Appendix Three - Example of a Regulatory Impact Statement
Statement of the Problem and the Need for Action
[Refer Problem Definition"]
1. The Friendly Societies and Credit Unions Act 1982 (the FSCU Act) currently governs credit unions in New Zealand. This legislation is unduly restrictive in its regulation of credit unions. Most of the problems with the current statute are encapsulated in the prescriptive, but unclear nature of the governance structure for credit unions. Difficulties also exist under the FSCU Act in relation to the prudential controls placed on credit unions that effectively inhibit the ability of credit unions to borrow, lend, deposit and invest funds.
2. The present legislation for credit unions inhibits efficiency and precludes the ability of credit unions to aggregate capital and manage economic risk in the interests of their members. Further, the specific legislation for credit unions creates an independent regulatory regime that is far different from that presently governing other competing financial institutions.
Statement of the Public Policy Objective
[Refer "Specifying Desired Objective(s)"]
3. The key objective of the review is to ensure that the legislation for credit unions is efficient and effective as a means of achieving economic and social benefits through aggregating capital and managing economic risk. In recognition of the fact that it is good legislative practice for essentially similar entities to be governed by a single regulatory regime wherever possible, another objective of the review is to ensure like entities are governed in a similar manner. Ensuring this situation avoids "re-inventing the wheel", increases the certainty of application of the law and reduces the possibilities for "regulatory arbitrage".
Statement of Options for Achieving the Desired Objectives
[Refer "Identifying Feasible Options"]
Non-Regulatory Measures
4. No non-regulatory measures exist that would be capable of achieving the specified objectives for the review.
Regulatory Measures
5. Two regulatory measures have been identified:
- Option A: Amending the relevant provisions in the Friendly Societies and Credit Unions Act 1982 to provide better definition with respect to corporate governance issues, and allow more flexibility for credit unions in relation to prudential matters.
- Option B: Incorporating credit unions within the generic regime provided for under the Companies Act 1993.
6. While it is possible that we could make necessary amendments to the current specific legislation to reflect the statutory corporate governance regime provided for in the Companies Act 1993, this option would be inefficient. To adopt Option A would mean ignoring one of the key objectives of the review that seeks to avoid "re-inventing the wheel" and reduce regulatory arbitrage. Ministry officials are therefore of the view that Option B achieves the desired objectives for the review, and is therefore the appropriate option to be considered further.
Statement of the Net Benefit of this Proposal [Option B]
[Refer "Impact Assessment"]
Benefits
7. A number of benefits would accrue to credit unions upon their incorporation within the generic framework provided for under the Companies Act 1993. These include:
- automatic attainment of body corporate status and limited liability for shareholders. This change would enable greater protection for shareholders;
- better clarity of the status of shareholders' deposits in credit unions which would result in better security for shareholders' debt securities;
- credit unions automatically losing their exemption from income tax. A likely outcome of this would be greater comparability in the treatment of financial service providers in general which is consistent with the second objective for the review;
- enhanced accountability and governance within credit unions. This would be likely to result in increased objectivity and transparency in the governance of credit unions; and
- a better ability for credit unions to be salvaged in the event that they got into financial difficulties, thereby decreasing the financial loss to shareholders of credit unions as a result of a venture failing.
Costs
8. These include:
- potential risk of inappropriate actions by inexperienced credit union officers enjoying greater flexibility under the Companies Act 1993 regime. This could potentially result in a financial loss to shareholders should credit union officers act unsuitably;and
- credit unions becoming subject to the solvency test. This is only likely to be an issue for a credit union when a credit union company is required to acquire the shares of a member leaving a credit union. It is believed however, that any practical difficulties for credit unions created in this area could well be addressed via mechanisms already available in the Companies Act 1993.
9. Accordingly, on balance, the expected benefits to credit unions and the financial services market as a whole outweigh any expected costs associated with the proposed measure.
Consultation
[Refer "Public Consultation"]
10. To date, the following parties have been consulted on the adoption of option B identified above. Further consultation is to be undertaken with industry participants and interested parties on the appropriate legislative vehicle for the incorporation of credit unions within the Companies Act 1993 regime, and the appropriate form of prudential control for credit unions.
Government Agencies | Other Parties |
|---|
| The Treasury | Registrar of Friendly Societies and Credit Unions |
| Inland Revenue Department (IRD) | |
| Ministry of Justice | |
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