The New Zealand Government yesterday announced in-principle decisions as part of Phase 2 of the review of the Reserve Bank of New Zealand Act.
Cabinet has decided that the Reserve Bank of New Zealand Act 1989 will be replaced with two separate Acts – an ‘Institutional Act’ and a ‘Deposit Takers Act’. Cabinet has also confirmed that, outside of the Phase 2 review process, work will continue on an executive accountability regime for banks and insurers.
The proposed Institutional Act will contain the governance and accountability arrangements for the Reserve Bank, including:
- establishment of a governance board;
- introduction of a Financial Policy Remit from the Minister of Finance;
- greater alignment of reporting and monitoring requirements with state sector practice to enhance accountability of the Reserve Bank; and
- implementing a high-level financial stability objective of "protecting and promoting the stability of New Zealand's financial system".
Deposit Takers Act
The proposed Deposit Takers Act will:
- integrate the regulation of banks and non-bank deposit takers under one deposit taking regime;
- provide for standards to be set by the Reserve Bank as the primary tool for imposing regulatory requirements on deposit takers;
- requirements that impact on the rights of individuals, however, will be provided for in primary legislation, rather than in standards. For example, fit and proper requirements for directors and senior executives;
- increased accountability requirements for directors of deposit takers established through broad positive duties, with civil penalties as the primary sanction for noncompliance;
- increase the Reserve Bank's supervision and enforcement tools, for example, to undertake onsite visits, powers to issue directions to a deposit taker and to delicense a deposit taker without Ministerial involvement;
- reform the enforcement and penalty framework and introduce a broader range of potential sanctions; and
- establish the deposit insurance scheme which will insure deposits up to a limit of $50,000 per depositor, per institution.
The Cabinet paper proposes to include a new resolution regime in the proposed Deposit Takers Act. That regime will provide the Reserve Bank with a greater range of bank resolution and crisis management options without relying on taxpayer funds. This will include providing the Reserve Bank with the ability to ‘bail-in’ (that is, write-down or convert to equity) certain unsecured liabilities, as a new mechanism to recapitalise a failing bank. The Cabinet paper notes that bail-in may not be usable in all circumstances, such as for debt instruments issued by NZ banks under foreign law. It also notes that, in general, international experience shows that contractual clauses in debt instruments expressly permitting bail-in may be necessary. Safeguards protecting creditor property rights in a bank resolution will be introduced, reflecting the "no creditor worse off" principle.
It is intended that a Bill for the Institutional Act be introduced into Parliament in mid-2020.
Treasury will undertake a further round of public consultation on the Deposit Takers Act and the deposit insurance scheme in the first quarter of 2020. Cabinet plans to make final policy decisions and to progress legislation after that.
Executive Accountability Regime
In addition, Cabinet has agreed in-principle, subject to further advice from a cross-agency process separate from the Phase 2 review, to the development of an integrated prudential and conduct ‘executive accountability regime’ to cover both deposit takers and insurers. Such a move would bring New Zealand broadly in line with similar regimes in other jurisdictions such as Australia and the UK.
The Minister of Finance's Cabinet briefing paper explains that initial advice has been commissioned in respect of this new regime from the cross-agency process. That advice is to outline the possible timeframes and resourcing requirements for progressing this work, and to discuss the appropriate prioritisation of this work with the relevant agencies taking into account other policy and legislative initiatives (eg. the introduction of the new ‘fair conduct’ licensing regime next year).
For further context on this development, see our earlier update here, which includes detail on the first effectiveness reviews emerging on the UK Senior Management Regime.
If you have any questions on the proposed changes and how they might affect your organisation, please reach out to one of our experts listed below.
Further information, including the relevant Cabinet Papers and progress updates, can be found on the Treasury website here.
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