John Kay on banks, regulators and politicians

The Treasury has had Professor John Kay in town this week.  Kay has had a long and distinguished (microeconomics-focused) career in the United Kingdom as an academic, adviser, FT columnist, author etc and last year published a new book Other People’s Money: Masters of the Universe or Servants of the People, the introductory chapter of which is here.  Key’s Treasury guest lecture was built around the ideas in this book.  To be clear, I have not read the book –  although despite the skeptical comments that follow I may now do so.

It wasn’t a lecture, and apparently isn’t a book, about the 2008/09 financial crisis per se.  That said, the book probably wouldn’t have been written without the crisis, and he clearly sees the crisis as a manifestation of what, in his view, has gone wrong with the financial sector. In a line from his website :

The financial crisis of 2007-8 has dominated subsequent discussion of economic policy. In my view the responses are characterised by two widespread misunderstandings. The first mistake is to believe the crisis is an inexplicable, once in a lifetime, event, rather than another demonstration of an increasingly dysfunctional financial system.

Kay began with a line many have used –  the changing nature of the people who go into banking.  In the 1960s, when he grew up in Edinburgh, banking was for the people not quite smart enough to get into university (as in New Zealand, only a small proportion of school leavers then went to university).  By contrast, these days finance attracts many of the smartest graduates from top universities.  The range of products is, of course, much more complex.  But not, Kay would argue, so correspondingly socially useful, despite the staggering remuneration on offer to a fairly small number of people in these institutions (if I recall rightly, he notes that most people in the big UK bank Barclays actually earn less than the UK median wage).  And, of course, the incidence of financial crises is much greater today than it was in the post-war decades.

For a time, politicians across much of the advanced world fell at the feet of bankers.  Kay showed an amusing clip of Gordon Brown, then Chancellor of the Exchequer, opening a new headquarters in Europe for Lehmans only 10 years or so ago.  And in the United States in particular, there is the ongoing unease over the revolving door that seems to operate between senior government positions and highly-remunerated positions in the financial sector  (it isn’t just Goldmans’ alumni going into government and back into the financial sector (eg Robert Rubin), but the flow from government positions into the financial sector –  be it Bernanke, Summers, Geithner or whoever).  Bernie Sanders is currently tapping that anxiety.

Kay isn’t “anti-finance”.  As he notes

A country can be prosperous only if it has a well-functioning financial system, but that does not imply that the larger the financial system a country has, the more prosperous it is likely to be. It is possible to have too much of a good thing. Financial innovation was critical to the creation of an industrial society; it does not follow that every modern financial innovation contributes to economic growth. Many good ideas become bad ideas when pursued to excess.

And so it is with finance. The finance sector today plays a major role in politics: it is the most powerful industrial lobby and a major provider of campaign finance.

He seems to be arguing some combination of the following:

  • Banks are too large, and encompass too many different types of activities within them,
  • Banks should be broken up.
  • There is “too much finance”
  • Banks have huge political clout (especially in the US and the UK), and exercise that in their own interest, in particular in the (successful) pressure for bailouts.
  • Someone should pay for what went wrong in 2008/09.
  • Banking regulation has become too prescriptive and detailed.

I didn’t find the overall story that persuasive, partly because it doesn’t seem to generalize across countries, and partly because it doesn’t even seem to get to the heart of the 2008/09 issues.  There are bits of the story I agree with  –  concerns about the volume of increasingly detailed, lawyer-driven, focus of regulation, often in effect more concerned with process and form than with economic substance.  And I sympathise with his unease about the hubris implicit in the belief among central bankers that they can somehow determine what risk weights to use for each and every type of credit.

So what bothers me?

First, is there any evidence that banks were “bailed out” because of the political clout of the sector?  I’ve read huge number of the books written since the crisis, and tracked events through the crisis very closely, and that interpretation simply just doesn’t ring true –  in the US, the UK, Ireland, or anywhere else for that matter.  After all, by and large it was not bank shareholders (or senior management) who were bailed out –  and many of the senior management of banks had large proportions of their own wealth tied up in shares in their own banks.  The bailouts typically primarily benefited creditors  (not exclusively –  after all, even Bear Stearns shareholders walked away with a small amount of their money)  and – so the argument went –  the economy as a whole.  Creditors weren’t always voters, but most voters were creditors of banks in one form or another, and most were employees –  alarmed at the prospect of extreme economic disruption.

This isn’t the place to debate whether any or all of the bail-outs were good things or not, simply to note that –  as things were by 2008 –  they would have happened, largely as they did, if financial sector interests had had no clout and no superior access to politicians at all.

And what of the line that banks are simply too big and complex to be run effectively?  Well, for decades we saw that argument run about corporate conglomerates across the western world (including our own Fletcher Challenge).  But actually the market had ways of taking care of that problem –  companies were bought up, restructured, dismantled etc, by purchasers who could make more of the assets that the unwieldy conglomerates could.    The “asset strippers” weren’t always attractive personalities, and some probably went close to (or even beyond) the edge of the law, but the point simply was that the market has a way of ensuring that assets are owned by those who can place the highest value on them.   Bank takeovers aren’t always easy, but they happen.  It isn’t obvious what the (financial stability) policy problem is, unless a strong case can be mounted that some combination of size and complexity effectively buys a bailout insurance policy.  I don’t think the evidence for that point is particularly persuasive either.

At one point is his lecture drew the distinction between whether we thought as banks as a “den of thieves” or as a “monastery”.  I’m not sure either description is remotely warranted.  Avaricious, arrogant and unpleasant as many of these leading bankers seem to have been, I don’t see any sign that the crises of 2008/09 –  in any country –  occurred because anyone systematically set out to dupe anyone else.  Don’t get me wrong: I’m not suggesting there was none of that sort of activity, simply that much more of what went on is down to some combination of:

  • choices of politicians (choosing to adopt the euro, which involved holding interest rates well away from natural interest rates for year after year –  most obviously in Spain and Ireland –  and the high degree of political pressure brought to bear in the United States on the financial system to take on low quality housing loans)
  • collective over-optimism, among borrowers, lenders, citizens and politicians.

Were people let down?  Yes, no doubt.  Banks failed, but so did most of the world’s leading regulators and central bankers (as Kay put it, the effortless subsequent continued rise of several, who had been quite dismissive of risk before the crisis, illustrates the “unimportance of being right”), and most of the world’s leading finance ministers (and most of those who might have wanted to replace those central bankers and finance ministers).  So who should pay, and in what form?

And of course there is the “so what” question.  If one believes that the financial crises (or even the build up of debt prior to the crisis) was responsible for the world’s current economic travails (eg GDP per capita 15 per cent or more below pre-crisis trends) one might perhaps regard the financial sector as a dangerous bacillus, attacking the common wealth.  But as I’ve noted here several times, I don’t think the case is that strong.  Through its history, for example, the US was plagued by financial crises, and yet each time the economy bounced back  – usually quite quickly –  to much the same growth path it was previously on

What of New Zealand?  Is there too much finance here?    We don’t have complex banks (they lend, mostly in quite vanilla forms, and the borrow –  domestic households and institutions, and from abroad.)  We don’t have many complex instruments either –  actively traded or not.  It isn’t obvious banks have huge political clout either –  for better or worse, in the midst of the crisis we forced them to join the deposit guarantee scheme, we forced through the local incorporation policy, we compelled them to pre-position for OBR, and we’ve imposed higher effective minimum capital requirements than most of the countries.  We didn’t have a domestic loan losses financial crisis during 2008/09 (actually neither did the UK), and yet, as I’ve repeatedly highlighted, our economic performance over the last decade has been distinctly mediocre.  There is a lot going on globally, insufficiently understood, but it isn’t yet remotely clear that finance is the problem, rather than just another symptom.

finance and insurance

The New Zealand financial sector is larger than it once was. But much of that isn’t about  over-mighty financial institutions and their “master of the universe” bosses  – although we had our period of craziness in the mid-late 80s.  But if high house prices here  –  as in much of the West –  are about the interaction of supply restrictions and population pressures, the increase in the stock of credit is substantially an endogenous response to those structural distortions.  If governments make urban land really scarce and expensive, younger generations will need to borrow more real resources from older generations to be able to afford a house at all.  The stock of credit (on the one side) and deposits (on the other side) rises, and financial institutions facilitate that-  and value-added associates with that activity and accordingly appears in the national accounts.  Don’t blame banks for that, but governments that so badly mess up the markets in housing supply.

I’m left uneasy about what social value much of the activity in the financial sector generates.  As an analyst, even as a citizen, I’m curious about that.  But I’m not sure that Kay –  or others –  have made a convincing case that is deeply harmful either. In principle it could be –  as others might argue that sugar, alcohol, fast food, or fast cars could be harmful.    Kay avers that he wants less intrusive regulation, but in fact the thrust of his arguments tends to give aid and comfort to those who want more of it.  That appeals to regulators, responds to a public itch “something is wrong, and banks aren’t overly sympathetic causes”, but doesn’t rest sufficiently on a hard-headed analysis of the role of governments and regulators in past crises, and the importance of markets –  messy as they often are – as “a chaotic process of experimentation…the means through which a market economy adapts to change”.

That last quote comes from an excellent lecture, The Future of Markets, which I return to often, given by one John Kay in 2009.

In conclusion, I would just note that at one of his sessions this week, Kay was apparently asked about deposit insurance. He asserts that it is simply imperative: without it the pressure for bailouts of all creditors inevitably becomes almost impossible to resist.  It was a point I made here last week, and remains good advice for our political parties, our government, and for those among the official agencies who continue to believe that the OBR tool deals with these pressures.

Predictable pre-Christmas bureaucrats

Bureaucrats are mostly rather predictable.

I’d been conscious that the Reserve Bank had not yet released the results of its “regulatory stocktake”, even though submissions had closed three months ago.  The Friday before Christmas seemed like a good day for a release by an institution that might want as little coverage as possible of its decisions.  So I kept an eye on my email yesterday, and sure enough at 4.35pm up popped the results of the so-called stocktake.  As far I can see, there has been no media coverage so far, and even if any of the relevant journalists are still around, readership interest in anything serious is rapidly waning.  NBR had covered the issues earlier, and it has already published its last paper for the year.

The stocktake was never a very serious exercise. I was still at the Reserve Bank when the terms of reference was determined, and the Governor was clear then that he did not want any serious issues addressed.  It seemed that it was as much an exercise in appeasing the Minister, to show that the Bank was willing to look afresh at its stock of regulation and perhaps even tidy up some small stuff.

There were, in my reckoning, three main issues dealt with in the consultation document:

  • Refinements to the disclosure regime, generally with a view to reducing public disclosure
  • Refinements to the “fit and proper” regime
  • Some reflections on the Bank’s own policy processes for bank regulation.

I made a submission to the stocktake, along with many of the banks and variety of fairly well-informed individuals including the former Governor, Don Brash.

As far I can tell from reading the document the Bank released yesterday, it had no real interest in any submissions other than those of the banks and of a single rating agency.    It does report the gist of some of those individual submissions, but there is no sign that any of them had any impact on the Bank’s thinking, nor an attempt to explain why the Bank regards the arguments made as unconvincing.   That is one of the problems in having a regulatory agency set policy as well as implement it –  insiders will tend to be defenders of the status quo, and if they are responsive to outside input at all it will tend to be to submissions from those they have most to do with (in this case, the regulated entities, the banks).

The Reserve Bank has been putting progressively less emphasis on public disclosure by banks over the last decade or so.  The Bank itself has been quite open that it does not now use the information in the disclosure statements for supervisory purposes, having replaced it with a variety of ‘private reporting’ returns that no one else has access to.  Note that the Bank is very enamoured of what it describes as a “non-zero failure regime” –  that is, the system is run to allow for the possibility of bank failures (rather than to prevent them all), and with the aim of ensuring that any losses fall, as far as possible, on shareholders and creditors (including depositors).  There is no deposit insurance in New Zealand, and the Bank is staunchly opposed to the introduction of deposit insurance.  In other words, in their vision the risks from any failure of a bank fall first and foremost on creditors, not taxpayers.  And yet those creditors do not get access to the information that the Reserve Bank regards as vital to assess the health of banks.  The disclosure statements are really, in effect, just a legacy of history –  probably of no real value to creditors (since it isn’t the information the supervisors themselves use).

I pointed this out in my submission, and suggested a rather simpler and cheaper approach which would better reflect the risks the system is designed around –  ie providing creditors much the same information as the central bank gets, when the central bank gets it.

The Bank has canvassed an option somewhat along these lines in its consultative document, raising the option of a “continuous disclosure” model, something like what stock exchanges impose on listed entities, for periods between six-monthly disclosure statements (at present, disclosure statements are quarterly).

The Bank did not respond to my suggestion at all.  It did respond to the partial continuous disclosure idea.  The first argument advanced against it was “banks did not support this option”, but with no statement of why –  and recall that we don’t have access to submissions made to the Reserve Bank.  The Bank’s own concern seemed to be that it might lead to “confusion in the market”,  but quite why it should lead to such confusion, and among whom, is not made clear.

The Bank appears to have settled on a halfway house, that might be workable, but continues to maintain a charade –  a disclosure regime that forces banks to disclose some information, but not the information that the Reserve Bank itself uses for supervisory purposes, and only then with a considerable lag.  Perhaps there is a good reason for maintaining this distinction, but in its release yesterday the Bank gives no sign of having thought hard about the issues at all.

There is further consultation to come on the Bank’s preferred “dashboard” option for 0ff-quarter disclosure, but a strong hint in the document that the Bank wants to consult only with banks.  The Reserve Bank needs to remember that banks are the regulated entities, regulated in the public interest.  Registered bank perspectives on cost and workability should be welcomed, but the rationale for supervision is that banks represent a risk to the rest of us, not those in whose interests regulation is undertaken.

On “fit and proper”, again the Bank showed no interest in asking or answering some of the more fundamental challenges some submitters posed (eg straightforward ones such as “is there any evidence that fit and proper tests, applied discretionarily by bureaucrats, have done any good, in promoting the soundness of the financial system?”.  I proposed a much simpler and cheaper option than what the Bank has been doing (or will be doing in future): ban anyone with a conviction for dishonesty in the past 10 years and require senior officers and directors CVs to be listed on the website of the regulated entity.  I’d be surprised if the Reserve Bank, with the best will in the world, could improve on that option, not being granted the gifts of insight or foresight greater than those of mere creditors and shareholders.    Again, the Reserve Bank gave no hint of why it thought this (quicker and cheaper) approach would lead to worse outcomes.

But there was modestly encouraging stuff to come out of the stocktake.  In their, still secret, submissions several banks (or perhaps the Bankers’ Association, to protect individual banks) had raised concerns about the Bank’s policy processes.

Various banks had complained that the typical consultation period was far too short, for often rather complex issues.  The Bank has agreed that in future its normal consultation period will be 6 to 10 weeks,   but this looks like a rather small gain as the Bank reserves the right to ignore this guideline when it suits them (eg when the Governor wants to rush in new LVR restrictions, on very limited evidence).

Various banks also appear to have raised concerns about the robustness of the Reserve Bank’s cost-benefit analysis in support of regulatory changes (unsurprisingly I’d have thought, as I don’t recall any quantitative cost-benefit analysis for this year’s investor finance restrictions) and of the Bank’s regulatory impact statements.  Of course, RISs are mostly a sick joke around much of the public sector, but it is good to keep the pressure up on individual agencies –  especially independent ones –  to improve their game.  The Bank doesn’t offer anything very specific in response, but seems conscious of the concerns.

One bank “asked for a requirement that the Reserve Bank publish a summary of submissions and responses (including rationalise) to viewpoints not accepted.”

The Reserve Bank responded that “we currently aim to publish summaries of submissions that take into account responses to viewpoints not accepted.  We would welcome specific feedback from industry in cases where they feel this insufficient.”.  As I noted, none of the views I and other expressed in this consultation were responded to specifically.  Then again, I guess I’m not “industry”.  The Bank  might want to note that “industry” are not the (only) stakeholders –  they are the regulated entities.

Dearer to my heart was this comment:

One bank also suggested that submissions should be available online, in addition to the Reserve Bank publishing the summary of submissions. This bank noted that this is the standard practice for public consultations run by other government departments (e.g. the Ministry of Business, Innovation and Employment).

This is a point I’ve made repeatedly.  And it isn’t only government departments. Submissions to Select Committees are public, submissions on City Council consultations are public, and submissions to the Productivity Commission are public. It is simply good practice, taking seriously the idea of open government.  Such submissions are not just public after all the decisions have been made, but while deliberations are going on.  The Bank has always been very resistant to such openness.  However, they have now shifted their ground somewhat:

Our current approach is based on our understanding that respondents prefer to keep their submissions confidential. Prior feedback indicated that banks, in particular, were reticent to share cost information and the Reserve Bank is concerned that the publication of submissions would impact the quality and detail of the submission feedback. On the other hand we also recognise the importance of transparency in the policy-making process, so we will return to this issue and consult on a revised approach under which the default position would be that all submissions are published on our website (although submitters could ask to have any confidential information in submissions redacted). We will add this issue our register of “Future Policy Work.”

I think this statement tells one a lot about the extent to which the Reserve Bank sees its clients as primarily the institutions it regulates, rather than the public the institution exists for.  I’m sure that banks would generally prefer to keep their submissions confidential, and it is precisely for that reason that their submissions, in particular, should be made public.  It is too easy for a cosy relationship to develop between the regulator and the regulated (Ross Levene among others have written extensively on this topic) ,and although I don’t think it has really happened to a great extent in New Zealand it is a risk that constantly needs guarding against.

In any case, kudos to the Bank for a modest step forward.  I’ll look forward to their consultation document on this issue to see whether it represents a serious move to the sort of consistent transparency other agencies adopt.  And I’ll be interested to see how they plan to get around the limitations of section 105 of the Reserve Bank Act –  which, as I noted a few months ago, really needs amending.

In the meantime, I lodged an OIA request months ago for the submissions on this consultation. I agreed with the Bank to delay the request taking effect until the results of the stocktake were published (otherwise they would just have declined it), so in the new spirit of openness I will look forward to a fairly comprehensive release  –  not just private individual submissions – in the New Year.  Given that they have had the submissions for months already, if they were serious about transparency they could release them right now (“as soon as reasonably practical” is what the Official Information Act says).

I will take some convincing that they are serious about transparency. Recall that in the course of this year they have already:

  • Refused to publish many of the submissions on the investor finance restrictions consultation (all of them initially)
  • Refused to publish most of the background material to the 2012 PTA (under threat of heavy charges)
  • Have still not published their forecasting model  [UPDATE: a commenter points out that the model has now been released, something I had missed]
  • Have refused to publish any of the substantive papers as part of their work programme on reforming governance of the Reserve Bank
  • Have refused to publish any minutes of meetings of the Governing Committee
  • Have refused to publish any material provided to the Bank’s Board as the basis for the Board’s evaluation of the September Monetary Policy Statement.

And then I had an email from them the other day about another request.  I had asked for copies of minutes of the Bank’s Board’s meetings for a couple of years in the late 1980s.  I wanted them for two, quite unrelated, pieces of work I was doing.  I assumed this would be uncontroversial –  it is material that is almost 30 years old, and not conceivably withholdable.  Actually, I had made a similar request for a couple of other years’ Board minutes when I was still at the Bank, and was told I was free to photocopy the relevant papers, which I did.

The Board papers are all nicely bound and properly stored, so there is no research or collation involved in meeting my request.  I deliberately just asked for all the minutes –  perhaps five pages a months, 11 months a year, rather than excerpts, to minimise any effort in meeting the request.  All it required was some undemanding photocopying or scanning, taking no more than hour in total.

But the Bank first took almost 20 working days to respond (“as soon as reasonably practicable”?), and even then has not determined whether the information is releasable at all.  And it is demanding $276 as a deposit to even begin determining whether the material could be released.   Note, by contrast, the easily availability of historical Board (equivalent) minutes at the Bank of England.

The Reserve Bank has announced:

The Reserve Bank has a policy of charging for information provided in response to Official Information requests when the chargeable time taken to provide the information exceeds one hour, and charging for copying when the volume exceeds 20 pages. Our charges are $38 per half hour of time and 20c per page for copying (GST inclusive).

Their stance appears to be technically legal, but hardly in the spirit of open government[1].  I’m curious how many people have been charged by the Reserve Bank under its policy, and am wondering whether I should now expect a bill for (a) the request for submissions on the regulatory stocktake, and (b) the request for information on the Reserve Bank’s volte face on the short-term impact of immigration.

The institution needs serious reform. Among other things, it needs to take on board the spirit of pro-active release.   It remains a bit puzzling why the Minister of Finance has closed down work on even reforming the governance provisions.  Occasional sideways or mildly critical comments about the Bank’s recent monetary policy mistakes are all very well, but they don’t seem to lead anywhere.


[1] And I’d happily come in to the Bank and photocopy the pages myself, and even cover the photocopying costs.

Disclosure requirements: some anomalous laws

Parliamentary sovereignty is a key feature of our political and governance system. But sometimes parliaments end up producing rather anomalous results when we look from one piece of legislation to another.

Twenty years ago, the Reserve Bank moved to a system of prudential regulation of banks that was designed to rely heavily on public disclosure of key information on a regular basis. Disclosure was never envisaged as the only element of the regulatory regime. Basle 1 basic regulatory capital requirements were also in place, and were left in place as much at the request of the banks (who wanted to be seen as operating in an internationally-recognisable regime) as because of any conviction by the Reserve Bank that capital requirements were worthwhile. And the Bank and the Minister of Finance retained significant powers to intervene if a bank was getting into trouble, and was (or appeared to be approaching) insolvency.

But the proposition underpinning the disclosure framework was that investors (depositors, bond-holders) and others transacting with a bank should have all the information that the Reserve Bank had about a regulated bank. That seemed only fair and reasonable – after all, it was investors’ money that was at stake, not the Reserve Bank’s.  And if the Reserve Bank had private information that was not disclosed to depositors/investors that could, in the event of a subsequent failure, open the Reserve Bank up to charges (political and rhetorical, even if not legal) that it should have acted earlier, and thus prevented the losses investors/depositors subsequently experienced.  Private information might have supported the argument for government bailouts if things went wrong.

A lot of effort went in to devising the disclosure regime. In some areas it may have gone a little too far.  One example might have been requirements on banks to have Key Information Summary documents immediately available in every branch.  I suspect the number of these documents that were ever actually read was extremely small. The regime went to somewhat absurd lengths: someone who worked in the economics department of one local bank told me that their bank interpreted the regulations to mean that Key Information Summaries had to be available for perusal in the economics department (“branch”)  itself – a part of a bank not typically visited by the public.

Because so much weight was put on disclosure requirements, the law was written in a way that exposed those responsible for bank disclosure documents to significant penalties (including potential imprisonment) for breaches of the requirements. Don Brash has many stories to tell of the reaction of outraged directors (and puzzled ones in other jurisdictions). There had, perhaps, been a tendency for bank boards to be made up of people with gilded reputations, rather than much ability or willingness to ask hard questions about the conduct of the Bank. The prospect of such steep penalties certainly altered incentives, and behaviour.   Banks may, or may not, be safer, but directors have certainly gone to considerable lengths to minimise their own risks

In the last decade, the Reserve Bank has backed away from heavy reliance on the public disclosure aspect of the regulatory regime for banks. The disclosure requirements have themselves been watered down, and there are proposals for further reductions in the requirements in a recent Bank consultative document. This tendency seems unfortunate – despite inevitable complaints from banks about compliance costs. If anything, the focus globally in recent decades has been on more and more disclosure. Perhaps more concerning is the explicit shift the Reserve Bank has made to collecting private information about banks’ day-to-day activities and risks, information which is not available to investors and depositors.  The  Reserve Bank has been keen to promote the idea of its OBR tool being used in the event of a bank failure, so it remains the case that the regime is designed to be about depositors/investors being primarily at risk of losing money, not the Crown. And yet the Crown uses statutory powers to acquire information about these regulated institutions which depositors do not typically have access to.

But notwithstanding the diminished emphasis on disclosure, the Reserve Bank is still keen to remind people of the stiff penalties for breaches of disclosure requirements. In a speech only a couple of years ago, the head of the banking supervision department noted

Self-discipline is closely linked with sound governance. We have a strong tradition of director attestations, coupled with heavy penalties for non-compliance. For example, bank directors who fail to comply with disclosure obligations face fines of up to $200,000 or 18 months in prison.

Those are very stiff penalties for individuals, even if the scale of potential fines on the institutions themselves seems lighter (a maximum fine of $2 million –  banks typically have rather more than 10 times the equity of a typical director).

But, of course, banks are only one element of the financial system, and only one of the areas in which people are exposed to financial risk.  Another, in which people are typically quite risk averse, is superannuation schemes.   There is no prudential supervisory regime for superannuation schemes –  no government regulator actively scrutinises the business of schemes to minimise the risk of failure.  To a large extent, members of superannuation schemes are on their own.

However, there is a Superannuation Schemes Act, which is designed to provide some basic regulatory parameters and protections for members.  One key component of that regime is disclosure.  And that makes sense, how can members make good decisions, and help ensure that their money is safe, if they do not have access to information.

One of the key requirements is regarding scheme annual reports.  For members of superannuation schemes, the material in the Annual Report is akin to a disclosure statement for bank depositors.  But an important difference is that there is a quite a lot of public information available about banks, even if disclosure statements didn’t exist (credit rating information for example), whereas there is almost none about superannuation schemes.  The disclosures in the Annual Report are absolutely imperative.

There is an entire schedule to the Act which sets out minimum information that must be included in the Annual Reports.  That includes audited financial statements, disclosure of related party exposures, affirmations that contributions and payments have been made in accord with the rules of the relevant scheme.  And scheme trustees must also advise members of any amendments to the relevant trust deed since the previous Annual Report.  All of those seem pretty foundational.  You wouldn’t want to be in a scheme where the rules could be changed without you being aware of it.

Recall that breaches of disclosure requirements on banks could be met with both civil and criminal sanctions, with the latter including up to 18 months in prison.

And in the Superannuation Schemes Act?  Well, there, Parliament seemed to take a rather different approach.  Breaches of disclosure requirements are subject to a fine of up to $500.  No, there are no missing zeroes there, the maximum penalty is five hundred dollars.  I’m a trustee of a superannuation fund, and I was surprised to learn how light the potential criminal penalties are [1].  And yet people who are members of longstanding defined benefit pension schemes typically have far more money tied up in those schemes than most will have in any bank or other regulated financial institution.

I’m not quite sure why Parliament in 1989 had such a different approach to the importance of full  and honest legally-required disclosures than it had only a few years later when it came to consider the case of banks.

I’m not usually a fan of increased regulation, but if there is a good case for such disclosure laws at all, as there probably is with very long-lived commitments such as superannuation schemes, which often involve people in their declining years, then such slight penalties almost make a joke of the requirements.  Trustees might, for example, come to treat apparent breaches of such requirements as a matter of little account, even if the consequences for members of such breaches could have been serious.

I hesitate to encourage them, but this looks an issue for MBIE, in its policy role, and the FMA to take up.

[1] And apparently, and equally remarkably, there is apparently a two year statute of limitations on prosecuting such offences