The more things change, the more they stay the same -- or so the saying goes. The expression could not be a more apt description of what we are witnessing at the Reserve Bank.

In 2018 The New Zealand Initiative published a research report, Who Guards the Guards? Regulatory governance in New Zealand.

Our report followed up on a 2014 publication from the Productivity Commission, Regulatory Institutions and Practices, in which the Commission found a litany of shortcomings with New Zealand’s regulatory agencies. The Commission concluded that the governance arrangements of our regulators were ad hoc rather than based on sound governance principles, that there were problems with how the agencies were monitored, and that appointment processes for governance roles were of variable quality.

Our report picked up where the Commission left off, drilling down into specific regulatory agencies to identify what is working and what is not. We met with New Zealand’s major consumer groups to gain their views on our leading commercial regulators. We interviewed the leaders of many of those regulators, along with the government officials tasked with monitoring them. And we surveyed New Zealand’s largest businesses and asked them to rate the performance of their regulators against 23 KPIs, ranging from consistency to commercial expertise, and from clarity of objectives to learning from mistakes.

To the surprise of the authors (of whom I was one), we found that the Reserve Bank commanded the lowest levels of respect and confidence among the businesses it regulated of any of the major regulatory agencies. On average only 28.6% of respondents ‘agreed’ or ‘strongly agreed’ that the Reserve Bank met the KPIs with 36% ‘disagreeing’ or ‘strongly disagreeing’.

To put our findings in context, the results for the Reserve Bank’s sister regulator, the Financial Markets Authority, revealed that on average, 60.8% of respondents ‘agreed’ or ‘strongly agreed’ that the FMA met the KPIs, and only 10.3% ‘disagreed’. 

A new start or more of the same?

Now, all this occurred shortly before the commencement of current Reserve Bank Governor Adrian Orr’s tenure. And after taking office, the new Governor seized on the results of our report and promised the Bank would take on board the criticism and deliver a fresh approach. As Hamish Rutherford wrote about it at the time for Stuff:

Adrian Orr, the new governor of the Reserve Bank, has written to the chief executives and chairs of New Zealand's banks alerting them to a damning report fed by their anonymised comments.

An improbable star of New Zealand finance, Orr, 55, started in the role on March 27, arriving at a central bank which he acknowledges is under fire.

"This place is a diamond, but it needs significant polishing in places," Orr said in an interview in the Reserve Bank headquarters.

"We need to think much harder about how we behave, how we roll, how we explain, how we do things. That's a cultural challenge for the bank."

A survey by think tank the New Zealand Initiative, released on April 13, drawing responses from "some of New Zealand's largest financial institutions" had most respondents claiming the bank's consultation and engagement was poor.

Respondents did not believe management was well-respected, did not find staff constructive and most said the bank did not learn from its mistakes. Verbatim comments from the survey would make for difficult reading for Reserve Bank staff.

"RBNZ [staff are] completely divorced from the reality of how things are done," one told the survey. Another described the bank as "archaic", adding that entrenched officials "don't get challenged".

Written by NZ Initiative chairman Roger Partridge, a former executive chairman of leading law firm Bell Gully, the report gained limited attention in the days after its release.

But Orr has decided to amplify the message, acknowledging the bank's reputation is below what he believes it could be.

As well as posting the comments of the report on the Reserve Bank's internal intranet, Orr had written to bank bosses with the message that: "Hey, this doesn't print well. We hear you. We need to do something about it."

He expected that writing the letter and making public statements would elicit "free, unsolicited advice about how this place can do better".

A little over a year on, things have changed. The National Business Review’s Tim Hunter published an article this week following an interview with Orr (How the RBNZ front-footed the bank capital debate) in which he wrote this:

“When I turned up as governor [in March last year] and I walked into this vacuum, the first thing I received was a NZ Initiative report on how we don’t ring, we don’t write, we don’t come to see you, we don’t explain ... this damning report where they’d interviewed eight people.”

The report was the NZ Initiative’s Who guards the guards report from April last year, which found fault with the RBNZ’s governance.

“I felt the bank had almost become a free hit and it was fine just to criticise or throw things at the bank,” Orr. said

“So I deliberately removed the ‘free’ component of that to say ‘well hang on, if you say that, expect to be questioned’.

“We are humans behind this concept called the central bank. You can’t just abuse us. It’s hashtag not ok.

“That we wanted to be open, accessible, and not put up with abuse, came as the biggest shock to the usual customers or the usual behaviour.”

So, when Orr started, he praised our report and amplified its message. One and half years later, he calls it “abuse” and claims it was based on interviews with eight people. It was not. It was based on both survey results and – because of the surprising results of the survey results – follow-up interviews with leading financial markets’ participants. And it was peer-reviewed.

A little over a year on, Orr’s message is plain: no one is “free” to criticise the Reserve Bank. Do that, and we will retaliate.

This is no way for a regulatory agency to operate. Especially one that wields as much power as the Reserve Bank. Institutions of the state must be open to robust criticism. Afterall, they do not always get everything right. Miscarriages of justice occur even with our most powerful regulatory agencies like the New Zealand Police and the Serious Fraud Office. And regulators should expect to receive criticism even if it might not prove justified. Critics might not get things right too.

For Orr to suggest criticism should be limited because “we are humans” is more than a little odd. Criticism, even robust criticism, comes with the territory of exercising power. Criticism should be treated with respect. And even where a regulator thinks criticism is misguided, it should be willing to ‘take it on the chin.’ (Just imagine the harm it would cause if the Police fought back every time they received criticism they disagreed with).

Reserve Banks governance arrangements need to change

In Who Guards the Guards? we concluded it should be no surprise that the Reserve Bank performed so poorly in our survey. The Reserve Bank is an unusual entity. It has a board that is not a board, and a governor who is also a chief executive. The governor has immense power, including sole responsibility to determine the capital requirements for all registered banks by controlling their “conditions of registration.” We have recently seen that power in action, with Orr’s decision to double the level of capital registered banks must hold.

Because the governor’s regulatory powers are vested directly in him by the Reserve Bank of New Zealand Act, he is not accountable to the bank’s board for how he exercises those powers. These arrangements result in an extraordinary concentration of power in the hands of a single individual.

Perhaps, then, it should come as no surprise that there are deep-seated concerns with how that power is exercised.

Fortunately, change is on the horizon. The Reserve Bank’s governance is the subject of Phase 2 of the Minister of Finance’s review of the Reserve Bank of New Zealand Act. In June this year the Minister of Finance announced an “in-principle decision” to change the Reserve Bank’s governance arrangements by introducing a proper governance board. This decision mirrors the recommendation we made in Who Guards the Guards?

For the sake of anyone with the temerity to question whether the Reserve Bank’s decision-making processes are in the public interest, the change cannot come soon enough.