Changes To The Regulation Of Deposit Takers In New Zealand

The Reserve Bank of New Zealand (RBNZ) had previously sought feedback on draft legislation for a proposed Deposit Takers Bill (the Bill).  The Bill, when enacted, would establish a single regulatory regime for banks and non-bank deposit takers (organisations such as credit unions and building societies, which are in the business of taking deposits and lending to households and businesses).  It would also establish a Depositor Compensation Scheme (which would allow some deposits to be protected in certain circumstances), and grant the RBNZ new supervisory and enforcement tools, among other things.

The Bill was introduced to Parliament on 22 September 2022, and was sent to select committee, the Finance and Expenditure Committee, on 27 September 2022.  The Finance and Expenditure Committee (the Committee) called for public submissions and input on the Bill, which closed on 10 November 2022.  On 11 April 2023 the Committee released their report on the Bill and outlined their concerns and proposed amendments.  Those amendments were reflected in the Bill and, after passing its second and third readings (with only minor drafting amendments from the Committee of the Whole House), the Bill received royal assent on 6 July 2023 as the Deposit Takers Act 2023 (the Act).

Review of the Reserve Bank of New Zealand Act 1989

The Act has come as a result of the review of the Reserve Bank of New Zealand Act 1989.  The review, which began in 2017, had the aim of updating and modernising the legislation underpinning the RBNZ.  The review led to two key reforms.  Firstly, the creation of the Reserve Bank of New Zealand Act 2021, which modernised the institutional arrangements of the RBNZ by creating a new decision making model (for more information on this, please see our earlier article - The Reserve Bank of New Zealand Act 1989 review).  Secondly, the Act itself, which creates a single regulatory regime for all bank and non-bank deposit takers.

Introduction of the Bill to Parliament

The exposure draft of the Bill was released in December 2021 and consultation on the exposure draft closed on 21 February 2022.  Following this round of consultation, the RBNZ considered feedback and revised the Bill as appropriate.

The Bill was introduced to Parliament on 22 September 2022 and received royal assent on 6 July 2023.

A summary of the changes made to the exposure draft of the Bill following the submissions made between December 2021 and 21 February 2022 can be found in the explanatory note for the introduction of the Bill.  The most notable changes between the exposure draft of the Bill and the Bill as introduced were:

  • A number of offences in the Bill have been designated strict liability but with imprisonment removed as a potential penalty.  Previously there were a number of offences in the exposure draft that blended strict liability with a mental component, and contained imprisonment as a potential offence
  • 'Large' non-financial corporates are no longer excluded from the Depositors Compensation Scheme (DCS)
  • The Bill now provides for the power to exempt "certain classes of licensed deposit takers from the DCS".

Select Committee Report on the Bill

The Bill was referred to the Committee on 27 September 2022, and the Committee sought public submissions on the Bill, closing on 10 November 2022.  On 11 April 2023, after consideration of the public submissions, the Committee released their report on the Bill.

The report included both the Committee's overall concerns regarding the Bill, as well as a number of proposed amendments based on submissions.  The Committee's concerns regarding the Bill as introduced included the following:

  • The Bill could lead to an overall reduction in diversity in the deposit taking sector, to the detriment of financial inclusion, competition and innovation
  • The prudential supervision requirements necessary for registered banks may be excessive for smaller non-bank deposit takers (NBDTs)
  • The Bill lacked certainty for deposit takers, with a number of the RBNZ's regulatory powers to be provided for in secondary legislation.

The Committee highlighted the submissions of smaller deposit takers, who were concerned that the Bill could lead to a "disproportionate and highly onerous level of regulation".  These smaller deposit takers were also concerned about the level of uncertainty under the Bill, as the RBNZ would have a large amount of flexibility in how to exercise its regulatory powers.

Following on from the above concerns, the Committee suggested a number of amendments to the Bill, which included the following:

  • Adding an additional purpose to the Bill relating to the accessibility of financial products
  • Adding an additional principle to the Bill on the desirability of a diversity of institutions in the deposit taking sector
  • Requiring the RBNZ to create and publish a proportionality framework that details how the RBNZ is taking into account the proportionality principle of the Bill (which requires a proportionate approach to regulation and supervision)
  • Clarifying the RBNZ's powers to grant exemptions to the requirement to have a credit rating
  • Changes to address concerns raised in relation to the scope of the duty of due diligence for directors of deposit takers, including the availability of insurance and indemnities
  • Clarifying that it is readily transferrable securities that are not included in the DCS (this involved removing specific references to "debentures" and "bonds" as examples of securities which are not included in the DCS – this is because a security is not included in the DCS because it is readily transferrable, not because of the classification of the security)
  • Amending the definition of a deposit taker to require a deposit taker to be carrying on business in New Zealand

The Committee's report included a full draft of the Bill, including further amendments in addition to those outlined above.  Those amendments were subsequently incorporated in the Bill, with the Bill passing its second and third reading.

Overview of the Act

On 6 July 2023 the Bill received royal assent.  Most of the Act will come into force by Order in Council, but any section of the Act not otherwise in force or brought into force by Order in Council will come into force on 6 July 2029.  The Act will eventually replace the existing regimes for the regulation of banks and non-bank deposit takers, which are currently governed by parts of the Banking (Prudential Supervision) Act 1989 (formerly known as the Reserve Bank of New Zealand Act 1989) and the Non-Bank Deposit Takers Act 2013.  The RBNZ has stated that they expect the Banking (Prudential Supervision) Act 1989 and Non-Bank Deposit Takers Act 2013 to remain in force until the Act is fully in force, which is expected to be around 2028.

As noted above, the Act will:

  • Establish the DCS
  • Introduce a single regulatory regime for NBDTs and banks, with standards that would allow the RBNZ to set requirements
  • Strengthen the accountability for directors of their deposit takers, with penalties for non-compliance
  • Broaden the RBNZ's supervision and enforcement tools, which would include creating a new power to conduct on site inspections
  • Strengthen and clarify the crisis resolution framework for deposit takers.

The Depositor Compensation Scheme

Under the DCS, each "eligible depositor" can protect up to $100,000 of their deposit with a licensed deposit taker (Protected Deposit).  The DCS would provide compensation to these eligible depositors in the event that they have a Protected Deposit and the RBNZ has issued a "specified event notice").  The RBNZ may issue a specified event notice in relation to a licensed deposit taker if the licensed deposit taker is put into liquidation under New Zealand law, a receiver is appointed in relation to all, or substantially all, of the licensed deposit taker's assets and undertakings, or the licensed deposit taker has entered resolution under the Act.  To issue a specified event notice, the RBNZ must also be satisfied that the licensed deposit taker's financial or other difficulties are likely to cause serious or prolonged disruption to eligible depositors being able to deal with their Protected Deposits.

Under the Act, an "eligible depositor" means a holder of a Protected Deposit or a person on whose behalf a Protected Deposit is held.  It does not include another licensed deposit taker, a licensed insurer, a government agency, associated persons or directors of the relevant licensed deposit taker, or other persons prescribed by regulations.

The RBNZ would be responsible for managing and administering the DCS.  This would include determining entitlements, exercising rights of subrogation, collecting the levies and interest payable that would fund the scheme, administering, operating and investing the fund, and more (the full list of its responsibilities can be found at section 195 of the Act).  Ultimately, the purpose of the DCS is to contribute towards protecting and promoting the stability of New Zealand's financial system, by protecting eligible depositors and allowing the fund to be used to support resolution measures undertaken in relation to a licensed deposit taker.  The RBNZ has stated that the DCS will be prioritised ahead of the rest of the sections of the Act coming into force, with the DCS intended to commence by late 2024.  Part 1 of Schedule 1 of the Act will allow for the DCS to come into force prior to deposit takers being required to be licensed.  Clause 3 of Schedule 1 allows for deposit takers to be treated as being a licensed taker for the purpose of the DCS during the transitional period (after the DCS is in force but prior to licences being required to be held).

New regulatory regime

The Act brings together the currently separate registered bank and NBDT regulatory regimes into one 'licensed deposit taker' framework.  Broadly speaking, the framework is intended to capture entities that carry on the business of borrowing and lending money in New Zealand, with exclusions for organisations that wholly borrow from wholesale investors (ie, do not make regulated offers of debt securities).

Under the Act all deposit takers will be required to have a licence, which is issued by the RBNZ (this is set out in Part 2 of the Act).  The RBNZ will have the power to use licence conditions to differentiate between deposit takers (ie, not all deposit takers will be subject to the same prudential requirements – for example different deposit takers may be subject to different minimum capital ratios).  This will allow the RBNZ to take a proportionate approach to prudential regulation.  Prudential requirements for licensed deposit takers will be set out in standards, which will be a secondary legislative instrument issued by the RBNZ under the Legislation Act 2019 (the Act also sets out the scope of matters that can be addressed through standards).

The RBNZ, in exercising their powers and functions under the Act, is required to take into account a range of principles, including the desirability of proportionality, consistency and diversity.  The full list of principles which the RBNZ is required to take into account are set out in section 4 of the Act.

Supervision, enforcement, and increased accountability

Part 4 of the Act sets out the new supervisory powers of the RBNZ, while Part 5 of the Act sets out the new enforcement powers of the RBNZ.  Among other things, the RBNZ will have the power to:

  • Require that information be supplied (from the deposit taker themselves, from a firm that may be a financial service provider (to help determine if firms are inappropriately operating without a licence), or from other entities that may have information about the business activities of a deposit taker)
  • Require a third party report
  • Undertake 'on site' inspections of licensed deposit takers.

Criminal penalties will apply to most breaches of the Act (but breaches of licence conditions or the standards issued by the RBNZ will only incur pecuniary penalties).  As well as court based enforcement and infringement fees, RBNZ will be able to sanction entities in other ways.  These include issuing a remedial notice (which would require the deposit taker to take specific actions or prepare a remedial plan to address any contraventions) or asking the deposit taker to voluntarily enter into enforceable undertakings.

Crisis management and resolution

Part 7 of the Act deals with crisis management and resolution.  It sets out the powers RBNZ will have in the event of a crisis (for example, the Act gives RBNZ the ability to issue directions to deposit takers or individual employees working for deposit takers in certain circumstances, such as when the deposit taker is insolvent or likely to become insolvent).  In addition to granting these powers, the Act imposes an obligation on the RBNZ to prepare and maintain a resolution plan for each licensed deposit taker (a plan to facilitate dealing with a licensed deposit taker where it would not be possible for the licensed deposit taker to go through normal insolvency proceedings because of the risk of financial instability and public harm).

Next steps

The Act received royal assent on 6 July 2023, however only a small number of sections of the Act immediately came into force.  The remainder of the Act will come into force by way of Order in Council, or on 6 July 2029.  The DCS is being prioritised ahead of the rest of the Act and is expected to be implemented in late 2024.

We regularly publish updates on developments relating to the new Deposit Takers Act.  Please subscribe to receive these updates.

If you would like assistance in understanding how the Act may affect you, please contact a member of our financial services regulation team.