Reserve Bank seeks comments on draft deposit law


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The Reserve Bank of New Zealand (RBNZ) is seeking comments on a bill for a deposit borrowers bill (the bill). The bill, if enacted, would establish a single regulatory regime for banks and non-bank organizations (organizations such as credit unions and building societies, which are in the business of receiving deposits and lending households and businesses). It would also establish a depositors compensation system (which would protect certain deposits in certain circumstances) and grant the RBNZ new monitoring and enforcement tools, among others.

Consultations on the bill are open until February 21, 2022. If you would like to submit a proposal on the draft bill, please contact a member of our financial services regulation team.

Review of the Reserve Bank of New Zealand Act 1989

The bill is the result of the ongoing review of the Reserve Bank of New Zealand Act 1989. The review, which began in 2017, aims to update and modernize the legislation underlying the RBNZ. The review led to two key reforms. First, the creation of the Reserve Bank of New Zealand Act 2021, which modernized the institutional arrangements of the RBNZ by creating a new model of decision-making. Second, the creation of the bill, which seeks to create a single regulatory regime for all bank and non-bank DCIs.

Overview of the bill

The bill, if passed, would replace existing regulatory regimes for banks and DCIs, which are currently governed by parts of the Reserve Bank of New Zealand Act 1989 and the Non-Bank Deposit Takers Act 2013.

The new bill on depository bodies aims to:

  • Set up a depositors’ compensation system (DCS)
  • Introduce a single regulatory regime for non-bank depository corporations (NBDTs) and banks, with standards that would allow the RBNZ to set requirements
  • Strengthen the accountability of the administrators of their DCIs, with sanctions in the event of non-compliance
  • Expand RBNZ monitoring and enforcement tools, which would include the creation of a new power to conduct on-site inspections
  • Strengthen and clarify the crisis resolution framework.

The depositors’ compensation scheme

Under the DCS, each “eligible investor” can protect up to $ 100,000 of their deposit with an approved depository (protected deposit). The DCS would provide compensation to these eligible investors in the event that they have a protected depository and the approved depository body is put into liquidation (initiated or accepted by the RBNZ). The DCS would also provide compensation to these eligible investors when the RBNZ issues a specified event notice (such notice would allow compensation to be paid whether or not the approved depositary has gone into liquidation).

Under the bill, the term “eligible investor” would include a holder of a protected deposit or a person in whose name a protected deposit is held. This would not include an approved depository body, licensed insurer, government agency, and more (the complete list of exclusions can be found in article 185 of the bill).

The RBNZ would be responsible for the management and administration of the DCS. This would include the determination of rights, the exercise of subrogation rights, the collection of levies and interest payable that would finance the plan, administration, operation and investment of the fund, and more (the full list of his responsibilities can be found in clause 189 of the bill). Ultimately, the purpose of DCS is to avoid or mitigate the negative effects of financial instability.

New regulatory regime

The bill brings together the current regulatory regimes of registered banks and the NBDT into a single framework for “authorized depositories”. Broadly speaking, the framework is intended to capture businesses that borrow and lend in New Zealand, with exclusions for organizations that borrow entirely from wholesale investors, or that make ancillary loans as part of a commercial activity (more information on this topic can be found in the RBNZ’s Deposit Takers Bill – Exposure Draft: Explanatory Notes).

Under the new framework, it is foreseen that all depository bodies will be required to have a license (this is stated in part 2 of the bill). The RBNZ will have the power to use the license conditions to differentiate between depositories. It may also adopt a proportionate approach to prudential regulation. Prudential requirements for licensed depositories will be set out in standards, which will be a secondary legislative instrument issued by the RBNZ under the Legislation Act 2019 (the bill also defines the scope of matters that can be addressed by standards).

Supervision, enforcement and increased accountability

Part 4 of the bill defines the new supervisory and enforcement powers of the RBNZ. Among other things, the RBNZ will have the power to:

  • Require that information be provided (from the depository itself, from a company that may be a financial service provider (to help determine if companies are operating inappropriately without a license), or from other entities who may have information about the business activities of a deposit taker)
  • Require third-party report
  • Undertake “on-site” inspections of approved depositories.

These powers will be available when the RBNZ is satisfied that a breach of prudential obligations is likely to have occurred. Criminal penalties will apply for most breaches of the bill (but breaches of the standards issued by the RBNZ will only result in civil penalties). In addition to court-based enforcement and infringement costs, RBNZ may sanction entities in other ways. These include issuing a remedial notice (which would require the depository institution to take specific action or prepare a remediation plan to remedy any breach) or requesting the depositary institution to take voluntarily binding commitments.

Crisis management

Part 7 of the bill deals with crisis management. It sets out the powers that the RBNZ will have in the event of a crisis (for example, the bill gives the RBNZ the ability to give instructions to ICDs or individual employees working for ICDs in certain circumstances, for example when the ICD operates fraudulently or recklessly). In addition to granting these powers, the bill imposes an obligation on the RBNZ to prepare and maintain a resolution plan for each approved ICD (in other words, a plan for dealing with approved ICDs in a situation. where it would not be possible for the authorized depositary to go through normal insolvency proceedings due to the risk that this would harm the public interest or cause financial instability).

Implementation of the bill

The consultation will end on February 21, 2022. After the consultations close, the RBNZ will consider the comments and revise the draft law if necessary. The bill will then be presented to Parliament in early 2022. It is expected to enter into force as law sometime in 2023. After the bill enters into force, there will be a transitional period to give the RBNZ and the entities covered by the bill time to adapt. to the new regime. The length of this transition period has not yet been determined.

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