Reserve Bank guidance on restricted words for overseas banks - class authorisations

On 8 August 2019, the Reserve Bank of New Zealand (RBNZ) released two guidance notes on the use of restricted words by unregistered overseas banks carrying on activities in New Zealand, following a consultation by RBNZ in late 2018. Our general note on the content of the guidance notes can be found here.

On 26 August 2019, the Reserve Bank gazetted the Reserve Bank of New Zealand Act (Overseas Banks) Class Authorisation Notice 2019 (Class Authorisation); see here. The Class Authorisation comes into force on 23 September 2019.

This alert is designed to provide some more detail for offshore banks and other directly affected parties.

Restricted Words

In New Zealand, the Reserve Bank of New Zealand Act 1989 (RBNZ Act) provides that:

“No person may—

  1. be formed, incorporated, or registered using a name or title that includes a restricted word; or
  2. change a person’s name or title to a name or title that includes a restricted word; or
  3. carry on any activity directly or indirectly in New Zealand (whether through an agent or otherwise) using a name or title that includes a restricted word;”

unless authorised or exempted by RBNZ to carry on the activity without being registered.

A “restricted word” means the words “bank”, “banker”, “banking” and any derivative or translation of those words.

The registration requirement focuses on whether an overseas bank is “carrying on” an activity, and whether that activity is being carried on in New Zealand.

Traditionally, many overseas banks that are not registered in New Zealand, but which use a restricted word (Overseas Banks) have taken the view that lending to or taking security or credit support from New Zealand customers from off-shore does not constitute “carrying on” activity in New Zealand. These Overseas Banks have therefore not sought authorisation or exemption from RBNZ in order to undertake such activities in New Zealand. Before the current review, RBNZ has not publicly commented or raised any concerns with this approach. RBNZ has also had a practice of providing non-objections (or “letters of no-action”) to a small number of Overseas Banks, if approached, expressly recording that it does not object to certain limited activities.

What has changed?

RBNZ has expressed that it wishes to move away from providing non-objections, and instead issue express authorisations.

RBNZ has issued the Class Authorisation permitting Overseas Banks who elect to carry on the following types of wholesale business in New Zealand without being registered here as a bank (subject to conditions):

  • wholesale banking activities,
  • wholesale lending activities,
  • financial advisory services in relation to wholesale customers (WC),
  • involvement in capital market issuances in relation to WCs,
  • acting in roles supporting capital market issuances in relation to WCs,
  • their own capital market investment activities,
  • acting in wholesale foreign exchange and derivatives markets, and
  • acting in roles supporting the derivatives market in relation to WCs.

The Class Authorisation defines a “wholesale customer” as 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”.

RBNZ is also establishing a public register of overseas banks able to use restricted words while carrying on forms of business in New Zealand without being registered here as a bank.

The Restricted Word Guidance note provides detail on whether RBNZ considers an activity is carried out in New Zealand. Overseas Banks can consult this document to determine whether RBNZ considers their activities fall within the ambit of s64 of the RBNZ Act. Unfortunately, it is now difficult to conclude with certainty in many circumstances whether activities are being carried out in New Zealand.

The Authorisation Guidance Note sets out the process for an Overseas Bank to obtain authorisations. These authorisations will only be granted to Overseas Banks with no place of business in New Zealand.

RBNZ will also likely require the provision of information relating to the authorisation annually, which may include the number of New Zealand customers; funding the Overseas Bank has received from New Zealand; descriptions of how the activities carried on in New Zealand have materially changed over the past year and a description of the Overseas Banks’ plans for activities in New Zealand in the future.

The Class Authorisation applies to overseas banks that do not have a place of business in New Zealand (eligible overseas banks). An Overseas Bank is defined in the RBNZ Act as any person that is formed, licensed, or registered as a bank in any country other than New Zealand. The authorisations in the Class Authorisation are subject to the conditions that the eligible overseas bank:

  1. notifies the RBNZ, before relying on the authorisations given in this notice, that it intends to carry on activities using a name or title that includes a restricted word on the basis of the authorisations,
  2. maintains an authorised agent in New Zealand for the purpose of accepting service of documents,
  3. submits to the RBNZ any information requested under section 36 of the Act regarding its authorised activities, and
  4. carries on in New Zealand only those activities that are specified in this notice.

The class authorisations relating to wholesale banking activities, wholesale lending activities and involvement in capital markets issuances will be revoked on 22 September 2020.

The remaining class authorisations will be revoked on 22 September 2024.

Our view

There is now unfortunate ambiguity as to whether lending to or taking credit support or security from an NZ entity, or provision of other financial services to NZ clients can be definitively considered to be outside of the regime. Accordingly, we recommend Overseas Banks undertaking these activities seek to become subject to the Class Authorisation.

What next?

If you have any questions in relation to the Class Authorisation, would like us to apply for a Class Authorisation on your behalf, or are considering how it may affect your business, please contact one of our experts.

Who can help