Reserve Bank issues outsourcing policy

The Reserve Bank has released its final outsourcing policy for large banks (Final Policy).

The Final Policy applies to each bank that is incorporated in New Zealand and whose net liabilities exceed $10 billion (Large Bank). The stated objectives of the Final Policy are to ensure that outsourcing arrangements made by a Large Bank do not compromise the bank’s ability to:

(a) be effectively administered under statutory management;

(b) be effectively operated for the purposes of continuing to provide and circulate liquidity to the financial system and wider economy;

(c) facilitate the carrying on of basic banking services by any new owner of all or part of the bank; and

(d) address the impact that the failure of a service provider may have on the bank’s ability to carry on all or part of the business of the bank.

Background to Final Policy

In 2014 the Reserve Bank undertook a review of the operation of its outsourcing policy and concluded that it was not being consistently interpreted and applied by Large Banks. Consequently, the Reserve Bank ran public consultations throughout 2015 and 2016 before releasing its Final Policy Decisions and an Exposure Draft in early 2017.

The Final Policy has some substantive changes from the Final Policy Decisions and Exposure Draft. We consider the Final Policy is improved from the Exposure Draft in respect of clarity and structure but significant grey areas remain.

Next steps

The Final Policy provides for a five-year transition period. This does not mean there are not significant requirements to consider immediately as, from 1 October 2017, each Large Bank will be subject to a new condition of registration requiring compliance with the Final Policy. Further, each Large Bank is expected to agree its path to compliance with the Reserve Bank by 1 April 2018.

Depending on their structure, each Large Bank will need to implement work programmes to ensure that:

(a) it has a draft separation plan in place by 1 April 2018, and a fully compliant separation plan in place by 1 October 2022;

(b) the prescribed set of minimum contractual terms are included in new outsourcing arrangements from 1 October 2017, and are included in all outsourcing arrangements by 1 October 2022;

(c) from 1 October 2017, it follows the required non-objection process for each outsourcing arrangement that is not an “existing outsourcing arrangement” or an “in-progress outsourcing arrangement”;

(d) it holds and updates a compendium of outsourcing arrangements by 1 October 2019; and

(e) annual external reviews are conducted during the five year transition period, and every three years thereafter.

For more information, see the Outsourcing Policy and Review of the outsourcing policy for registered banks pages.

MinterEllisonRuddWatts has a long established internal BS11 working group that would be delighted to discuss any questions you may have.

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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