whether (so-called) macro-prudential analysis and regulation should be governed differently than the day-to-day regulatory regimes applying to banks, insurers, and deposit-takers.  I gather Labour recognises that the issues exist, but has as yet not really given any thought to how to resolve the issues.  I’m sure Treasury has some advice waiting for whoever does take office.

Robertson has been at pains to stress that the core of the Reserve Bank Act was passed almost 30 years ago (and previous core Reserve Bank Acts didn’t last that long).  There are enough issues outstanding –  lots not touched on in this post –  that doing the reform well really should be quite a major piece of legislation.  That will take time, but if he wants to embed change, reorient and lift the overall performance of the institution, he really should be thinking a lot harder (than he appears to be, based on this interview) about ensuring that he acts early to ensure that any government he is a leading figure in can choose as central bank Governor someone they are confident in, both as regards the conduct of policy, and about making effective the sort of structural and cultural changes they talk of.

 

Just a couple of days after the election, Graeme Wheeler’s term as Governor of the Reserve Bank expires and Wheeler will leave office.

In the normal course of events, a new appointment of a permanent Governor would long since have been made.   But as officials belatedly realised late last year, and as the Reserve Bank Board had eventually to be directed to recognise, a new permanent appointment of someone to take office in late September could not be made in the run-up to the election, without breaching the conventions that govern how the period around elections is handled.

I’d been drawing attention to the issue for 18 months or so, and had suggested that the practical solution would have been to have invited Wheeler to accept a short extension of his term, allowing whoever formed the new government after the election to make their own appointment.  We don’t know whether Wheeler wasn’t willing to consider that, or whether the Minister of Finance wasn’t, but there were no legal obstacles to such an extension.  And yet it didn’t happen.

Instead in early February, the Minister of Finance announced that he was appointing the existing Deputy Governor (and deputy chief executive) as acting Governor for six months after Wheeler’s departure.  Spencer in turn had indicated that he would not be seeking permanent appointment and would retire at the end of the acting Governor period.

There is provision in the Reserve Bank Act for an acting Governor in some circumstances.  Thus, when in 2002 Don Brash resigned in the middle of his term to enter politics, Deputy Governor Rod Carr was appointed as acting Governor for a few months.

But ever since the Spencer appointment was announced I’ve been raising questions about the legality of this appointment (I have no concerns at all about Spencer himself).   There was this post on the day the Spencer appointment was announced.   And then a later post outlining the argument in more detail.   The gist of the argument is that the wording of the Act appears to provide for an acting Governor only when a vacancy arises in the course of a Governor’s term (as happened in the Brash/Carr case), and not when a Governor’s term expires and the Minister decides, for whatever reason, not to make a permanent appointment for a time.  Not only do the words naturally lead to that interpretation, but the overall context (the way related bits of the Act are designed) suggests that that was indeed Parliament’s intention in using those words.

I lodged OIA requests with the Reserve Bank Board (responsible for recommending appointees), the Minister of Finance, and with The Treasury (principal advisers to the  Minister of Finance).   The Board’s response was both obstructive, and indicative of how badly they appear to be in breach of the Public Records Act.  But, as usual, the response from Treasury was much more helpful.   In this post, I outlined the considerable amount we learned about the process from the papers Treasury released.      But The Treasury withheld the advice they had received from Crown Law on the lawfulness of various aspects of the appointment, and there was not even any report of the Crown Law reasoning in any of the policy advice documents.

The protection of legal professional privilege is grounds for withholding documents under the Official Information Act, and is widely used by officials to keep the thrust of legal advice confidential.    But this ground for withholding, like several others, is subject to a caveat

unless, in the circumstances of the particular case, the withholding of that information is outweighed by other considerations which render it desirable, in the public interest, to make that information available.

The Ombudsman had relatively recently highlighted this provision, and on occasion had ordered the release of either the legal advice itself, or a full summary of that advice.  And so I appealed to the Ombudsman against Treasury’s decision to withhold the legal advice. I didn’t really expect to get the advice itself, but I wanted to understand the reasoning and argumentation Crown Law had provided in support of the Minister of Finance’s decision.  And since it involved an appointment to a position holding very considerable discretionary power in a number of policy areas, it seemed to me that it would be in the public interest to make at least a summary of the advice available.  After all, if there were doubts about that lawfulness of the appointment, that could undermine confidence in the Bank’s action, and its capacity (during the term of a purported acting Governor) to exercise (for example) its crisis management powers.

And, somewhat to my surprise, the system worked.  In a post at the time, in April, I lodged the appeal I noted

I suppose it will take some considerable time for the Ombudsman’s office to get to this request –  perhaps even after the acting Governor’s term has ended –  but with the possibility of reviews to the Reserve Bank Act governance provisions in the next couple of years, it would still be valuable for this advice and intepretation (in full or in summary) to be put in the public domain. This is, after all, about the appointment and accountability provisions for the most powerful unelected public office in New Zealand.

But last Friday the Ombudsman’s Office rang to inform me that after discussions between the Ombudsman and Treasury, Treasury had agreed to release a summary of the Crown Law advice.  The Ombudsman’s office assured me that, having seen all the orginal opinions themselves, it was a fair and representative summary of the advice.  Since I only ever really expected to obtain a summary of the advice, I agreed to discontinue my appeal for the full advice.  An hour or two later, the summary of the Crown Law office arrived in my email in-box.   Only five months after the original appeal was lodged, and before the (purported) acting Governor takes office.  I was impressed, and grateful that Treasury did not seek to drag the matter out longer (which they could have done).  I’m not sure why they changed stance, but perhaps they recognised that with the changeover only a couple of weeks away, there might well be further questions about the lawfulness of the appointment.  If so, it would be desirable to have the Crown case in the public domain.  Perhaps too they had noticed reports of Grant Robertson’s concerns about some of the Reserve Bank appointments this year (I’m not sure if he has concerns about lawfulness, but he might reasonably be disgruntled at not being consulted over the appointment of a very powerful public official to commence work on the third working day after the election). Spencer might be (purporting to be) acting, but in that role he would have all the discretionary policy powers of the Governor.

The document I received from The Treasury is here.

Crown Law summary advice re acting Governor Official Information Act Response – Michael Reddell (20170031)

Macroeconomists often don’t have much to do with lawyers and legal opinions.  But I’ve had more than more my share, both in various regulatory and markets role over the years, here and abroad, but also for the last nine years as a trustee of the (somewhat troubled) Reserve Bank staff superannuation scheme.   There are good lawyers and poor ones.  And even from decent lawyers there are good and persuasive opinions and poor ones too.   In just the last six weeks, I’ve read a very persuasive opinion on an issue where I was initially inclined to (and would have preferred) the opposite interpretation, and an opinion  –  the conclusion of which I was inclined to agree with –  where the reasoning left a great deal to be desired.     We’ve had cases where draft legal opinions have come back and we’ve had to point out that the lawyers have simply overlooked key considerations that seem relevant, and so on.

Ours is an adversarial legal system, where in each side of any particular case, there are lawyers arguing the interests of their clients.  Whatever the truth is –  whatever the final judicial decision is –  there is no particular reason to expect it to be captured in a single opinion from a lawyer arguing the interests of his or her client.  In this case, the Minister of Finance wanted to make an acting appointment, of Grant Spencer, and Crown Law’s advice appears (see those earlier documents linked to above) to have been sought quite late in the piece, to backfill a political and bureaucratic preference.   It is what in-house lawyers do –  and that is the role Crown Law serves.  Sometimes they will say “no you just can’t do that” but often enough they be casting around for a half-plausible interpretation to enable the client to do what they want to do anyway, perhaps especially when the risk of an actual court challenge is low.

Which is all by way of saying that I didn’t find the Crown Law reasoning persuasive.  I didn’t really expect to, but I was curious to see what arguments –  or precedents –  they would mount.    In fact, I was surprised by how thin and unconvincing their reasoning was.    I’m now more worried than ever that this major public appointment will be unlawful and, therefore, that real doubts will hang over the lawfulness of any Reserve Bank actions taken by the (purported) acting Governor during the next few months.

Crown Law notes, by reference to a couple of Supreme Court cases from last decade, that under the Interpretation Act 1999

The meaning of an enactment must be ascertained from its text and in the light of its purpose

As the Supreme Court noted,

even if the meaning of the text may appear plain in isolation of purpose that meaning should always be cross checked against purpose in order to observe the dual requirements

In this case, both the text and the purpose work in the same direction, towards the same interpretation.  And that interpretation isn’t the one Crown Law places on the relevant provisions of the Reserve Bank Act.  In fact it highlights the limitations of legal opinions when the lawyers concerned are not intimately familiar with the legislation concerned and with the policy purposes behind the relevant provisions.

Section 48 of the Reserve Bank Act allows the Minister, on the recommendation of the Board, to appoint an acting Governor

for a period not exceeding 6 months or for the remainder of the Governor’s term, whichever is less

The plain meaning of the text “in isolation” is that an acting Governor can be appointed if a vacancy arises during a Governor’s term, but not if the Minister and Board simply don’t appoint an acting Governor.  After all, on 27 September there is no “remainder” of any Governor’s term, and the relevant term limit is “whichever is less”.    There is no number of days –   let alone months –  less than zero.

Ah, but, argues Crown Law, “the scheme of Part 3 of the RBNZ Act indicates that there is to be a Governor at all times”.   This assertion governs much of the rest of their advice.  If there has to be a Governor at all times and a permanent appointment hasn’t been made, a temporary (acting) appointment must be able to be made, and “whichever is less” is of no account.

Actually, I’d agree that the Act envisages there being someone with the powers of  Governor at all times.  But the Act’s wording appears to be designed so that there can be an acting Governor –  if an unexpected vacancy arises during a Governor’s term –  wielding those powers, but that in the normal course of events it is up to the Board and the Minister to get on and make a substantive appointment so that a new Governor is in place at the end of the old Governor’s term.   There is no provision, express or implied, for the Minister and Governor to evade those expectations and restrictions.  (It might, in some cases, be desirable for there to be such provisions –  for exactly a case like this, where the election date falls near the end of the outgoing Governor’s term, but there isn’t.   Laws as passed are not always written in the way that, with hindsight, we might prefer.)

The Crown Law people appear to have realised that a key aspect of the Reserve Bank Act is operational autonomy in respect of monetary policy.  But they don’t seem to have appreciated –  they certainly don’t mention –  the explicit precautions Parliament took to prevent that autonomy being eroded through the appointments process.  Thus, any new Governor must be appointed for five years.    The initial appointment cannot be shorter, even if some superb candidate turned up and was only available for four years.  Without a restriction of that sort, it will have been reasoned, the Minister and the (Minister-appointed) Board could get together and appoint someone for six months or a year at a time, rolling over those appointments if appropriate depending on the extent to which the Governor heeded the Minister’s preferences.  It simply can’t be done, under the Act as it stands.  An existing Governor (but only he) can be extended for a short period, but of course that person will already (by construction) have served at least five years in office.

Thus, for Crown Law to be correct –  in claiming that the Minister and the Board are free to appoint an acting Governor for up to six months even when there is no remaining term to complete –  they are effectively arguing that one of the key provisions of the Act –  that specific five year initial term –  can be effectively subverted by a succession of six-month acting appointments.  These are extreme illustrative examples, but my point is not that this is what was intended by the Spencer appointment, but that it is what the law must allow if Crown Law is right.  Since the plain words and the purpose of the relevant provisions of the Act take us in the opposite direction, Crown Law simply must be wrong on this point.

I have also argued previously that there is no statutory provision for the signing of a Policy Targets Agreement between the Minister and an acting Governor.   That makes sense on my interpretation of the Act because on that interpretation, there can only be an acting Governor when an existing gubernatorial term has been unexpectedly interrupted.   Thus, a Policy Targets Agreement is signed “for that person’s term of office” (section 9) before a Governor is appointed.   And when Don Brash resigned his term still had another 17 months to run, and there was already a PTA in place for that term.  Thus when the Minister appointed Rod Carr to be acting Governor for a few months of that remaining term, there were already policy targets in place for the Bank, signed by the person whose term Carr was partially completing.      There is nothing comparable from 27 September this year, since the PTA Wheeler signed with Bill English in 2012 will have expired the previous day.

Crown Law attempts to get round this by asserting –  and it is simply an assertion  –  that  acting Governor “is the Governor”.  If he is the Governor, there must be a PTA signed with him before he is appointed.   But they offer no statutory support for this proposition (acting Governor “is” Governor).  After all, the Act talks of an acting Governor having the powers and responsibilities of the Governor, but still maintains a distinction between the two titles.   If there was no distinction, there would be no need for the acting Governor statutory provisions.  But Parliament chose to make such a distinction, and must have intended something thereby.    And it seems to  have done so because of the emphasis Parliament placed on having all actual gubernatorial appointments be for five years.    There is no provision in the Act for an acting Governor to sign a PTA, because the Act clearly envisages (literal wording and policy purpose) that an acting Governor would be appointed only during the unexpired portion of a term of a substantive Governor.

Anyway, you can read the summary of the Crown Law advice yourself.  Perhaps you’ll be persuaded.  I’m not.     It would appear that (a) an unlawful appointment is about to be (or has already been) made, and thus the Reserve Bank will have no lawful head after Graeme Wheeler leaves office on 26 September, and (b) that the document Grant Spencer and Steven Joyce signed on 7 June, which purports to be a Policy Targets Agreement under section 9 of the Reserve Bank Act is, in fact, no such thing.

If so, not only will the Bank have no lawful head on 27 September, it will have no Policy Targets Agreement to guide and constrain any monetary policy actions it takes, or purports to take, over the period from them until the new permanent Governor takes office.   Even if my interpretation were finally to be shown to be wrong in law, the fact that it is a plausible interpretation –  I would argue the most natural interpretation, consistent with the provisions of the Interpretation Act –  should raise serious concerns, and leaves some doubt hanging over the ability of the Bank to act effectively over the next few months.

Quite possibly, the Bank won’t need to do much in that time.  Markets don’t expect the OCR to change, and it doesn’t seem likely that debt to income limits will be imposed either.  But circumstances can change quickly.  We might have a new government in a couple of weeks, and the Labour Party has indicated a desire to have the Bank focus on unemployment as well as inflation.  A natural step in the early days of such a new government would have been to seek a change in the PTA to make that expectation explicit, pending a subsequent change in the Act.   But what, formally, is the status of the existing document, let alone any new one Grant Robertson might seek to put in place?  Can he override (section 12) a purported PTA which isn’t a real PTA?  (In any case, shouldn’t the Opposition have been consulted about the 7 June purported PTA, given that it was an action being taken, to come into effect after the election to shape the conduct of macro policy for the first six months of any post-election government’s term).

The sad thing about this whole episode is how unnecessary it was.  First, if Graeme Wheeler had been persuaded to stay for another six months, there would be no legal uncertainty whatever.  If that couldn’t happen, a simple one-off amendment could have been made to the Reserve Bank Act to allow for this specific acting appointment, with a sunset clause such that the provision lapsed next March.  At this point, neither option is possible – Wheeler is off to take up his directorships, and Parliament doesn’t sit before 27 September.   For the time being, we –  and institutions directly regulated by the Bank –  will simply have to live with the uncertainty, hope that no difficult decisions arise before a substantive appointment is made.  And perhaps the Minister –  whoever he or she is –  might need to be prepared to legislate quickly if circumstances should turn nasty and the need for greater certainty becomes apparent (one wouldn’t want the exercise of crisis management powers being tested through the courts for years to come).

It has been pointed out to me that section 51 of the Reserve Bank Act allows the Governor to delegate any of his functions and powers to the Deputy Chief Executive and

Any such delegation, until it is revoked, shall continue in force according to its tenor, notwithstanding that the Governor who made it may have ceased to hold office.

In principle, so it might be argued, since Spencer is now the Deputy Chief Executive, the outgoing Governor could delegate all his powers to Spencer as deputy chief executive, and such a delegation would continue to be valid even though the Governor who gave the delegation has ceased to hold office.

It is an interesting idea.  But according to Board minutes released to me previously, the Board has already recognised that from 27 September the other Deputy Governor, Geoff Bascand, will be the deputy chief executive, replacing Spencer –  who presumably would not then have those powers.

It is the sort of issue that would seem to need a good lawyer’s advice.    Can a delegation remain in force not just if the Governor who gave it is no longer in office, but if there is no Governor at all (and recall that the Act puts almost all the powers of the Bank in the hands of the Governor).

It is a mess.  And a quite unnecessary one, if only the process had been better managed by the Minister of Finance, the Reserve Bank Board, and The Treasury from the start.

 

(PS.  Incidentally, were Crown Law to be correct that an acting Governor had to have a new PTA before he or she could have been appointed, Michael Cullen and Rod Carr would have been in breach of the Act in 2002.   This isn’t compelling on its own –  people do make inadvertent mistakes – but it is illustrative as to how the relevant provisions of the Act have previously been read.)

 

I was settling in for an afternoon of watching the gripping UK election results, when someone sent me a copy of a job advert that had appeared in Australia this morning.  The advert was for the job of Governor of the Reserve Bank of New Zealand.  (It is also on the Reserve Bank’s website.)

It seems pretty extraordinary for the Reserve Bank’s Board to be proceeding with this process now.  They were just getting underway with the search late last year, seemingly oblivious to the election, when the Minister of Finance told them to stop, and to nominate someone as an acting Governor.   One of the conventions under which our system of government operates is that major appointments are not made close to an election.   As the Minister of Finance noted, in announcing the acting Governor appointment

This will give the next Government time to make a decision on the appointment of a permanent Governor for the next five year term.

Since then we’ve learned that the current government has commissioned a report on possible statutory changes to the governance of the Bank.  And the main oppositions parties have also confirmed that they favour changes, both to the governance and to the mandate of the Reserve Bank.  Who knows which side will win, and what changes they would each make if they did.

But, clearly champing at the bit, the Board is already out with its advert.  In fact, applications close on 8 July, which is a whole 10 or 11 weeks before the election.   So the people who are brave or ambitious enough to apply actually have relatively little idea what they will be applying for.  Will they be the single decisionmaker –  a key dimension of the current model/job –  or not?  And even if not, will they just be presiding over a group of people they appoint, or something more Bank of England-like.  Will they be charged with low unemployment or not?  And so on.

Of course recruitment processes take time.  But with an acting Governor appointed through to late March next year, it isn’t obvious why the Board couldn’t have put their advert out in late August, looking for applications or expressions of interest by the end of September.   At least people considering applying might have a bit more a sense of quite what the role, as one part of overall New Zealand economic and financial management, might be.

The Board holds the whip-hand in the appointment process.  The Minister of Finance can only appoint as Governor someone the Board has recommended (a candidate the Board proposes can be rejected, but then it is up to the Board to find another candidate).    That is a very unusual model.  In most advanced countries, the Governor is appointed directly by the Minister of Finance or the Cabinet.  They can take advice from anyone they like, but aren’t bound by any recommendations.  It is the way things work in Australia and the United Kingdom for example.  In the US, the President nominates, and the Senate confirms (or not).  In those countries, such mechanisms provide a high level of democratic control over an appointment which is hugely influential, over the short to medium term performance of the economy, and over the financial system.  In New Zealand, the Governor is even more powerful –  single legal decisionmaker –  but there is very little democratic control over who wields that power.   (The situation is even worse here if the government changes –  the current Board were all appointed by the current government, and on average will tend to reflect that government’s interests/preferences/biases).

And so I’ve argued that the Opposition should quite simply state that one of the first pieces of legislation they would pass would be a short amendment to the Reserve Bank Act to remove the formal role of the Board in the process of appointing a Governor.  It might be hard for them to do so –  it could look like a power grab –  but when our model is so out of line with international practice,  any competent Opposition should easily be able to make the case.  Promise to consult and take advice, for sure, but we should ensure that the elected Minister of Finance (and Cabinet) can do as their overseas peers can, and appoint as Governor someone in whom they have full confidence, not just someone the company directors appointed by the previous government wheel up.

What about substance of the Board’s advert?   No doubt a person who fitted the profile might well be a good Governor, but there is a “walk on water” feel to it.  Perhaps that isn’t uncommon with job adverts.   What are they after?

• The ideal candidate will be a person of outstanding intellectual ability,
• who is a leader in the national and international financial community.
• The person will have substantial and proven organisational leadership skills in a high-performing entity,
• a proven ability to manage governance relationships,
• a sound understanding of public policy decision-making regimes, and
• the ability to make decisions in the context of complex and sensitive environments.
• Personal style will be consistent with the national importance and gravitas of the role.
• The successful candidate will also demonstrate an appreciation of the significance of the Bank’s independence and the behaviours required for ensuring long-term sustainability of that independence.

It is hard to argue too much with any of the individual items, although if I did I might wonder about:

• the emphasis on “outstanding intellectual ability”, but no mention at all of character or judgement.  In tough times, and crises –  a big part of what we have a Reserve Bank for –  the latter seem likely to be more important than the former.
• they have clearly chosen to emphasise financial experience/standing rather than policy experience.  It isn’t clear why an ideal candidate for this role –  a New Zealand public policy and communications role –  really would be a “leader in the international financial community”.   That was, after all, what they thought they were getting last time.
• The explicit comment about personal style and gravitas was interesting.   Are they suggesting that the new Governor might be more open to scrutiny and debate?  If so, that would be welcome.

I was inclined to agree with the comment made by the person who sent me the advert that it wasn’t clear that any of the various names mentioned as potential candidates really fitted this description.  Geoff Bascand, for example, would get a significant mark against him if they really want “a leader in the national and international financial community”.  There would be other marks against Adrian Orr, David Archer, Murray Sherwin.  Perhaps they are, after all, looking for an experienced banker?  One thing that is striking is that there is nothing in the profile stressing knowledge of, understanding of, or relationships in, the New Zealand economy or financial system.  That looks like quite a gap –  and I reiterate my view that an overseas appointment, of a non New Zealander, would be untenable especially while the single decisionmaker system remains.

The final item on the profile list was particularly interesting.

The successful candidate will also demonstrate an appreciation of the significance of the Bank’s independence and the behaviours required for ensuring long-term sustainability of that independence.

It sparked my interest on several counts:

• first, I’ve never seen wording like it previously in an advert for the Governor’s position,
• second, it sounds really quite embattled as if the Board think that the Bank’s independence might soon be under threat, but
• third, and most importantly, just how appropriate is this?  Parliament decides how independent or otherwise, in some or all areas of its responsibility, and it is the role of the Governor, and the Board for that matter, to work within the parameters that Parliament lays down. It isn’t the role of the Board to be seeking a chief executive who will advocate for a particular model of how the Bank should be run.   After all, even if everyone agreed (as most do) that the Bank should have operational independence around monetary policy, and on the detailed implementation of prudential policy, there is a lot of room in between, where views and international practices differ.   Should fx intervention be decided by the Governor?  In some countries it is, and others not.  Should regulatory policy  parameters (eg DTI limits) be set by the Governor, or the Bank, or by the Minister?  Again, practices differ, and so can reasonable people.    It is quite inappropriate for the Board to looking to employ someone to defend all the powers Parliament happens for the time being to have assigned to the Bank.
• we should also be a little cautious about that wording “the behaviours required for ensuring the long-term sustainability of that independence”.  Not only can the Governor or the Board not “ensure” that independence at all, but a variety of different types of behaviour –  not all desirable –  can be deployed contribute to that end.  Not making life difficult for the Minister (of whichever party) is a well-known bureaucratic survival strategy. It won’t necessarily be the behaviour that would in the wider public interest.    At the (perhaps absurd) extreme –  but it is an FBI day today –  J Edgar Hoover sustained his independence for the long-term in ways that were highly unseemly and not generally regarded as in the public interest.

Perhaps they just worded the advert badly, but it does rather betray a sense of a group of people who really aren’t suited for the role they’ve been given.  They might be okay at monitoring the routine performance of the Governor.  But you shouldn’t have control of the appointment to such a very powerful position in such hands at all –  and, even while it is, they should have delayed this process rather than rushing so far ahead before the looming election.

 

UPDATE:  For future reference (since the advert will be taken down when applications close) this is the advert

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.