Submissions close on 23 October in the next round of consultation by Treasury and the Reserve Bank on the prudential framework for deposit takers and depositor protection. In article 2 of our Deposit Takers Reform Series, we focus on chapter 5 of the consultation document – liability and accountability, and we'll discuss other chapters in future articles in the series. In the meantime, please contact one of our experts if you wish to discuss any aspects of the proposals in the consultation document. You can view the consultation document at the link here and our previous article on the consultation is available here.
Cabinet's in-principle decisions
Cabinet has made in-principle decisions to increase the accountability of deposit takers' directors by:
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imposing specific positive duties on them; and
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developing an executive accountability framework that would apply to directors and senior executives of deposit takers and insurers.
The development of the executive accountability regime will take place outside the phase 2 process of the Reserve Bank Act review. However, the consultation document signals that work within the current review on directors' duties will influence the later design of the executive accountability framework.
New directors' duties
The new duties will be de-linked from the current disclosure requirements and attestation process that applies to directors of registered banks. Instead, directors of deposit takers will be subject to high-level duties that will apply on an ongoing basis.
It is proposed that a director of a deposit taker will be required to:
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take reasonable steps to ensure that the deposit taker is being run in a prudent manner;
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act with honesty and integrity, and with due skill, care and diligence; and
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deal with the Reserve Bank in an open and honest manner.
The duties will be owed to the Reserve Bank. Not surprisingly, the proposed duties are similar to the duties imposed under Australia's BEAR and senior managers' regimes in other jurisdictions.
Signing disclosure statements
Despite the de-coupling of the directors duties from the current disclosure requirements (and the increased supervisory powers proposed in Chapter 6 of the consultation paper), it is proposed that directors still would be required to sign disclosure documents on a 6-monthly basis. It is not entirely clear why this is still necessary. For instance, it is no longer a requirement for directors to sign offer documents under the FMC Act. Removing this requirement is not likely to reduce the accountability or responsibility of directors, and 2 directors will still be required to sign annual financial statements under the FMC Act.
Deemed liability for directors
It is proposed that directors should have deemed liability for false or misleading disclosure, with criminal penalties for knowing or reckless breaches, subject to appropriate defences. Directors already will have deemed liability for a failure of a deposit-taker to comply with the financial reporting obligations of the FMC Act. But it doesn't necessarily follow that this same approach should be carried over to other (ie non-financial) disclosures made by a deposit taker in a 6-monthly disclosure statement. There is no deemed director liability, for instance, for a breach of the fair dealing provisions of the FMC Act, but accessory liability can arise.
Criminal and civil liability
It is proposed that the Deposit Takers Act would place less reliance on criminal sanctions than is the case under the Reserve Bank Act, and that criminal offences have an intent or knowledge of wrong-doing element. At present, the primary legislation for the two peaks of New Zealand's financial regulatory system (being the Reserve Bank Act and the FMC Act) take different approaches to liability, and the proposal would bring a more consistent approach.
Stakeholder feedback is sought on:
- the level at which maximum civil penalties for individuals should be set to provide sufficient deterrence without putting off otherwise appropriately qualified individuals from taking on director roles; and
- the level of criminal penalties.
Defences, insurance and indemnities
Sensibly, the consultation document is proposing that civil defences would be available for directors, based on the approach taken in the FMC Act. Broadly following the approach in the Companies Act, there would also be restrictions placed on a deposit taker's ability to indemnify or insure directors against loss that may arise from criminal or civil prosecution.
Summary: What does this mean for directors?
Directors of deposit takers that are New Zealand companies are already subject to general duties under the Companies Act, including to act in the best interests of the company, to exercise powers for a proper purpose and to exercise the care, diligence, and skill that a reasonable director would exercise in the same circumstances. The proposed new duties are likely to add a specific prudential focus to those general duties, rather than requiring entirely new matters to be taken into account or requiring a new set of skills.
The consultation paper recognises that the Reserve Bank may like to issue guidance on what is expected of directors, including what ‘taking reasonable steps’ means and the Reserve Bank’s expectations of ‘prudent risk management’. In this respect, alignment would ultimately be helpful with other similar duties, including the new duty on directors and senior managers under section 59B of the CCCF Act, which requires directors to exercise due diligence to ensure that a creditor complies with its duties and obligations under the CCCF Act. Further guidance on that duty is due to be released by the Commerce Commission prior to section 59B coming into effect.
In our next article of our Deposit Takers Reform series, we will discuss chapter 7 of the consultation paper: Resolution and crisis management. View the Deposit Takers Reform Series here.