Reserve Bank happy for KiwiSaver to remain outside prudential supervision umbrella, says FMA's market conduct approach appropriate

By Alex Tarrant

The Reserve Bank is happy to not have KiwiSaver fall under its prudential supervision umbrella, as the Financial Markets Authority (FMA) already covers aspects of the scheme, KiwiSaver providers are not financial intermediaries like banks, and due to the small size of KiwiSaver funds under management.

FMA boss Sean Hughes last week told interest.co.nz he would like there to be more regulatory oversight of KiwiSaver providers, like in Australia where the compulsory Super scheme there not only had a conduct and disclosure regulator, like the FMA here, but a prudential regulator in the Australian Prudential Regulation Authority also.

But Commerce Minister Craig Foss says the FMA will remain the sole overseer of the scheme, with its role focussing on competence and conduct.

At the press conference for the release of the Reserve Bank's May Financial Stability Report on Wednesday, Governor Alan Bollard and Deputy Governor Grant Spencer were asked whether they thought KiwiSaver providers should be brought under the central bank's prudential supervision.

At present, KiwiSaver and other managed funds were covered by the Financial Markets Authority in terms of market conduct like prospectus requirements, Spencer noted.

“Our view is that’s the appropriate approach in that prudential supervision of these funds is not required," he said.

“In other words, we look at them pretty much as an investment in securities, where it’s the ‘investor beware’, but the investor needs to be well-informed and assured that the risk return conditions or properties of the investment are represented in the information available."

From a prudential supervision viewpoint, the Reserve Bank was happy to leave KiwiSaver to a market conduct approach under the FMA.

Asked whether that was because prudential oversight was to do with the financial system as a whole, and that KiwiSaver was too small to be a factor in that, Spencer replied:

“Prudential is where you’re looking at the financial institutions in the financial system, and looking to assure that there are minimum standards of safety. In other words, risk management or risk standards for those institutions and their balance sheets.

“When it comes to market investments, there’s no reason why there should not be risky investments out there, and people can invest in risky investments as long as they know what they’re letting themselves in for," he said.

“With a typical KiwiSaver investor, for example, you have the conservative option, middle of the road, risky. As long as it’s very clear what those options are, and the risk returns involved, then the investor should be allowed to make the choice. It’s market conduct rather than prudential.”

To which Bollard added: “yes.”

The Reserve Bank is the only prudential regulator of New Zealand's financial system, and oversees banks, non-bank deposit takers (finance companies, building societies and credit unions) and now the insurance industry. It monitors institutions in the interest of maintaining a sound financial system, and avoiding significant damage to that system which could stem from the collapse of one of its regulated institutions.

Also see Gareth Vaughan's opinion piece, Mind the gap, the regulatory one. Why we need regulation of KiwiSaver providers' governance, related party transactions and audits.

Meanwhile in response to further questions from interest.co.nz about whether the Reserve Bank viewed KiwiSaver as sytemically important, or whether the Bank thought it would become so, a Reserve Bank spokesperson replied:

"The points made at the media conference were that managed funds (such as KiwiSaver) differ from banks and other deposit takers in that they are not usually engaged in financial intermediation – instead, investors effectively take on an equity stake.

"Thus the funds do not typically face the risks to their capital base that the banks do (and hence is the basis for regulating and supervising banks). This means that managed funds do not tend to pose the risk to broader financial system stability that intermediaries do. However, oversight of their individual conduct, which is done by the FMA, is an important and necessary protection for individual investors.

"The Reserve Bank is also mindful of the reputational risk that can be posed by funds management and other investment products and accordingly we do maintain a broad interest in this area of activity as a result of that. It should be noted that none of this suggests that the fund industry is ‘unimportant’ in the broader economic sense, as the funds are a growing part of household wealth."

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