New class authorisation coming for overseas banks' New Zealand activities

16 August 2019

A new class authorisation will be available from the Reserve Bank of New Zealand (RBNZ) from the end of this month for overseas banks not registered in New Zealand.

We describe it and the other changes the RBNZ is making to clarify the requirements.

Affected banks should consider whether to utilise the authorisations by notifying the RBNZ and meeting the other conditions.

The new class authorisation will cover banking and lending, financial advisory services, capital and debt market issuances, and foreign exchange and derivative market activities for wholesale customers and will be launched on 29 August 2019.

It creates an alternative route for overseas banks to operate in New Zealand using the word “bank” (and its derivatives). Other routes are to seek New Zealand bank registration or to obtain an individual authorisation to conduct only limited activities offshore (explained below).

We welcome this addition to New Zealand’s financial market regulation. The RBNZ consulted on its proposed guidance with legal practitioners through a specially convened committee of leading law firm representatives, chaired by Chapman Tripp partner Tim Williams. The class authorisation arose from that consultation.

The RBNZ has delivered two guidance notes, setting out how it will:

  • assess whether an overseas bank is prohibited from carrying on an activity in New Zealand, and
  • use its discretion to grant authorisations allowing overseas banks to conduct their New Zealand activities using their “bank” names.

It has indicated that it will issue authorisations only for overseas banks that have no New Zealand place of business, and typically only with respect to wholesale, not retail, banking activities.

It will no longer be possible for overseas banks to apply for non-objection letters. Banks with existing non-objection letters can continue to rely on them for the time being, but should consider obtaining an individual authorisation or relying on the class authorisation (if applicable).

Guidance note for overseas banks on when their New Zealand activities are regulated

The RBNZ states that it will:

  • take a purposive approach when it interprets whether banking activities are carried on in New Zealand, and
  • consider the individual circumstances of each situation, using a fact-driven assessment in which the quantum of the overseas bank’s New Zealand connected business will be a relevant factor.

For these purposes:

  • any permanent physical presence in New Zealand by the overseas bank (or its agent or other representative) will clearly constitute an activity being carried on in New Zealand, and
  • an overseas bank required to be registered as an overseas company under the Companies Act 1993 will be presumed to be carrying on activities in New Zealand.

However the note is clear that the prohibition can be applied to any banks carrying on a relevant activity in New Zealand, regardless of whether they have a permanent physical presence or an agent or representative in New Zealand; when considering where an activity is being carried on, the RBNZ will look at where the pre-contractual activities take place and how and where the contract is to be performed.

The guidance identifies certain activities that will not, by themselves, be prohibited, for example:

  • a one-off contract entered into as a result of a New Zealand wholesale customer independently and proactively requesting services from the overseas bank, or transactions between registered banks and overseas banks participating in the international interbank market
  • merely having overseas domained website accessible to New Zealanders, a general publication that mentions current New Zealand customers, or direct communications with New Zealand persons on the context of an existing customer relationship that was established overseas, or
  • providing back-office services to an affiliated financial institution in New Zealand.

Usefully, the RBNZ has provided greater certainty in three scenarios when overseas banks establish and maintain bank account relationships with New Zealand persons:

  • where a person maintains an overseas account on returning to New Zealand, mere retention of the account is not considered to be caught
  • where a New Zealander, on their own initiative, approaches an overseas bank to open a bank account (activities carried out on a reverse-inquiry basis are generally not considered to be caught), and
  • where an overseas bank markets accounts, targeting New Zealanders in New Zealand (activities targeted at new clients in New Zealand are generally considered to be caught and other activities undertaken after the customer opens the account may also be caught).

However, the RBNZ’s fact-driven assessment approach means that overseas banks must consider their particular circumstances to determine if the prohibition applies. For example, the RBNZ states that, while having an overseas domained website that is accessible to New Zealanders would not come within the prohibition, a different conclusion might be reached if that website targets New Zealanders or has New Zealand specific content.

Guidance note on section 65 authorisations for overseas banks

This provides two avenues for authorisation – either applying to the RBNZ for an individual section 65 authorisation, or relying on the class authorisation outlined above. Both avenues will be available only to overseas banks with no New Zealand place of business (those who do have a New Zealand place of business are expected to be registered).

Individual authorisations will typically not be granted to overseas banks for activities that involve retail investors, but an exception may be made where the retail business relates only to the provision of remittance services and the risks of the exception can be adequately managed (for example, through conditions).

The RBNZ will no longer issue non-objection letters. Any applications for a non-objection letter lodged after the guidance note comes into force will be treated as an application for individual authorisation.

The conditions applied to individual authorisations will generally require that the overseas bank:

  • continues to have no place of business in New Zealand
  • maintains an authorised agent in New Zealand to accept service of documents, and
  • submits to the RBNZ any information requested regarding its authorised activities (which are likely to be annual and by way of a template).

Other conditions may be applied as the RBNZ deems appropriate, including limiting the type of advertisement or solicitation of customers, the business visits to New Zealand by the bank’s staff and the authorisation’s duration.
The RBNZ will establish a public register on its website of overseas banks which have been granted section 65 authorisations, together with most of the authorisation details (which may include only the nature of the activities, rather than their scope, where the overseas bank indicates that this is commercially confidential).

Reserve Bank Act review

The Reserve Bank Act 1989 is currently being reviewed. One proposal being considered is changing the range of financial institutions subject to the RBNZ’s regulatory oversight and the way in which these are defined. Any resulting changes could affect how the regulatory regime applies to overseas banks’ New Zealand activities.

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