The Reserve Bank of New Zealand (RBNZ) is seeking feedback on draft legislation for a proposed Deposit Takers Bill (the Bill). The Bill, if 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 is currently at select committee stage. The Finance and Expenditure Committee has called for public submissions and input on the Bill, these can be made through the New Zealand Parliament website until 10 November 2022.
If you would like assistance in making a submission on the Bill, or if you would like assistance in understanding how the Bill may affect you, please contact a member of our financial services regulation team.
Review of the Reserve Bank of New Zealand Act 1989
The Bill has come as a result of the ongoing review of the Reserve Bank of New Zealand Act 1989. The review, which began in 2017, has the aim of updating and modernising the legislation underpinning the RBNZ. The review has 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 creation of the Bill, which is intended to create a single regulatory regime for all bank and non-bank deposit takers.
Overview of the Bill
The Bill, if passed, would replace the existing regimes for the regulation of banks and non-bank deposit takers, which is 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 new Bill aims to do the following:
- Establish a Depositor Compensation Scheme (DCS)
- Introduce a single regulatory regime for non-bank deposit-takers (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.
The Depositor Compensation Scheme
Under the DCS, each "eligible investor" can protect up to $100,000 of their deposit with a licensed deposit taker (Protected Deposit). The DCS would provide compensation to these eligible investors in the event that they have a Protected Deposit and the licensed deposit taker is put into liquidation (initiated or agreed to by the RBNZ). The DCS would also provide compensation to these eligible investors where the RBNZ issues a specified event notice (this notice would allow for compensation to be paid irrespective of whether the licensed deposit taker has entered liquidation).
Under the Bill, the term "eligible investor" would include a holder of a protected deposit or a person on whose behalf a protected deposit is held. It would not include a licensed deposit taker, a licensed insurer, a government agency, and more (the full list of exclusions can be found at section 185 of the Bill).
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 194 of the Bill). Ultimately, the purpose of the DCS is to avoid or mitigate the adverse effects of financial instability.
New regulatory regime
The Bill brings together the current registered bank and NBDT regulatory regimes into one 'licensed deposit taker' framework. Broadly speaking, the framework is intended to capture firms that are in the business of borrowing and lending in New Zealand, with exclusions for organisations that wholly borrow from wholesale investors, or that conduct incidental lending as part of a business activity.
Under the new framework it is anticipated that all deposit takers will be required to have a licence (this is set out in Part 2 of the Bill). The RBNZ will have the power to use licence conditions to differentiate between deposit takers. It will also be able 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 Bill also sets out the scope of matters that can be addressed through standards).
Supervision, enforcement, and increased accountability
Part 4 of the Bill sets out the new supervisory powers of the RBNZ, while Part 5 of the Bill 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.
These powers will be available where the RBNZ is satisfied that a contravention of prudential obligations is likely to have occurred. Criminal penalties will apply to most breaches of the Bill (but breaches of the standards issued by the RBNZ will only incur civil 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.
Part 7 of the Bill deals with crisis management. It sets out the powers RBNZ will have in the event of a crisis (for example, the Bill 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 operating fraudulently or recklessly). In addition to granting these powers, the Bill imposes an obligation on the RBNZ to prepare and maintain a resolution plan for each licensed deposit taker (in other words, a plan to deal with licensed deposit takers in a situation where it would not be possible for the licensed deposit taker to go through normal insolvency proceedings because of the risk that it would harm public interest or cause financial instability).
Implementation of the Bill
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 is expected to come into force in mid-to-late 2023. The DCS is expected to be implemented in early 2024. The Finance and Expenditure select committee is now seeking public submissions on the Bill.
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 introduction of the Deposit Takers Bill. The most notable changes between the exposure draft of the Bill and the Bill are:
- 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 DCS
- The Bill now provides for the power to exempt "certain classes of licensed deposit takers from the DCS".
After the Bill comes into force, there will be a transition period to give the RBNZ and entities caught by the Bill time to adapt to the new regime. The length of that transition period has not been determined yet.
If you require guidance in understanding how the Bill might impact you or require advice on compliance with the Bill, please contact a member of our financial services regulation team.