It’s time to make KiwiSavers fly and other dreams
I was as excited as anyone to see the initial results from last week’s general Election – and I don’t think the specials will see much change – the strong showing for National and Act shows the desire for a new path and an electorate that does not like the direction which New Zealand was heading. Now it’s down to the hard work of delivering change that was talked about so readily on the campaign trail.
We want change in the financial services industry (or at least the areas in which I am involved) or put another way we want consistency rather than the constant roller coaster we have been on for the past ten years. Here is my short list of what I would like to see changed.
We need a period of regulatory stability
Over the past five to ten years, the regulatory environment in New Zealand has gone through a massive overhaul, which I will admit has been largely for the better. We have seen multiple laws introduced and enacted to protect consumers, the laundry list includes: CCCFA (to protect against predatory lending), COFI (to ensure financial institutions do right by their customers), FSLAA (to ensure financial advisers act in their customers best interests), Climate Related Disclosures (making companies and fund managers report on their emissions) and of course AML / CFT regulations (to protect against money laundering and funding of terrorism). Not a small list and I can tell you not easy to administer or comply with.
While all of these new rules have good intentions and have attempted to address big changes in the industry, it has been an avalanche of regulation which has meant many financial services companies now focus and expend considerable resources on how they comply with the law rather than better serving their customers. We now need this avalanche of regulation to stop as we in the sector need to finish embedding all of the changes that have been introduced over the past six years and give them time to work through.
National has talked about repealing COFI. Although that is admirable that should only be done if it is not replaced by something new. Organisations have spent the money and built the systems for COFI, so we don’t want to go back to the drawing board and start again.
We need the regulators to enforce current rules and laws rather than continuing to extend their remit
New Zealand’s financial services regulatory approach is as a “principles-based regulator”. Effectively this means that rather than issuing clear guidance on what should or should not be done, the various regulators will set broad high-level standards that come back to customer outcomes.
Although this might seem like the right approach on first blush, it creates a huge amount of ambiguity for the industry. Rather than being held to a clear and specific set of guidelines, we are now asked to prove why and how that which we are doing aligns with the principles of the regulatory framework and why it is in the customers best interests.
Lawyers have even started providing caveats on legal advice saying it is based on “their interpretation” of the rules and regulations but those might not align with the regulator’s perspective.
Under this principles-based regulation we have seen a massive widening of regulatory scope rather than a focus on some of the high risk areas that need focus.
One example of this is the wholesale exemption. Everyone knows that it is sometimes used as a loophole to offer investors the opportunity to invest in what may be perceived as higher-risk products with fewer investor protections. Examples include some property syndication or mortgage funds. It is good that the regulator is now taking a look at this area of wholesale exemption and I would also like to see more focus on other potentially higher risk areas too, rather than focusing on areas such as reducing KiwiSaver fees or Climate Disclosures.
It’s time to deal to the big banks, they are an Australian tax on our economy
The New Zealand branches of the big Australian banks are some of the most profitable in the world. In 2022, according to the NZ Banking Association’s website, New Zealand’s banks delivered an average return on equity of 13.4%. This return is almost 3% higher than the global average return on equity of 10.5% (sourced from FactSet).
For far too long many New Zealand politicians have paid heed to the theory that we are better off having banks that are too profitable (i.e., they are well-funded, robust, stable etc) rather than banks that are not profitable enough (weak, vulnerable etc). The Commerce Commission is about to start a review of the banking sector, but if the Supermarket review is anything to go by we do not have much to hope for.
Some simple changes would make a massive difference to the industry: acceleration of open banking, bank account portability and, most obvious of all, take the Government business away from them where possible (including KiwiSaver default schemes). Remember, the Government actually owns a bank, Kiwibank! The costs of these changes are not in-significant, but the banks can and will make the changes if they need to.
Given the importance of the big four Australian banks to the New Zealand economy, excess profits need to be looked at as a tax on the broader New Zealand economy.
Time for a KiwiSaver reset rather than tinkering around the edges
During the election campaign we saw some interesting announcements from National about KiwiSaver. These were good electioneering promises even initiatives, but still don’t fully address the real issues of our not saving enough in aggregate and New Zealand not being able to afford NZ Super as our population continues to age.
KiwiSaver is now almost 17 years old and the rules have not really changed since we welcomed our first KiwiSavers back in 2007. In my mind, we need a KiwiSaver review to look at the very important question of do we want KiwiSaver to act as an alternative to NZ Super over the longer term or are we happy with our current retirement settings. If you want my answer on that, check out my article here.
Once we have agreed on the purpose on KiwiSaver let’s look at contribution rates, how to use the default structure to foster more competition and also incentives.
A broader review is necessary rather than a little more tinkering around the edges.
We now (I hope) are about to have a Government of action and a laser focus on efficiency and productivity. That is exciting for the financial sector. But the main thing that we want is stability. We want a set of rules that we can play to and build our products and businesses for those rules, the last five years have felt like an ever changing set of goal posts and that needs to stop. Consumer outcomes will be better in more ways than one.