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Article 4: Supervision and Enforcement

Home Insights Article 4: Supervision and Enforcement

Contributed by:

Contributed by: Emmeline Rushbrook and Guy Lethbridge

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Published on: September 25, 2020


Deposit Takers Reform Series: Article 4

Consultation on the prudential framework for deposit takers and depositor protection

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 this briefing, we focus on chapter 6 of the consultation document – supervision and enforcement. That chapter focusses predominantly on:

  • the scope of a new "on-site inspection" power for the Reserve Bank and for the FMA;
  • whether a breach reporting requirement should be directly provided for in legislation; and
  • the Reserve Bank's enforcement toolkit. 

The paper proposes that the Reserve Bank's new supervisory and enforcement powers will sit within the new Reserve Bank "Institutional Act", rather than the "Deposit Takers Act". Accordingly, the Reserve Bank may ultimately be able to use the new powers across all the sectors it regulates (eg deposit takers, insurers and FMIs).

Similarly, the new FMA onsite inspection power would sit within the FMA Act 2011 and so could be used by the FMA across a range of sectors. For example, in its oversight of financial advisers, and (once the relevant Bills are passed) in its supervision of:

  • banks, insurers and non-bank deposit takers under the conduct of financial institutions regime; and
  • FMIs. 

On-Site Inspection Powers

The Reserve Bank has traditionally taken a less intrusive supervisory approach than other prudential regulators internationally. To support a shift in this approach, in an early stage of the Phase 2 Reserve Bank Act review, Cabinet agreed in principle to empower the Reserve Bank to undertake on-site inspections as part of its supervisory activities. This change would be supported by an increase in funding to the Reserve Bank. 

The consultation paper now seeks comments on the scope for a new on-site inspection power. The paper proposes a scope similar to that at section 133 of the AML/CFT Act. That Act allows for onsite inspections without notice in which an AML/CFT supervisor may require an entity's employees, officers or agents to answer questions and to provide information. The paper suggests that limits on when the power could be used would be achieved through:

  • the scope being limited to accessing business premises at a "reasonable time";
  • the power needing to be used by staff with appropriate authorisation or approval; and
  • confidentiality provisions for information gained from inspection.

The paper describes an expectation that the new power will be used sparingly. The intention being that the Reserve Bank would conduct most on-site inspections on a BAU basis whereby inspections would be well signalled, effectively under "de facto notices of inspection". That being the case, we query whether it may be helpful (and more consistent with LDAC's Legislation Guidelines) for this intention to feature in the legislative design. For example, a broader "reasonableness" test could be included - such as a stipulation that reasonable notice of inspections is required, unless this would defeat the purpose of the visit (or if consent is obtained).
We suggest similar refinements to the proposed on-site inspection power for the FMA discussed in the paper.

Breach Reporting

The consultation paper is seeking feedback on whether a breach reporting requirement should be directly provided for in legislation and, if so, whether this should be in the Deposit Takers Act or in the Institutional Act as a requirement for all entities regulated by the Reserve Bank. The proposal, in all events, would apply to all deposit takers (not just to registered banks as is the position under the current framework). 

The paper recognises that, even if included within legislation, some flexibility regarding breach reporting obligations would still need to be retained. In this respect, it is suggested that the Reserve Bank would:

  • determine the time periods in which deposit takers would need to report "material" versus "minor" breaches; and
  • provide guidance as to the boundaries between "material" and "minor" breaches. 

Entities may wish to consider:

  • what, in practice, would be the most sensible form of determination and guidance from the Reserve Bank; and
  • process points, including whether consultation with entities should be required and/or review periods set.

Enforcement toolkit

Cabinet has made an in-principle decision to expand the Reserve Bank's enforcement toolkit. The paper proposes the following range of tools in order that the Reserve Bank has a full suite of tools available to it:

  • Statutory Public Notices: formal public warnings
  • Infringement Notices: small fines for minor compliance-type offences
  • Enforceable Undertakings: a commitment given by a deposit taker, and accepted by the Reserve Bank, to undertake a particular action to address non-compliance
  • Action (Remedial Plans): a requirement for a deposit taker to set out how it will remedy a breach of a regulatory requirement
  • Remedial Notices: a requirement for a deposit taker to remedy a breach or take specific action to remedy a breach
  • Directions: a broad power requiring a specified action on the part of the deposit taker, including addressing a breach

If this range of tools is adopted, we would encourage the publication of a Reserve Bank enforcement guideline regarding expected approaches to enforcement. In this respect, further thought on the boundary between when an enforceable undertaking versus an action plan will be appropriate. Save for the voluntary nature of an enforceable undertaking, we would expect that the content of enforceable undertakings and action plans would be similar in the prudential context. This is in circumstances where, despite the paper's description of how the enforceable undertaking power could be used,

  • we find it hard to think of situations in which deposit takers may need to make compensatory payments in a prudential regulation context (as compared to conduct regulation contexts); and
  • we query in what circumstances "an amount in lieu of a monetary penalty" may be paid to the Reserve Bank (or potentially a charity), albeit an enforceable undertaking might, for example, be able to cover investigation costs of the Reserve Bank.

Location: Institutional Act or Deposit Takers Act?

Overall, while some refinements may be required, we do not envisage deposit takers should have major objections to what is proposed in this chapter. We can see too that locating the new powers in the Institutional Act, rather than the Deposit Takers Act, would in most cases be sensible for both simplicity and consistency across the sectors the Reserve Bank regulates.

To view the others articles in our Deposit Takers Reform Series, see here.

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.

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