Guidance for the preparation of a separation plan for the BS11 outsourcing policy

The Reserve Bank has released guidance (Guidance) for the preparation of a separation plan under the Reserve Bank’s outsourcing policy (BS11).

The purpose of a separation plan is to enable the bank to provide for the steps it would take to ensure a bank’s outsourcing arrangements can continue to be provided following its failure.

The Guidance, prepared at the request of the banks, is intended to be indicative of the things banks should include in their separation plans. However it is a non-exhaustive guideline which is expected to evolve as banks implement changes to comply with BS11.

The Guidance applies to locally incorporated “large banks” (those who net liabilities exceed $10 billion) that are a part of a foreign owned banking group.

Policy considerations and organisational overview

Banks must prepare a separation plan with a number of the Reserve Bank’s policy requirements in mind, including:

  • the bank must be open by 9am the business day after separation;
  • the bank must not have any reliance on the parent for the provision of any services or functions necessary to meet any of the outcomes required by BS11, including the provision of basic banking services;
  • the arrangements for the separation must be sustainable; and
  • the bank needs to ensure that it can meet the outcomes of the policy on an indefinite basis while the New Zealand authorities determine the final resolution of the bank failure.

The Reserve Bank requires separation plans are sufficiently robust to enable separation at any time of any day, and as such must be tested annually.

Meeting the outcomes of BS11

A key requirement of the separation plan is that it identifies all the functions and services (whether outsourced or not) currently provided by the bank or by another party on behalf of the bank. The bank must then categorise which functions and services are relevant to the outcomes of BS11 (including the provision of basic banking services) and those that they consider are not captured. The separation plan will need to specify how the relevant functions and services will be separated, and how the new arrangements will be implemented post separation.

We note functions and services a bank considers not relevant to BS11 must still be documented, and discussed with the Reserve Bank to ensure the bank’s interpretation is correct. Moreover the separation plan must still cover these functions and services and how they will be dealt with post separation, for example, whether they will be wound down with affected staff redeployed elsewhere.

Operational processes on separation

The Reserve Bank also requires an internal operational management framework as part of each separation plan. The Guidance requires each framework to be widely useable and transferrable, given the potentially unstable dynamic of internal management post separation. As such the separation plan is required to detail:

  • operational governance arrangements, setting out the governance, control and risk management approaches to be implemented by each business unit in order to support the planned separation approach;
  • operational arrangements to support ongoing functionality, identifying both the immediate and on-going requirements needed to achieve the banks obligations in a separation event;
  • a run plan, highlighting how long it will take to achieve full separation; and
  • funding and liquidity during and post separation, given that a separated bank will need access to collateral in order to allow them to access Reserve Bank’s liquidity facilities.

Our view

Banks will need to invest significant resources developing their separation plans, given the strict requirements which must be satisfied, including annual testing. We note in particular separation plans must even cover functions and services that are not relevant to BS11 policy outcomes.

MinterEllisonRuddWatts has a long established internal BS11 working group that would be delighted to discuss any questions you may have. In addition, as a member of the MinterEllison Legal Group, we are well-placed to advise on any Australian interface.

Please contact us if you would like to discuss how we can assist in this area.

Elliot McKeown, Solicitor

A key part of the BS11 team and contributor to the content above, Elliot advises New Zealand’s banking industry on Reserve Bank compliance. He has in-house experience working for one of the country’s big four banks. Elliot has also worked for the Ministry of Business, Innovation and Employment, advising on corporate law and regulation.

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