3/02/2022·4 mins to read
Submissions on the Deposit Takers Bill closing soon
A draft of the Deposit Takers Bill (Bill) has been released for public consultation. Interested parties have the opportunity to test the workability of the Bill’s provisions and provide comment. Submissions can be made until 21 February 2022.
The Bill aims to overhaul the existing regulatory regime for bank and non-bank deposit takers under the Reserve Bank of New Zealand Act 1989 and the Non-Bank Deposit Takers Act 2013.
At a glance, the Bill will:
- establish a single regulatory regime for both bank and non-bank deposit takers, such as credit unions, building societies, and retail-funded finance companies;
- establish a Depositor Compensation Scheme that will protect eligible investors up to $100,000 per licensed deposit taker;
- broaden the RBNZ’s supervision and enforcement tools and its crisis management powers; and
- impose a new due diligence duty on directors of licensed deposit takers, with penalties for non-compliance.
The Bill will likely be introduced to Parliament in May 2022 and enacted in late 2023. A transitional period will enable deposit takers to prepare for the new regime.
The Bill reflects Government policy decisions made following prior, extensive consultation on the proposed reforms. Nevertheless, firms likely to be captured by the new Deposit Takers Act should carefully consider the Bill’s details, as there is still opportunity for feedback to address any areas of concern.
This FYI outlines the Bill’s key provisions.
Single Regulatory Regime
The new Bill consolidates the existing two regimes (for banks and non-bank deposit takers respectively) into a single regime for all “deposit takers”.
Broadly, all firms that are in the business of “borrowing” and “lending” will be captured as “deposit takers” unless an exclusion applies.
“Borrowing” includes offering debt securities that:
- require disclosure under the Financial Markets Conduct Act 2013;
- are issued by registered banks; or
- are call debt securities (i.e. are repayable within 5 working days after demand, without the demand triggering break fees or interest rate reductions).
“Lending” means carrying on a business of providing credit under credit contracts (excluding contracts under which no interest and no credit fees are payable, such as typical “buy now pay later” contracts).
All firms captured under the existing two regimes will fall within the new regulatory perimeter, including retail banks, credit unions, building societies, and retail-funded finance companies. Firms that are funded only from wholesale debt investors and do not offer call debt securities (such as providing “transactional accounts”) will not be captured as “deposit takers”, nor will local authorities or Crown entities, among others.
All deposit takers will need to be licensed. The Reserve Bank of New Zealand (RBNZ) will be responsible for issuing licences, as well as supervising deposit takers and enforcing prudential requirements. These will be set out in “standards” issued by the RBNZ. Standards will replace Conditions of Registration for registered banks.
Standards may apply to all deposit takers, a class of deposit takers, or a particular deposit taker. They may regulate the governance and structure of a deposit taker, capital and liquidity requirements, and information disclosure requirements, among other things.
Depositor Compensation Scheme
The Depositor Compensation Scheme (the Scheme) will be a formal scheme to protect depositors from loss. It will compensate “eligible investors” for up to $100,000 (including interest) if a deposit taker is placed into liquidation or, in certain circumstances, if a deposit taker has entered “resolution” (see “Crisis management” below).
Eligible investors are those holding “protected deposits”. Transactional and savings accounts and term deposits will generally be protected deposits, but debentures, bonds and notes (among other products) will not. “Sophisticated” investors, such as large corporations, other deposit takers, licensed insurers, operators of designated financial market infrastructures, and government agencies, will not be investors eligible for protection by the Scheme.
The RBNZ will manage the Scheme, and will calculate and distribute entitlements.
The Scheme will be funded by levies collected from deposit takers, with a Crown backstop to meet all entitlements in the event that the fund is not sufficient. Levy calculations will be determined by Regulations.
Supervision and Enforcement
The Bill broadens the RBNZ’s supervisory tools, including the power to:
- request information from depositor takers and others that may have relevant information about a deposit taker’s business activities;
- require third party reports; and
- undertake on-site inspections of deposit takers without notice (but only at reasonable times and in a reasonable manner).
The RBNZ may also issue remedial notices requiring deposit takers to take certain actions to address actual or potential contraventions of prudential obligations, or to prepare a remedial plan.
Pecuniary penalties will apply for failures to comply with RBNZ’s lawful requests for information or remedial notices.
The Bill contains a more graduated enforcement and penalty framework. Criminal penalties are tiered and, in addition to court-based enforcement, the Bill allows the RBNZ to issue directions (as discussed below) and remedial notices (as discussed above).
The RBNZ can also accept written undertakings from deposit takers or other persons to correct actual or potential non-compliance with a prudential obligation, or to pay an amount to the RBNZ as an alternative to a pecuniary penalty. If accepted, no criminal proceedings or pecuniary penalties can be bought or continued. Undertakings will be enforceable by a court order.
New Zealand’s legislative framework for bank crisis management hasn’t been meaningfully reviewed since the late 1980s. The changes in the Bill have been informed by international experience and the post-global financial crisis reforms.
The Bill introduces early intervention triggers to allow the RBNZ to proactively respond to financial distress.
The RBNZ will have the power to direct deposit takers if a deposit taker is (among others):
- insolvent or likely to become insolvent;
- in circumstances that are prejudicial to the soundness of the financial system;
- non-compliant, or is likely to be non-compliant, with a prudential obligation or licence condition to maintain a minimum amount or ratio of capital; or
- operating fraudulently or recklessly.
Unlike the existing regime for banks, the RBNZ will not require Ministerial consent to issue a direction to a registered bank.
The RBNZ will be required to prepare and maintain a resolution plan for each deposit taker and may recommend the “resolution” of a deposit taker in certain circumstances. “Resolution” is the power of managing a failing financial institution to minimise damage to depositors and the stability of the financial system. It is an emergency power that can only be used if there is no reasonable prospect of certain failures (such as insolvency, or contraventions of a direction or prudential obligation) being remedied by other means.
Once in resolution, an extendable 12-month moratorium will apply and management of the deposit taker will vest in the RBNZ. The RBNZ will have the power to, among other things, carry on the business of the deposit taker, pay creditors, compromise with creditors, and sell assets.
The Bill also introduces a “no creditor or shareholder worse off” mechanism. This entitles pre-resolution creditors and shareholders to compensation if they have, or are likely to receive, less in the resolution of a deposit taker than they would have received in a liquidation.
The Bill will require all directors and senior managers of deposit takers to be fit and proper persons.
Directors of deposit takers will be subject to a new positive due diligence duty to ensure that the deposit taker complies with its prudential obligations. This duty includes taking reasonable steps to ensure that adequate systems, processes, and policies are in place and that any deficiencies are promptly remedied.
Each director must exercise the care, diligence, and skill that a reasonable director would exercise in the same circumstances.
It will be a defence if directors can show that reasonable steps have been taken to meet their obligations. Other defences, relating to reasonable reliance on information or conduct of external persons, will also be available.
Breaches of this duty may attract a pecuniary penalty of up to $1 million.
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