On Tuesday this week, the Reserve Bank of New Zealand (RBNZ) released an exposure draft of the new Deposit Takers Bill for public consultation. The consultation is open until 21 February 2022.
Further public consultation is expected on the funding framework which includes industry levies before the Depositor Compensation Scheme is implemented.
Links to the exposure draft of the Bill and the RBNZ’s explanatory notes are available here.
Who needs to read it? Why?
The Deposit Takers Bill should be reviewed by all registered banks, non-bank deposit-takers, overseas banks operating into New Zealand, and others who operate close to the regulatory perimeter of the current regime.
The Bill will make some of the most profound changes to banking regulation in a generation, and create a new regime for the prudential regulation of all deposit takers – institutions that are in the business of taking deposits and lending to household and businesses.
The Bill will repeal the Banking (Prudential Supervision) Act 1989 (the new name for the prudential supervision related parts of the Reserve Bank of New Zealand Act 1989) and the Non-bank Deposit Takers Act 2013, and therefore affect, and be of interest to, all current registered banks and licensed non-bank deposit takers.
The Bill also makes changes to the ‘regulatory perimeter’ and may capture entities that provide call accounts for wholesale investors. It allows the Reserve Bank to declare certain persons to be deposit takers within the scope of the regime. There is also an ability to impose standards related to lending by non-deposit taking lenders. Wholesale funded lenders not currently captured by the existing regimes should also consider these changes in particular.
Finally, liquidators and those who may in time act as ‘resolution managers’ under the Bill should be aware of the potential impacts to them, in the event they are appointed to such a role in relation to a failed deposit taker.
What does it cover?
In summary, the Bill deals with the following:
- Regulatory perimeter (as discussed above).
- Licensing – Part 2 of the Bill provides that firms within the perimeter must be licensed, and the matters the Reserve Bank must consider in considering a licence application. The Reserve Bank will be able to use licence conditions to differentiate between deposit takers and take a proportionate approach to prudential regulation. Licence conditions may apply particular prudential standards to firms and make other firm-specific restrictions on the business of a deposit-taker.
- Standards – Prudential requirements for all licensed deposit takers will be set out in standards – a secondary legislative instrument under the Legislation Act 2019 issued by the Reserve Bank. Part 3 sets out procedures for the issuance of standards and the scope of matters that can be addressed via standards.
- A new duty for every director of a licensed deposit taker to exercise due diligence to ensure that the deposit taker complies with its prudential obligations, and restrictions on the extent to which directors may be indemnified or insured in respect of any breach of the duty.
- Supervision and Enforcement – Part 4 of the Bill provides supervisory powers to the Reserve Bank when dealing with licensed deposit takers. The key change here is the introduction of a regime for ‘on-site’ inspection of licensed deposit takers.
- Coverage, eligibility, and compensation rules for the proposed Depositor Compensation Scheme, including detailed rules about how depositors’ entitlements are to be calculated for different account types (e.g. joint accounts, bare trusts, solicitor’s client accounts, trusts generally).
- The introduction of, and funding arrangements for, the Depositors Compensation Scheme.
- Design of the new crisis management framework. The substance of key statutory management powers from the 1989 Act, is carried over, but those powers are (where practicable) placed directly in the hands of the Reserve Bank as resolution authority, rather than in a statutory manager. However, the Reserve Bank is permitted to delegate these powers to a ‘resolution manager’ to enable effective day-to-day operations of the resolution process. The RBNZ is particularly interested in feedback on this point. A key practical change is the Bill imposes an obligation on the Reserve Bank to plan for resolution, by preparing resolutions plans for each licensed deposit taker, and a public ‘Statement of Approach to Resolution’.
- Miscellaneous matters, including continued restrictions on the use of the words bank, banker or banking unless authorised by the RBNZ.
In addition, Annex A to the Explanatory Notes lists the regulations and standards to be developed to implement the Depositor Compensation Scheme. The RBNZ notes it is particularly interested in industry’s views on some practical matters related to implementation, and welcomes feedback on these points.
Our view
The exposure draft Bill largely follows through the Cabinet Decisions on the new regime released in April 2021. The current consultation will be the last step before the Parliamentary process, and therefore is a critical opportunity for affected entities to influence the approach before it enters the political arena.
In our view, the new Bill is a positive step in modernising New Zealand’s prudential regulatory regime, in particular by providing for resolution planning and on-site inspection powers, bringing the regime closer into line with international best practice. The new architecture of licensing and standards should also be a positive, helping to provide a clearer process and statutory basis for the RBNZ’s rule making powers than the current Conditions of Registration regime for banks.
The rules relating to determining entitlements under the Deposit Compensation Scheme are relatively complex, and will need to be carefully worked through to ensure no unintended consequences arise. We also expect that banks and NBDTs will be particularly concerned to ensure that any new information gathering, systems and testing requirements imposed by a Deposit Compensation Scheme Standard (as referred to in the Annex to the Explanatory Notes) are workable, as these may impose significant additional cost and compliance burdens.
What next?
The Bill is expected to be introduced into Parliament in early 2022, and come into force in 2023. There will then be a transition period to allow both the Reserve Bank and regulated entities time to adapt to the new regime. The Depositor Compensation Scheme provisions of the Act are targeted for initial implementation in 2023, ahead of the rest of the Act coming into effect.
If you have any questions in relation to the Bill or its potential impact on your business, please contact one of our experts.
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