Changes To The Regulation Of Deposit Takers In New Zealand

On 31 July 2023, the Reserve Bank of New Zealand (RBNZ) and Treasury released two consultation papers in relation to the implementation of the Depositors Compensation Scheme (DCS), which will be established by the Deposit Takers Act 2023 (DTA).  

Treasury released a consultation paper on the funding strategy for the DCS (Treasury Consultation) and the RBNZ released a consultation paper on the levy framework for the DCS (Levy Framework Consultation).  Submissions on the Treasury Consultation and Levy Framework Consultation will be shared between the RBNZ and Treasury as both agencies are working together on the implementation of the DCS.

In addition, on 31 July 2023, the RBNZ released a draft version of, and a consultation paper in relation to its proposed proportionality framework (Proportionality Framework Consultation) for the DTA. 

The consultation period for all three consultation papers closes at 5pm on 25 September 2023.

For further information on the background of the DTA and details of the DCS please see our previous article - Changes to the regulation of deposit takers in New Zealand.

What has happened?

Treasury Consultation

The Treasury Consultation discusses the DTA requirement that the Minister of Finance publish a Statement of Funding Approach (SoFA) every five years.  The SoFA is required to contain information in relation to:

  • Likelihood of a specified event notice being issued by the RBNZ
  • The estimated costs of the DCS
  • The target level of the DCS fund and the estimated timeframe to reach this target
  • Requirements for investment of the DCS fund
  • How a deficiency in the DCS fund will be dealt with.

The Treasury Consultation made a number of key proposals in relation to the above.  For example, Treasury has proposed a range for the target fund size, which is "0.5% to 1.1%" of protected deposits (which are those deposits at licensed deposit takers that are protected under the DCS), the timeframe to reach this target fund size (being between 10 and 20 years) and a range of other considerations in relation to the SoFA.

Levy Framework Consultation

The Levy Framework Consultation is closely linked to the Treasury Consultation as it is the levies collected from licensed deposit takers that will fund the DCS.  The SoFA, especially in relation to the estimated costs of the DCS, the target level of the DCS fund and the estimated timeframe to reach this target, will be key determinative factors as to what the rate of levies for licensed deposit takers will be.

The Levy Framework Consultation primarily considers two points. 

  1. How best to determine what the protected deposit amount is for each licensed deposit taker (ie the actual monetary value of deposits held with a licensed deposit taker that would be covered under the DCS).  The protected deposit amount will be the DCS levy base, meaning the higher the protected deposit amount, the higher the DCS levy payable. 
  2. What should be the DCS levy approach - the RBNZ has proposed a flat rate approach and two potential risk-based approaches.  The flat rate approach means all licensed deposit takers will pay the same levy contribution rate, which is then multiplied against the licensed deposit takers' protected deposit amount.  The two potential risk-based approaches are different contribution rates as a reflection of the risk that an individual licensed deposit taker poses to the DCS fund.  The RBNZ has outlined two ways of how the risk measure could be determined, solely by credit rating or by a composite risk matrix of capital adequacy, asset quality, liquidity and business model and management).

Proportionality Framework Consultation

Under the DTA, the RBNZ must prepare and publish a proportionality framework that sets out how the RBNZ will, or proposes to, take into account the proportionality principle (found in section 77 of the DTA) when developing standards.  The Proportionality Framework Consultation outlines how the RBNZ intends the proportionality framework to balance the costs and benefits of regulation in relation to different sizes and business models of deposit takers. 

As a basis of its proportionality framework, the RBNZ has proposed creating three groups of deposit takers, which are primarily based on the total assets of the deposit taker:

  • Group 1: deposit takers with total assets of $100b or more (currently this would be only the big four banks)
  • Group 2: deposit takers with total assets between $2b and $100b
  • Group 3: all other deposit takers with total assets less than $2b.
Who does this affect?

The DTA will implement a new single regulatory regime for deposit takers in New Zealand.  This affects all registered banks and non-bank deposit takers (including building societies and credit unions).

What do I need to consider?

The Levy Framework Consultation proposes a flat rate versus a risk-based approach to how the DCS levy should be structured, which will be of particular importance to all licenced deposit takers, as it determines the levy they will pay.  We recommend all deposit takers consider the Treasury Consultation, Levy Framework Consultation and Proportionality Framework Consultation and consider whether they would like to participate in the development of the SoFA, the DCS levy, and/or the proportionality framework.

Please contact our financial services regulation team if you would like any assistance with preparing a submission, or if you would like to discuss the implementation of the DTA or the DCS.