The Reserve Bank has published the third and final consultation paper on the branch policy review (Branch Review). The consultation refines the proposal to restrict dual-registered branches' business to "large wholesale customers" only. This was originally proposed in the second consultation paper published in August 2022.
Background to the Branch Review
As acknowledged by the Reserve Bank, the conditions of registration that apply to banks registered as branches are inconsistent and difficult to understand. The proposed reforms intend to introduce a coherent framework and level the playing field for overseas banks operating in New Zealand.
Proposed reforms
The proposed reforms, which were originally published in the second consultation last year are to:
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restrict all branches' business in New Zealand to wholesale customers only (meaning branches will not be able to take deposits from, or offer products and services to, retail customers);
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require branches to locally incorporate once total assets exceed NZ$15 billion; and
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continue to allow dual-registration (where an overseas bank is registered in New Zealand as both a branch and as a locally-incorporated subsidiary) but with additional requirements to:
- ensure that the governance and risk management controls of the branch and subsidiary are sufficiently separate; and
- further restrict dual-registered branches business to "large wholesale customers" only (which is the subject of the third consultation paper).
The proposed package of reforms will likely lower the threshold for local incorporation and the potential size of branches' wholesale activity. The current threshold to locally incorporate is based on net external liabilities which allows branches to deduct related-party liabilities. The Reserve Bank expects to review the threshold for local incorporation every five years.
The Reserve Bank also proposed additional reporting and disclosure requirements for branches and to work towards greater engagement with the home regulators of branches to increase its own understanding of branches' home regulatory environments.
Restriction on "large wholesale customers" for dual-registered branches
The second consultation paper proposed to restrict dual-registered branches' business to "large wholesale customer" only, and to apply a turnover test to determine whether a wholesale customer is "large".
The intent of this proposal is to mitigate the risk that a branch ceases to provide critical services (eg FX and interest rate products and services) to small-to-medium customers. Large wholesale clients (eg large corporates) are more likely to have multiple banking relationships, and therefore the withdrawal of critical services in the event a branch ceases business in New Zealand is less likely to adversely affect these customers.
It would also mitigate the risk of regulatory arbitrage by requiring small-to-medium customers be retained in the locally-incorporated subsidiary.
Submissions on the second consultation paper noted that large wholesale customers are diverse, with some having high turnover and others having lower turnover but large balance sheets.
In response to this feedback, the Reserve Bank has amended its proposed "large wholesale customer" test to include customers' turnover and net assets. This follows the approach used in the definition of "large" wholesale investor in the Financial Markets Conduct Act (see clause 39 of schedule 1). The Reserve Bank does not expect that this will undermine the intent of the proposal.
The Reserve Bank will also issue guidance that banks have systems and controls to periodically reassess customers as qualifying as "large wholesale investors" at least every two years.
Implementation
The Reserve Bank has also proposed to delay the implementation of the Branch Review decisions until the commencement of the Deposit Takers Act in 2028.
The Deposit Compensation Scheme will be introduced in late 2024, at which stage some existing branches that intend to wind down their retail business may still hold retail deposits. The Reserve Bank intends to consult on the regulations that will implement the Scheme, including exemptions for any affected branches in early 2024.
Class authorisation regime
The Branch Review does not relate to overseas banks that currently rely on the class authorisation to undertake limited wholesale business in New Zealand using restricted words (eg "bank") without being registered.
Our comments
The outcomes of the Branch Review will impact existing branches' businesses differently, given the different conditions of registration that apply across the branch population. Many branches will need to assess the suitability of their business models against the proposed reforms.
Although the objective of the Branch Review is to introduce a more coherent framework, in practice it may still result in a divergence in how branches are regulated. This is because the Reserve Bank ultimately reserves the ability to impose additional requirements on any branch as a result of its supervisory assessment framework. Over time this could lead to different conditions of license being imposed on branches.
For example, the Reserve Bank is not proposing to update its jurisdiction equivalent assessments at this stage. Therefore, the current conditions of registration that impose relative size constraints on certain dual-registered branches' assets will continue to apply. Under a future branch standard, the Reserve Bank will also reserve the right to introduce additional risk mitigants for particular branches, for example imposing quasi-capital or quasi-liquidity requirements like ring-fencing assets in New Zealand.
The implementation of the Branch Review outcomes will occur alongside the development of standards under the Deposit Takers Act that may be relevant to branches. The Reserve Bank will use the findings from the recent governance thematic review to develop a new governance standard under the Deposit Takers Act. This may include new governance requirements for branches (eg in the form of additional reporting and disclosure requirements or the requirement to establish a separate branch audit committee). Under the Deposit Takers Act the Reserve Bank must also prepare resolution plans for deposit takers who are overseas persons in relation to their New Zealand business.
Please contact one of our experts if you wish to discuss any aspects of the Branch Review proposals in the consultation document.
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.