RBNZ Consultation Update - Exposure Draft of Deposit Takers Bill

We farewell 2021 with a range of Reserve Bank of New Zealand – Te Pūtea Matua (RBNZ) consultations underway with submissions closing in the New Year.

Deposit Takers Bill

2022 will see the introduction into Parliament of a new Deposit Takers Bill (Bill). Prior to this, the RBNZ published an exposure draft of the Bill. The Bill is consistent with the Cabinet policy decisions notified in the course of the review of the Reserve Bank of New Zealand Act 1989 (RBNZ Act) which has been underway since late 2017.
 
To this end, the Bill proposes to replace the existing regulatory regimes for banks and Non-Bank Deposit Takers (NBDTs) under the Reserve Bank of New Zealand Act 1989 (RBNZ Act) and the Non-Bank Deposit Takers Act 2013, and will be of interest to all current registered banks and licensed NBDTs.
 
The headline policy change introduced by the Bill is the introduction of a Depositor Compensation Scheme (DCS). Cabinet had previously agreed in principle to implement a DCS, and the Bill confirms the decision announced earlier this year to increase the deposit protection threshold from $50,000 to $100,000, which will bring the coverage limit more in line with similar schemes in OECD jurisdictions.
 
Other major policy changes introduced by the Bill include:

• The ability for the RBNZ to set standards as the main tool for imposing prudential requirements.

• A new due diligence duty for directors of banks and NBDTs which covers "prudential obligations", including Anti-Money Laundering and Countering Financing of Terrorism Act 2009 (AML/CFT Act) obligations.

• Increased supervision and enforcement tools for the RBNZ, including a range of civil liability provisions which will provide the RBNZ with a potentially more usable set of enforcement tools versus those in the current RBNZ Act where the focus in on criminal liability.

• A revised crisis management framework.

While the Bill is consistent with previously notified policy decisions, the devil is often in the detail and registered banks and licensed NBDTs and their directors should take this opportunity to engage with that detail. 

Timeline

The approach to transition from the existing legislation to the Bill is still being considered by the RBNZ, although it has acknowledged that industry will require sufficient time to transition to the new regime. 

Further RBNZ consultation on 'The Future of Money' and policy for branches of overseas banks

In addition to the consultation on the Deposit Takers Bill, the RBNZ is currently consulting on a range of other issues, including:

• The latest issues paper in the RBNZ's comprehensive public consultation on "The Future of Money – Te Moni Ananmata" (read more here). This issues paper relates to cash system redesign, and follows earlier consultation on stewardship and central bank digital currency. Consultation on the cash system redesign issues paper closes at 10am on 7 March 2022.

• A consultation document in relation to the RBNZ's review of policy for branches of overseas banks (available here). This review is relevant to both existing registered branches and to future applicants seeking registration. The objective of the review is to create a simple, coherent and transparent policy framework for branches of overseas banks that promotes financial stability through a sound and efficient financial system in New Zealand, and avoids significant damage to the financial system that could result from the failure of a registered bank. Submissions on the consultation paper are due by 5pm on 2 March 2022.

A summary of each of the key policy changes from the Deposit Takers Bill is below. For further background and detail on the reform of the prudential framework for deposit takers, please see our Deposit Takers Reform Series of articles here.

The Bill - A single regulatory regime for NBDTs and banks

The Bill will establish a single "licensed deposit taker" regulatory regime for all banks and NBDTs, with standards, a secondary legislative instrument under the Legislation Act 2019, to be issued by the RBNZ as the main tool for imposing prudential requirements. 
 
Standards can be applied to all deposit takers, or to particular deposit takers or classes of deposit taker; as well as to all circumstances, particular circumstances or a class of circumstances. The Bill provides the example of different lending standards applicable to lending to customers in different geographical areas.
 
Part 3 of the Bill sets out procedures for the issuance of standards, along with broad, illustrative examples of the scope of matters that can be addressed via standards. This includes with regards to governance of a bank or NBDT (including organisation structure and remuneration), capital and liquidity, bail-in arrangements, lending, exposures, risk management and business continuity planning.  Section 85(1)(e) of the Bill enables standards to regulate or deal with any other matters that may be prescribed in regulations.
Depositor Compensation Scheme
 
The DCS will apply to New Zealand dollar deposits in transaction, call, and saving accounts, as well as term deposits (or equivalent products). The Bill also enables 'temporary high balances', such as proceeds after selling a house or compensation received from an insurance policy, to be protected pursuant to regulations. Depositors who are 'sophisticated investors' such as large corporations, licensed deposit takers, licensed insurers, operators of financial market infrastructures, and government agencies are excluded from the scheme. 
 
A pay-out under the DCS will occur if the bank or NBDT is put into liquidation (initiated or agreed by the RBNZ), or if the RBNZ issues a 'specified event notice' under its resolution powers. The $100,000 cap on recovery under the DCS is inclusive of both the principal and the interest accrued on protected deposits. 
 
The DCS will operate as an additional function of the RBNZ. As was previously signalled, it is proposed that the DCS will be entirely funded by levies collected from banks and NBDTs, with further regulations to prescribe how levies will be calculated. Where levies are insufficient in the event a DCS pay-out is triggered, public funds will be drawn upon to cover any remaining pay-outs or costs – however, the Reserve Bank may charge additional levies to repay any funds.

New positive duties and penalties for directors

The Bill imposes a new, positive duty on directors of banks and NBDTs to exercise 'due diligence' to ensure the relevant deposit taker complies with its prudential obligations. "Prudential obligations" has been defined widely as follows:
 
prudential obligation means an obligation imposed by or under any of the following:

(a) this Act or the regulations:
(b) the standards:
(c) a condition of a licence issued under Part 2:
(d) a direction given under this Act:
(e) the Anti-Money Laundering and Countering Financing of Terrorism Act 2009 and regulations made under that Act
 
'Due diligence' is defined similarly to the recently introduced senior managers and directors obligation in the Credit Contract and Consumer Finance Act 2003, and includes (but is not limited to) directors taking reasonable steps to ensure the bank or NBDT has sufficient procedures in place to require it and its employees and agents to comply with prudential requirements, is able to systematically identify deficiencies in its compliance procedures, and promptly remedies any deficiencies discovered.    
 
Pecuniary penalties (the scale of which are outlined below) may apply to directors who fail to comply with this new duty. The RBNZ also has the ability to apply for a District Court order banning individuals from being involved in deposit taking businesses, if they have been a director of a deposit taker that has persistently or seriously breached its prudential obligations. The Bill also prohibits banks and NBDTs from insuring against liability arising for breaches of this duty.
 
The RBNZ has also proposed the introduction of a broader 'executive accountability regime' for directors and senior employees of banks, NBDTs and insurers. This is being developed separately to the deposit takers' reform.

Increased supervision and enforcement tools for RBNZ

The Bill provides increased supervisory and information gathering powers for the RBNZ in respect of licensed deposit takers, including by empowering the RBNZ to require the supply of information from banks and NBDTs (or other entities with information about the business activities of a bank/NBDT), require a third-party report to be prepared, or undertake on-site inspections (following reasonable notice). 
 
Banks and NBDTs, along with their auditors, will be required to report suspected or actual non-compliances of prudential obligations to the RBNZ. However, such reports cannot be relied upon as evidence in any civil or criminal proceeding (unless the proceeding relates to a falsified report).
 
The penalty regime for most non-compliances in the Bill itself is criminal. Below are the three different tiers of potential penalty below, with significant maximum penalties available:
 

The RBNZ may also issue infringement or remedial notices, and accept enforceable undertakings, as an alternative means of sanctioning a non-compliant entity. 
 
The Bill also sets out numerous infringement offences, with a lower level of applicable fees (a $10,000 infringement fee and a Court-imposed fine not exceeding $25,000). Examples of these more minor offences include a failure to comply with a requirement to provide the RBNZ with a fit and proper certificate for a director or senior manager, or a failure to notify the RBNZ of a change in credit rating within 20 working days.
Crisis management framework
 
The Bill sets out the design of a revised crisis management framework. The substance of the key statutory management powers from the RBNZ Act remain, but are transferred to the RBNZ as resolution authority. However, for practical reasons, the Bill enables the RBNZ to delegate its statutory management powers to a 'resolution manager' to enable effective day-to-day operations of the resolution process, while retaining the ability to direct the resolution manager. The RBNZ has indicated they are particularly interested in receiving feedback on this proposal.
 
Absent from the Bill is the previously flagged proposal to introduce a statutory bail-in regime at this time, which would have enabled the RBNZ to write down or convert certain liabilities. This is because the new crisis management framework provides broad transfer powers to the RBNZ that can be used to impose losses. The Bill also includes a pre-resolution direction power that enables the RBNZ to require deposit takers to exercise contractual rights to bail-in prepositioned bail-inable instruments in the future.

Contact Us

Please get in touch with one of our experts if you wish to discuss any aspect of the Deposit Takers Bill reform process or any other RBNZ consultation processes.
 

This article is intended only to provide a summary of the subject covered. It does not purport to be comprehensive or to provide legal advice. No person should act in reliance on any statement contained in this publication without first obtaining specific professional advice. If you require any advice or further information on the subject matter of this newsletter, please contact the partner/solicitor in the firm who normally advises you, or alternatively contact one of the partners listed below.