On Tuesday last week, the Finance and Expenditure Committee sent a revised Deposit Takers Bill back to the House with a recommendation that it be passed.
The Committee made relatively few amendments. Amendments were made to the purpose and principles of the Bill (adding a new purpose relating to the accessibility of financial products and a new principle for the Reserve Bank to take into account the desirability of a diversity of deposit-taking institutions), adding a requirement for the Reserve Bank to create a proportionality framework, and clarifying the credit rating exemption power. The Committee also made amendments relating to the new directors' due diligence duty, Depositor Compensation Scheme (DCS) and what constitutes a deposit taker, which we summarise in this insight.
Directors' due diligence duty
-
Removal of AML/CFT Act obligations: Obligations under the AML/CFT Act will no longer form part of the prudential obligations that are subject to the directors' due diligence duty. However, this change only applies to the due diligence duty, and the AML/CFT Act obligations are still included as "prudential obligations" wherever that term is referenced elsewhere in the Bill. This means, for example, that a deposit taker will have an obligation to report to the Reserve Bank if it believes that it has contravened, may have contravened, or is likely to contravene an obligation under the AML/CFT Act in a material respect (clause 116). The AML/CFT Act itself does not include a mandatory breach reporting obligation, so this will place deposit takers in a different position to other reporting entities under the AML/CFT Act.
-
Reliance on employees or advisers: A new clause 93A is inserted, which enables directors to reasonably rely on information and advice from employees or advisers. Clause 93A is modelled closely off section 138 (use of information and advice) of the Companies Act.
-
Overseas licensed deposit-takers: For overseas licensed deposit takers, the due diligence duty now only applies to the New Zealand CEOs, instead of the overseas directors. In making this change the Committee recognised that shifting the liability to the New Zealand CEO is appropriate, especially since an overseas board of directors may be overseeing operations in multiple countries, with its operations in New Zealand possibly representing a relatively small part of the entity’s business. New clause 93A also applies to the New Zealand CEO.
-
Prohibition on indemnities or insurance removed: The restrictions on deposit takers providing indemnities and insurance for breaches of directors' due diligence duties is removed. The requirement to publish indemnity or insurance details in an interests register is also removed.
-
Reserve Bank guidance on due diligence duty: A new clause 94 is inserted, which requires the Reserve Bank to prepare and publish guidance about the due diligence duties. This is in response to submissions on the Bill requesting greater clarity about what might be considered a breach of the duty of due diligence in the new regime. A Court will be required to consider the Reserve Bank's guidance when deciding the penalty for a breach of the due diligence duty.
-
Transitional period: The due diligence duty does not apply to existing registered banks and non-bank deposit takers during the transitional period before they become a licensed deposit taker.
Changes to the DCS
-
Eligible protected deposits: The Bill contemplates that foreign currency deposits could be included as protected deposits under the DCS, subject to enabling regulations being made.
-
Overseas debt securities: Debt securities that are issued out of, or administered by, an overseas office or branch of a licensed deposit taker will be expressly excluded from protected deposits.
Definition of "deposit taker"
There are two changes made to the definition of "deposit taker". First, there is a new overarching requirement that a deposit taker must be "a person carrying on business in New Zealand". The intent of this wording is that overseas entities that conduct limited activities connected with New Zealanders (without actually carrying on business here) should not be subject to the legislation. Secondly, there is a new category of a "specified overseas entity" of deposit taker, which is a bank or any other entity that is authorised to accept deposits in an overseas jurisdiction and meets criteria prescribed in regulations.
Timing and Next Steps
The Bill is expected to come into force as law after receiving Royal Assent in mid-to-late 2023. After the Bill comes into force, there will be a transition period to allow the Reserve Bank and regulated entities to adapt to the new regime. The DCS is being prioritised ahead of the rest of the Bill coming into effect and expected to be up and running in late 2024.
If you would like to discuss any aspect of the Bill or its proposed amendments in further detail, please get in touch with one of our experts.