Modernising the regulation of deposit takers

Contributed by Sam Williamson

*NB: This bill was passed on the 29 June 2023

In 2017 the government initiated a review aimed at modernising and updating New Zealand’s financial stability policy frameworks which culminated in the development of the Deposit Takers Bill (DTB). If passed into law, the DTB will create a single regulatory regime for all deposit takers, including banks and non-bank deposit takers (NBDTs) such as building societies, credit unions, and finance companies. The purpose of the DTB is to promote prosperity and well-being and contribute to a stable and productive economy by protecting and promoting financial stability, through:

• Modernising the regulatory requirements for deposit takers;
• Strengthening the supervisory, enforcement, and crisis management powers of the Reserve Bank; and
• Creating a Depositor Compensation Scheme to protect customer deposits.

Modernising the regulatory requirements of deposit takers

Currently banks and licensed NBDTs are regulated by separate regimes under the Banking (Prudential Supervision) Act 1989 (the BPSA 1989) and the Non-bank Deposit Takers Act 2013 (NBDTA 2013) respectively. The DTB will bring all deposit taking entities within one regulatory and supervisory regime with the aim of creating a more coherent approach across the deposit taking sector.

Under the DTB:

• All deposit takers will be required to be licensed and supervised by the Reserve Bank.
• The prudential requirements for licensed deposit takers (LDTs) will be set by the Reserve Bank in standards and the DTB sets out the several areas in which the Reserve Bank may set these. They include matters relating to the governance and ownership of an LDT, capital and liquidity requirements, risk management and business continuity planning, and outsourcing arrangements.
• Directors of LDTs and New Zealand chief executive officers of overseas LDTs will have a positive and on-going duty to exercise due diligence. This includes taking reasonable steps to ensure that the LDT follows procedures that are designed to ensure compliance with its prudential obligations. Breaches of this duty by directors may result in directors being subject to civil pecuniary penalties.
• There is a fit and proper requirement for the appointment of directors or senior managers of an LDT. This includes an on-going duty on the LDT to disclose to the Reserve Bank all information which may indicate that a director or senior manager of the LDT is not, or is not likely to be, a fit and proper person to hold the relevant position.

Strengthening the Reserve Bank’s supervision, enforcement, and crisis management powers

The DTB provides the Reserve Bank with a range of tools when supervising LDTs, enabling the Reserve Bank to act before an LDT is at risk of failure. These powers include notices requiring the production of information or third-party reports, and on-site inspection powers including a power to require employees or directors of the LDT to answer questions relating to its documents and provide all other information that the Reserve Bank may reasonably require for the purpose of the inspection.

The DTB expands the Reserve Bank’s enforcement toolkit for contraventions of an obligation by an LDT or individual. Depending on the provision or standard contravened, the new enforcement response may include one, or a combination, of infringement notices for certain lower-level offences, remedial notices, court enforceable undertakings, notices requiring the recipient of a warning letter to publicly disclose it, and civil or criminal proceedings.

The DTB provides for crisis management powers aimed at avoiding significant damage to the financial system that could result from an LDT being in financial distress or other difficulties. These powers include:

• The Reserve Bank issuing directions to an LDT (or associated person) in certain situations: for example, where the circumstances of the LDT may be prejudicial to the soundness of the financial system or where the LDT has been operating fraudulently or recklessly. The content of the directions may involve directing the LDT to carry on its business in a particular way, removing or replace directors, or implementing all, or part, of the LDT’s contingency and recovery plan.
• Placing an LDT into resolution. The Reserve Bank may recommend to the Minister of Finance for the Governor General to place an LDT into resolution in certain circumstances, including where the LDT is (or is likely to become) insolvent, has contravened a requirement to maintain a minimum amount (or ratio) of capital, or has persistently or seriously contravened any other prudential obligation. Before making such a recommendation, the Reserve Bank must be satisfied that there is no reasonable prospect of the matters being adequately dealt with in a timely and orderly way other than through resolution.
• As part of the crisis management framework, the DTB requires the Reserve Bank to prepare and maintain a resolution plan for each LDT. These resolution plans are designed to facilitate dealing with the LDT in an orderly manner if it were to enter into resolution.

Creating a Depositor Compensation Scheme (DCS)

The DCS essentially operates as an insurance scheme for depositors by compensating them for losses of up to $100,000 per depositor per institution in the event of an institution failing. The DCS contributes towards protecting and promoting the stability of New Zealand’s financial system by allowing consumers to have confidence that their deposited funds are safe in the event of an entity failing.

The Reserve Bank will be responsible for managing and administering the DCS, including determining entitlements to compensation, collecting levies from industry to fund the DCS, and managing the fund created by those levies on behalf of the Crown.

Where is the DTB in the legislative process?

22 September 2022 – The DTB was introduced to Parliament.

11 April 2023 – The Finance and Expenditure Committee presented its report on the DTB (the Report) highlighting several areas of concern with the DTB as drafted. These included the

importance of diversity in the deposit taking sector that is dominated by four Australian-owned banks and the impact that a lack of diversity may have on consumers’ access to financial products. The Report also highlighted concerns raised by the NBDT sector around the potential for a disproportionate increase in regulatory burden on smaller deposit takers which may cause them to exit the market.

In response to these concerns the Report recommended:

• That the purpose of the DTB be amended to include an explicit consideration of the accessibility of financial products (although this would be subordinate to the general purpose of financial stability).
• The inclusion of an additional principle which would require the Reserve Bank to consider the “desirability of the deposit-taking sector comprising a diversity of institutions to provide access to financial products to a diverse range of New Zealanders.”
• That the Reserve Bank be required to publish a ‘proportionality framework’ outlining how it takes account of the size and nature of the businesses of different deposit takers, the extent to which a range of different requirements are necessary or desirable to promote the safety and soundness of each deposit taker, and the relative importance of different deposit takers to the stability of the financial system.

May 2023 – The DTB has been returned to Parliament and awaits its second reading.

Late 2023 – It is anticipated that the DTB will be signed into law later this year. Once enacted, there will be a transition period to allow both the Reserve Bank and regulated entities time to adapt to the new regime. The Reserve Bank has indicated that it will likely take several years to implement the new prudential framework for deposit takers. It is anticipated that the relevant parts of the BPSA 1989 and the NBDTA 2013 will remain in force until the relevant parts of the DTB have been fully implemented.

The Reserve Bank has indicated that it will prioritise the implementation of the DCS ahead of the rest of the regime coming into effect. The DCS is estimated by the Reserve Bank to be functional by late 2024.

Please contact us if you would like to know how SHIFT might be able to assist you in this area.