Deposit Takers Act: Navigating the New Regime

Written by Sam Williamson

Last year we updated you on the government’s proposal for modernising the regulation of deposit takers in New Zealand under a single regulatory regime. [1] In July 2023, the Deposit Takers Act (the DTA) was signed into law and the Reserve Bank of New Zealand (RBNZ) began work on designing the new framework.  

In this article we look at some of the steps that RBNZ has taken in the last year towards implementing the new regime, including RBNZ’s Proportionality Framework, the Core Standards consultation, and the Depositor Compensation Scheme (DCS) implementation progress. 

Proportionality Framework 

RBNZ launched its DTA implementation programme with the publication of its Proportionality Framework in March 2024.  Under the DTA, RBNZ must take into account the desirability of taking a proportionate approach to regulation and supervision in achieving the purposes of the DTA (the proportionality principle). [2] According to the Proportionality Framework, a proportionate approach involves:  

“balancing the costs and benefits of regulation in relation to different types of deposit takers [which] is important, as it means the public can benefit from not only a safe, sound and stable deposit-taking sector, but also one that can be diverse, innovative and inclusive.”  

The Proportionality Framework sets out how RBNZ will apply this proportionality principle when developing standards. Specifically, RBNZ will apply the proportionality principle through:  

• adjustments to the strength of the requirements (for example, higher vs lower capital requirements); and/or  

• the comprehensiveness of the requirements (for example, using detailed and precise vs simple and approximate methodologies to calculate capital ratios).  

RBNZ aims to adjust these variables to balance the costs and benefits of regulation proportionately.  

The Proportionality Framework also allocates locally incorporated licensed deposit takers into three groups based on the size of their assets. These groupings will be the baseline for RBNZ’s application of the proportionality principle, as it allows RBNZ to apply prudential requirements proportionately on a group-basis determined by the scale of business undertaken, and the risks posed by, each group. [3] Branches of overseas licensed deposit takers will be grouped together and will be subject to a different set of standards. [4] The groupings for locally incorporated licensed deposit takers are:  

Core Standards Policy Proposals  

RBNZ has also commenced consulting on its policy proposals for the new prudential standards to be made under the DTA.  The standards will be secondary legislation under the DTA, replacing over 800 pages of current banking and NBDT regulation.[5] The prudential standards will comprise four core standards and numerous non-core standards. 

• Core standards – The DTA prescribes four core standards relating to capital adequacy, liquidity, disclosure, and the DCS (relating to DCS-specific disclosure and Single Depositor View (SDV) requirements).  These core standards will form a key part of the overall standards framework and RBNZ will use these standards as the criteria to determine the eligibility of existing banks and NBDTs for licences under the DTA.  

• Non-core standards – These are the other standards that will be set for the purposes of prudential regulation of deposit takers and include standards relating to outsourcing, lending (e.g., Loan to Value Ratio and Debt to Income Ratio), related party exposures, general restrictions, governance, risk management, operational risk, branches, and open bank resolution. 

RBNZ recently consulted on the core standards policy proposals and will shortly begin consulting on its policy proposals for the non-core standards. Consultations on the exposure drafts of the core standards and the non-core standards will then proceed in tandem over the next several years. According to RBNZ’s current timelines the new prudential standards are anticipated to be issued by January 2027. [6 7] 

The core standards policy proposals are drafted in accordance with the Proportionality Framework and are applied to locally incorporated deposit takers on the group-basis described above.  Of the core standards, only the proposed disclosure standard and a subset of the proposed liquidity standard will apply to branches of overseas banks. 

RBNZ’s preferred proposals on three of the four core standards (the DCS standard is discussed below) are: 

Depositor Compensation Scheme 

The DCS ensures ‘protected deposits’ of up to $100,000 per customer per financial institution in the event of the failure of that institution. Protected deposits covered by the DCS:  

• include – current/transactional accounts, savings accounts, term deposits, and equivalent accounts held with a licensed deposit taker in New Zealand. The DTA also allows other products to be included or excluded as protected deposits through the use of regulation;  

• exclude – bonds, other tradeable products, and managed investment schemes (including KiwiSaver and other retirement schemes).  

RBNZ has committed to providing deposit takers with guidance and resources to communicate the DCS to their customers. 

The DCS will be fully funded by levies collected from licensed deposit takers, with a Crown backstop to meet payout requirements if the DCS fund is deficient. The precise funding model and levy structure will be determined by regulation (see below). The policy design of the DCS is already under way with RBNZ committed to have the DCS operational by mid-2025. 

DCS Regulations 

There have been two previous rounds of consultation on the substantive elements of the DCS, the most recent of which closed on 10 May 2024. Significant areas of that consultation included: [14] 

• DCS Levy calculation methodology and approach – From 2028, the DCS levy base (the amount of protected deposits the levy is applied in order to calculate the total levy owing) and the levy (the amount that each deposit holder will pay on their protected deposits) will be calculated from SDV information – the SDV standard (described below) will specify how deposit takers must record and inform RBNZ of an individual depositor’s covered deposits. However, in the interim until the SDV standard is set, RBNZ proposes calculating the levy base by using a proxy based on current survey data for the protected deposits base and the levy  by applying a composite risk-based approach containing three risk factors – capital, liquidity, and business model and management risk indicators.[15]  

• Scope of DCS coverage – In addition to the types of accounts listed above, RBNZ proposed that the definition of ‘protected deposits’ include credit balances of specific lending products (i.e., credit cards, revolving credit facilities, revolving home loans) as these can be equivalent to current accounts in substance. 

• Protection for ‘relevant arrangements’ – ‘Relevant arrangements’ captures arrangements where an amount is held in the name of a depositor on behalf of another person (i.e., trusts). During a compensation event where a DCS payout is made to a protected deposit that is subject to a relevant arrangement, RBNZ proposed that payouts would be paid to the account holder (i.e., not directly to the client).16 RBNZ further proposed that Bank sponsored PIE funds and client accounts of certain professionals who hold deposits on trust for others (i.e., conveyancers, lawyers, accountants, real estate agents, and retirement villages) should be specified as relevant arrangements. 

Final DCS regulations are expected at the end of 2024. [17] 

DCS Standards 

Separately, as part of the core standards consultation (discussed above), RBNZ requested feedback on the DCS standard.  The proposed DCS standard is split into:  

• DCS disclosure regime – The DCS disclosure requirements are intended to:  

• • help consumers understand whether their deposits are protected;  

• • outline the eligibility requirements for coverage under the DCS; and  

• • increase depositor awareness of the DCS and enable depositors to make more informed decisions about deposit products.  

RBNZ’s proposed approach focuses on the use of a RBNZ designed ‘DCS trademark’ to identify protected deposits, supported by a requirement to link to (or provide) supporting information that will be hosted and maintained on RBNZ’s website. Deposit takers will only be permitted to use RBNZ’s official DCS trademark and would not be permitted to create their own. RBNZ would require the DCS trademark to be used on advertising, marketing, and product disclosure statements for DCS protected products.  

• SDV file management – SDV files refer to data generated by a deposit taker’s system that enables RBNZ to determine a depositor’s entitlements to compensation under the DCS (prior to a compensation event) and make payouts. In addition, aggregate reports based on SDV files may be used for other functions, including levy calculations (described above) and to inform future changes to the Treasury’s Statement of Funding Approach.  RBNZ’s preferred approach for the content of the SDV files, SDV testing and SDV reporting is:  

• Content of SDV files – SDV files to contain several mandatory fields of customer and account information. 

• SDV testing – a  combination of deposit taker and regulator testing. This would require all deposit takers to test their SDV files every six months. Under this approach RBNZ may require oversight of a licensed deposit taker’s six-month test, to assess whether they are sufficiently prepared for a DCS compensation event. RBNZ will require a de-identified SDV file from these deposit takers to enable RBNZ to undertake further testing of the end-to-end payment process.18 

• SDV reporting – require deposit takers to build and maintain the capacity to report information on protected deposits at an aggregate level. The balance of aggregate reports would be required to align with SDV files and be reported to RBNZ quarterly.  

Where to from here 

The DTA represents a significant shift in the way that RBNZ regulates the deposit taking sector in New Zealand and requires an extensive work programme to implement, which will continue until at least 2028. In addition to the policy and consultation documents discussed in this article, RBNZ has committed to continued engagement with industry and stakeholders throughout this process: – some upcoming consultations and other DTA milestones to look out for include: 

Please reach out to SHIFT if you would like to discuss the DTA further, including assisting with preparing submissions.

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1. DTA replaces Banking (Prudential Supervision) Act 1989 (formerly the Reserve Bank of New Zealand Act 1989) and the Non-Bank Deposit Takers Act 2013.

2. https://www.rbnz.govt.nz/-/media/project/sites/rbnz/files/regulation-and-supervision/dta-and-dcs/the-proportionality-framework-under-the-dta.pdf

3. The grouping of locally incorporated deposit takers has been established by RBNZ based on the average ‘total assets’ of these deposit takers over a rolling year.

4. Variations to the application of prudential requirements can be made by RBNZ to take account of the circumstances of a particular type of deposit taker or an individual deposit taker through specific conditions in its licence. Additionally, some deposit takers may voluntarily ‘opt in’ to higher prudential requirements, for example, due to its growth strategy or the nature of its business model.

5. The banking handbook, conditions of registration, Orders in Council and NBDT regulations

6. Relevant parts of the current regulatory regime will remain in force until the remaining parts of the DTA have been fully implemented.

7. https://www.rbnz.govt.nz/regulation-and-supervision/depositor-compensation-scheme/dta-dcs-timeline

8. In 2019, RBNZ completed a capital review, which will not be fully phased in until July 2028.

9. However, there are a few particular areas of the capital framework for G1 and G2 DTs that RBNZ proposes to amend as part of the new standard: a) address minor or technical issues in the approach to credit risk requirements; b) modernise an outdated aspect of the existing framework regarding the approach to market risk requirements; and c) alter the Standardised Approach to the approach to operational risk requirements.

10. NBDTs are subject to the Deposit Takers (Credit Ratings, Capital Ratios, and Related Party Exposures) Regulations 2010. These regulations have been in place since 2010 and are substantially different from the capital framework for G1 and G2 DTs.

11. Currently, G3 DTs (mostly NBDTs) have significantly different capital requirements from banks.

12. RBNZ’s liquidity standards proposals build on work that has already been undertaken as part of RBNZ’s Liquidity Policy Review undertaken in 2022 and 2023.

13. RBNZ proposes 2 options: A) to carry over the current bank disclosure regime exactly as it is; or B) carry over the current regime with minor revisions. RBNZ prefers option B as it takes the opportunity to make simple tidy-ups and improvements to the regime.

14. https://consultations.rbnz.govt.nz/dta-and-dcs/dcs-regulations/user_uploads/dcs-regulations-consultation-paper.pdf

15 .RBNZ recognises that a risk-based approach is likely to result in smaller deposit takers having higher levies than larger deposit takers which may in turn impact the soundness of those deposit takers. RBNZ has attempted to address this by reducing weights on certain inputs that could be cyclical or volatile.

16. This is contrary to the usual look-through’ treatment applied to trust-type situations, where the underlying beneficial owner of the funds, not the named account holder, would be ordinarily entitled to the funds. RBNZ’s rationale for this approach is to ensure there are no unintended consequences arise through payments being released through the DCS, such as if there are conditions attached to the funds

17. https://mailchi.mp/lists/deposit-takers-news-issue-17757643

18. RBNZ anticipates that no more than 2 to 4 deposit takers would be tested with regulator oversight every six months