Reserve Bank releases guidance on restricted words for overseas banks

On 8 August 2019, the Reserve Bank of New Zealand (Reserve Bank) released two guidance notes on the use of restricted words by unregistered overseas banks carrying on activities in New Zealand. This follows a consultation paper released by the Reserve Bank in April last year, requesting feedback on proposed forms of these notes.

The guidance notes can be found here and here. The earlier consultation paper and our discussion of that paper are available to read.

The Reserve Bank is also intending to issue a class authorisation later this week, as discussed below. Once it is gazetted, we will provide a link to it here.

Who needs to read the guidance? Why?

The Reserve Bank guidance will be relevant to any overseas banks that are not registered banks in New Zealand under the Reserve Bank of New Zealand Act but nonetheless are considering offering products or services to persons in New Zealand.

Section 64 of the RBNZ Act 1989 makes it an offence for any person who is not a New Zealand registered bank to include in their names or titles certain restricted words (namely bank, banker, banking or translations of those in other languages), or carry on activities in New Zealand using names or titles that include those restricted words, except where an exemption or statutory exception applies or the Reserve Bank gives an authorisation.

What does it cover?

The Reserve Bank guidance is intended to help overseas banks that are not registered in New Zealand understand the scope of the limitation on using restricted words and the concept of carrying on activities in New Zealand under section 64(1)(c) of the RBNZ Act. The guidance is in two parts:

  • The first of the guidance notes deals with limitations on the use of restricted words (Restricted Words Guidance).
  • The second covers the Reserve Bank's approach to statutory authorisations for overseas banks (Authorisation Guidance).

The Reserve Bank will also be issuing a class authorisation notice (Class Wholesale Authorisation) permitting overseas banks to carry on certain types of wholesale business in New Zealand, on conditions. The Reserve Bank will also establish a public register of overseas banks able to use restricted words while carrying on certain forms of business in New Zealand without being registered here as a bank, for example under the Class Wholesale Authorisation.

Restricted Words Guidance

The Restricted Words Guidance sets out the restricted words and the restrictions placed on their use under the RBNZ Act. It goes on to explain the purposes of the restrictions in the RBNZ Act. These will be taken into account by the Reserve Bank’s purposive approach to interpreting these limitations, in the context of the particular circumstances in each situation.

The Restricted Words Guidance provides guidance on the five elements determining whether the restrictions apply, namely that:

  • there is an activity
  • the activity is being carried on
  • the activity may be carried on directly or indirectly
  • the activity is carried on in New Zealand, and
  • the activity being carried on uses a name or title that includes a restricted word.

The Restricted Words Guidance describes examples of relationships between overseas banks and New Zealand persons and whether these would tend to be considered activities carried on in New Zealand. In summary, the Reserve Bank considers it likely that where:

  • a person opens a bank account while living overseas and maintains it upon coming to New Zealand, this would generally not constitute the bank carrying on activities in New Zealand;
  • a New Zealand person, on their own initiative, approaches an overseas bank to open a bank account (known as “reverse solicitation”), this would generally not constitute the bank carrying on activities in New Zealand, but will be very dependent on the facts; and
  • an overseas bank actively offers New Zealand persons accounts by targeting marketing efforts to the New Zealand market (known as “direct solicitation”), this would generally constitute the bank carrying on activities in New Zealand.

Authorisation Guidance

While the Reserve Bank's general expectation is that overseas banks wanting to carry on activities in New Zealand should seek registration here, it recognises that allowing them to carry on limited activities here could bring efficiency benefits and provide access to niche products or services that are not otherwise available here.

Part of the impetus behind the initial consultation was that the Reserve Bank wished to shift its practice from issuing non-objection letters for overseas banks carrying on activities in New Zealand to authorising them under section 65 of the RBNZ Act.

The Authorisation Guidance explains the activities for which overseas banks can seek authorisation, and the factors that will be considered by the Reserve Bank in assessing any application. It is a useful guide to the background to the Class Wholesale Authorisation discussed below and the circumstances where the Reserve Bank may grant other class or specific authorisations. Authorisations can be made for a person or a class of persons licensed or registered as a bank in a country other than New Zealand and with no place of business in New Zealand.

The Authorisation Guidance states Reserve Bank policy to be generally against granting authorisations for activities involving retail investors. A list of factors that will be considered (as appropriate) in assessing an application is set out, although the Reserve Bank is able to also consider any other factor it deems relevant in any particular application.

However, Reserve Bank policy includes conditions of general application namely that:

  • the overseas bank continues to have no place of business in New Zealand
  • the overseas bank maintains an authorised agent in New Zealand for the purpose of accepting service of documents, and
  • the overseas bank submits to the Reserve Bank any information requested (likely annually and through a template) regarding its authorised activities.

The Authorisation Guidance goes on to set out the process of applying for authorisation, transitional arrangements that are to apply, and the application form for individual authorisations.

Class Wholesale Authorisation

In conjunction with the guidance notes, and following consultation with local firms, the Reserve Bank has announced that it will issue a class authorisation to cover wholesale banking.

We will issue a more detailed paper discussing the application of the Class Wholesale Authorisation when it is released. We will insert a link to this here. The Class Wholesale Authorisation is intended to be formally issued and gazetted on Thursday.

The Class Wholesale Authorisation will apply to overseas banks that do not have a place of business in New Zealand, and authorises, on conditions, the use of restricted words by overseas banks in relation to:

  • wholesale banking activities
  • wholesale lending activities
  • financial advisory services
  • involvement in capital market issuances
  • acting in roles supporting capital market issuances
  • their own capital market investment activities
  • acting in wholesale foreign exchange and derivatives markets, and
  • acting in roles supporting the derivatives market.

In each case, the authorisations use a definition of “wholesale customer” to limit their scope. “Wholesale customer” is defined by reference to the Financial Markets Conduct Act 2013 (FMCA). It means a person described in at least one of the paragraphs in clause 3(2) or (3) of Schedule 1 to the FMCA, including any entity controlled by such person within the meaning of clause 48 of Schedule 1 to the FMCA.

Each of these authorisations, other than that for foreign exchange or derivatives wholesale market activities, will expire in either 1 or 5 years following the date that the notice comes into effect.

Our view

In general, we welcome the clarity that these announcements provide around the operation of overseas banks in New Zealand. With the modern ability to conduct large volumes of transactions over the internet, New Zealanders are more able than ever to make use of services offered by overseas providers. The Reserve Bank will need to carefully consider (both in any future guidance and in the execution of the current) the obligations it places on those overseas banks, to balance the need to protect New Zealand users with the efficiency and access advantages that justified allowing overseas banks to operate in a limited way here.

In our earlier discussion of the consultation paper and proposed guidance, we noted that the Reserve Bank may be considering shifting from “restricted words” restrictions to activities-based regulation. The Authorisation Guidance acknowledges that the former approach is unusual internationally, but otherwise makes no indication that it plans to move further towards the latter. However, separately the Reserve Bank and the New Zealand Treasury are consulting on the reform of the RBNZ Act more broadly, and the issue may be picked up in that context.

What next?

With the guidance now finalised, overseas banks should consider the implications of this change in the Reserve Bank’s approach, and determine how they will need to comply with the new approach.

If you have any questions in relation to the guidance, or are considering how it may affect your business, please contact one of our experts.

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