The Deposit Takers Bill, returned last month from the Finance and Expenditure Committee, is substantively improved in terms of the proposed directors’ due diligence duty and the Bill’s application to overseas banks – although many key elements are still to be set through standards and regulation. We summarise below the Committee’s main recommendations.
The Bill proposes to create a single regime to regulate and supervise banks and non-bank deposit takers (NBDT), replacing the dual regimes contained in the Banking (Prudential Supervision) Act 1989 and the Non-Bank Deposit Takers Act 2013.
The main changes proposed by the Bill include:
- Modernising the licensing process;
- Enabling a range of prudential standards to be applied to particular deposit takers or classes of deposit takers;
- Expanding the Reserve Bank (RBNZ) supervisory and enforcement tools, allowing it to act before a deposit taker is at risk of failure; and
- Establishing the Depositor Compensation Scheme (DCS) to compensate for losses up to $100,000 in the event of a deposit taker failing, to be funded by levies collected from deposit takers.
Key submission theme – proportionality and financial inclusion
Smaller NBDTs were worried that the Bill would expose them to “one size fits all” regulation, subjecting them to disproportionate compliance requirements that could put them out of business.
The Committee heard that this prospect, and the significant flexibility that the Bill would accord the RBNZ, was making it difficult for them to raise capital.
The Committee was persuaded by these arguments and concerned that the Bill, as drafted, might reduce consumer choice in the sector and discourage financial inclusion, competition and innovation.
Many of its recommended changes seek to address these concerns. This includes:
- Proportionality framework: the Committee has changed the Bill to require the RBNZ to publish a proportionality framework setting out how it would take into account the clause 4 principle of “taking a proportionate approach to regulation and supervision”, as well as requiring it, when developing that framework, to take into account specified factors and conduct consultation;
- New financial product accessibility purpose: the Committee recommended that an additional purpose “to support New Zealanders having reasonable access to financial products and services provided by the deposit-taking sector” be inserted to balance the Bill’s existing financial stability purposes; and
- New diversity and accessibility principle inserted: the Committee recommended that the RBNZ be required to have regard to the principles of diversity (of institutions and products) and accessibility (to a diverse range of New Zealanders) when exercising its powers or functions, along with the existing principles relating to taking a proportionate approach, maintaining competition and avoiding unnecessary compliance costs.
The RBNZ will need to walk a tightrope between applying proportionate regulation and unduly increasing risk to customers and financial stability, with the recent example of the US Silicon Valley Bank failure - attributed in part to the lighter regulation applied to it as a ‘regional bank’, despite its size.
Director due diligence duty substantially amended
The Bill proposes to subject directors of licensed deposit takers to a due diligence duty to ensure that the deposit taker complies with its “prudential obligations”.
The Committee recommended the following amendments to moderate these proposals:
- AML/CFT obligations be excluded from the due diligence duty’s scope – the Committee considered that including AML/CFT obligations as “prudential obligations” in this context added an unnecessary layer of compliance;
- Indemnity and insurance restrictions removed – the Committee recommended that existing indemnity and insurance restrictions in section 162 of the Companies Act 1993 should apply to locally incorporated deposit takers;
- Confining the due diligence duty to the New Zealand chief executives of branches of overseas licensed deposit takers – the due diligence duty was to have been placed on the directors of overseas licensed deposit takers, but the Committee recommended that it should be applied to their New Zealand chief executives instead;
- RBNZ required to issue due diligence duty guidance – the Committee inserted provisions requiring the RBNZ, after it has taken specified consultation, to publish guidance on the due diligence duty and the respective roles of directors and senior management, with the courts being required to take account of such guidance; and
- Reliance on information and advice defence inserted – the Committee inserted a defence where a person under the duty diligence duty relies on information and professional/expert advice from other directors, or employees or professional advisers or experts in certain circumstances.
Bill’s territorial scope tightened
The Committee was concerned that the Bill’s drafting meant that the new regime would capture overseas entities, such as those interacting with New Zealanders at a very low level (for example, overseas banks offering offshore bank accounts to New Zealanders moving overseas, or allowing New Zealanders to operate offshore accounts opened overseas when they return to New Zealand).
To ensure such overseas entities were not captured, the Committee recommended that the “deposit taker” definition be restricted to persons who are “carrying on business in New Zealand” if that business is any of the following:
- A person who carries on the business of borrowing and lending money (as further defined in the Bill);
- “A specified overseas entity” that is authorised to accept deposits under overseas law (whether or not they have a restricted word such as “bank” in their name), and meets any criteria specified in regulations; or
- A person, or a member of a class of persons, declared by Order in Council to be a deposit taker.
The Committee also recommended that a person not be regarded as carrying on the business of borrowing and lending money if the extent to which the debt securities, banking or related financial services being offered to persons in New Zealand is less than a threshold prescribed in regulations.
Obligation to publish protected deposits list modified
The Committee inserted the words “classes of” into the clause obligating deposit takers covered by the DCS to publish a list of their protected debt security products, so that it is clearer that this should be high level rather than identifying all their products (including customer variations and rates). Care will still be needed to categorise products into “classes”, as the definition (taken from the Financial Markets Conduct Act 2013) is relatively narrow.
RBNZ’s credit rating exemption power subject to new factors
To provide greater clarity around the exercise of the RBNZ’s credit rating exemption discretion, the Committee changed the Bill to require that, when exercising the discretion, the RBNZ must have regard to:
- The size and nature of the relevant deposit taker’s business; and
- The extent to which the terms or conditions of the exemption can address or mitigate risks associated with not having a credit rating.
Regulation making powers to include foreign currency deposits
The Committee recommended giving the Minister a regulation making power (exercisable only on the RBNZ’s advice) to bring foreign currency deposits within the DCS in the future, similar to the approach taken in some other jurisdictions.
However RBNZ advice to the Committee has been that the relative size of foreign currency deposits in New Zealand is small, so the costs of covering foreign currency deposits would significantly outweigh the benefits. It is therefore unlikely this power will be exercised in the near future.
Other significant recommended changes
- RBNZ’s approval required for 25% change in voting rights: RBNZ approval will now be required when a person obtains the power to exercise or control (directly or indirectly) 25% or more of the voting rights in the deposit taker – previously the Bill specified a 50% threshold.
- References to debentures and other specific financial instruments deleted from exclusions from the “protected deposit” definition: the Committee considered a financial instrument should be excluded from the DCS on the basis that it was tradeable rather than its name or designation. The exact scope of the definition has been left for future regulation.
- Public funds can be used to cover DCS shortfalls: The Committee recommended that the Bill specify that public funds may be used to meet shortfalls in the DCS fund in connection with the RBNZ’s resolution measures. Previously this facility was specified to be available only on the issue by the RBNZ of a “specified event notice” (i.e., where the deposit taker has failed or is at risk of failure, and this failure is likely to cause serious and prolonged disruption to depositors).
The House of Representatives will consider whether to adopt the Committee’s recommended changes.
The Bill is expected to be enacted in mid-to-late 2023.
Those provisions relating to the RBNZ standards, and the regulations to support the new regime, will come into force immediately. The rest will be phased in over a five-year period.
Chapman Tripp comments
Chapman Tripp welcomes the Committee’s changes. It is desirable that:
- Personal liability for directors is targeted appropriately, towards truly culpable behaviour, so that the pool of potential talented directors is not diminished;
- Suitable local financial institutions are not disincentivised from carrying on business in New Zealand by the costs of over regulation; and
- Foreign banks, with solely wholesale or unsolicited retail activities in New Zealand, are able to continue to participate in the New Zealand market with due recognition to the consumer protections arising from the prudential regulations that apply to them in their home countries.
Still missing, and still desirable, would be for the proposed Regulations to incorporate the relief in the current Reserve Bank (Overseas Banks) Class Authorisation Notice, which was recommended to the RBNZ by an expert industry committee chaired by Chapman Tripp partner, Tim Williams.
Full implementation will require a significant work programme by the RBNZ over several years, especially on the DCS and how it will interact with the RBNZ’s current approach to bank resolution, in particular, with the Open Bank Resolution (OBR) process that the RBNZ has in mind as its default procedure in the event of a bank failure.
Our thanks to Alexander Schumacher for his help in preparing this article.