[Skip to Navigation]

Questions and Answers on prudential requirements for Non-Bank Deposit Takers

August 2008

The Reserve Bank of New Zealand Amendment Bill (No. 3) was introduced to Parliament in November 2007 and was reported back from Finance and Expenditure Committee in July 2008. As a result of the select committee process, some changes to the Bill as introduced have been made. For example, some components of the prudential regime, such as risk management and governance requirements, will now be included in the Bill as direct obligations on non-bank deposit takers (NBDTs, or deposit takers), rather than being imposed through regulation.

For the updated version of the Bill, please see http://www.parliament.nz/en-NZ/SC/Reports/8/0/c/48DBSCH_SCR4096_1-Reserve-Bank-of-New-Zealand-Amendment-Bill-No-3.htm.

What is in the Reserve Bank of New Zealand Amendment Bill (No.3)?

The Reserve Bank of New Zealand Amendment Bill (No.3), as reported back, sets out a new prudential regime for NBDTs where the Reserve Bank will become the single prudential regulator in New Zealand. The main elements of the Bill are:

  • Defining a deposit taker
  • Requiring deposit takers to have a credit rating
  • Empowering regulations to be made that impose requirements relating to capital, liquidity, and related party exposures. These requirements will be included in the trust deed and the trustee will be responsible for supervising compliance.
  • Requiring deposit takers to have a risk management plan that they adhere to and that is satisfactory to their trustee
  • Imposing minimum governance requirements on deposit takers
  • Placing certain obligations on trustees to report to the Bank; and,
  • Outlining penalties and offences.

For a full version of the current bill see http://www.legislation.govt.nz/bill/government/2007/0174/latest/versions.aspx.

What is a NBDT?

A “deposit taker” is defined as a person, other than a registered bank, that offers debt securities to the public, within the meaning of the Securities Act, and is in the business of lending money or providing other financial services.

The definition explicitly includes building societies and credit unions.

The definition will capture finance companies that fund from the public, as well as building societies, credit unions, the PSIS, and other such entities. The definition excludes issuers of collective investment schemes and finance companies and other entities that fund solely through non-public sources – e.g. those raising funds solely from related parties, or from corporate or wholesale sources.

Will the NBDT requirements be applied to all deposit-takers?

The Reserve Bank will have the power to exempt entities or classes of entity from the NBDT requirements in circumstances where it would be unduly onerous or burdensome to apply the requirements. Exemptions may be granted on the basis of any terms and conditions that the Bank thinks fit.

The Reserve Bank may also exempt entities from particular requirements of the Bill or regulations made under it.

The Reserve Bank may also recommend regulations to designate entities as deposit takers for the purposes of these regulations, where these entities are deposit takers in substance but are not captured by the definition.

It will be unlawful to be a NBDT without meeting the requirements of the Act or regulations, unless exempted from those obligations by the Reserve Bank.

What will be the obligations of NBDTs under the RBNZ Amendment Bill (No.3)?

NBDTs will be subject to the Securities Act requirements including the need to have a trust deed (and therefore be supervised by a trustee corporation), a prospectus, and an investment statement. In addition, they will be required to meet the following obligations under the RBNZ Amendment Bill (No.3):

  • A requirement that the NBDT obtains and discloses a credit rating from an approved rating agency, unless exempted by the Reserve Bank by 1 March 2010.
  • Governance requirements for companies and building societies: the governing body of the NBDT must include at least two independent directors, and that the chairperson of the governing body of the NBDT may not be an employee of either the NBDT or a related party.
  • A requirement for the NBDT to have a risk management programme and take all practical steps to comply with that programme by 1 September 2009.

Once regulations are put in place, NBDTs will also have to:

  • Maintain a minimum amount of capital. The minimum amount of capital, the capital ratio and the forms of capital will be set out by regulation.
  • A requirement that NBDTs include in their trust deeds a maximum limit, set in relation to the NBDT’s capital, on exposures to related parties. Related party exposures will be measured on a basis set out in regulation.
  • A requirement that NBDTs include in their trust deeds liquidity requirements (for example, minimum amount of liquid assets relative to liabilities).

Once such regulations are made, NBDTs and trustees must ensure NBDT trust deeds include such requirements. It will be a criminal offence for an NBDT to fail to comply with the regulatory requirements.

What will be the obligations of trustees under the Bill?

Under the Bill, trustees have the following obligations to the Bank:

  • Trustees may be required by the Bank to attest as to the NBDT’s compliance with requirements.
  • Trustees are required to report material non-compliance or likely non-compliance on the part of the NBDT to the Bank.
  • Trustees are required to disclose information to the Bank once they become aware of information that leads them to form an opinion that the NBDT is unable to pay their debts as they fall due, or the value of the NBDT’s assets is less than the value of its liabilities, or the NBDT has breached or likely to breach the terms of trust deeds, or the terms of any offer of debt securities to which the trust deed relates.

What will the RBNZ Amendment Bill (No.3) come into force?

The RBNZ Amendment Bill (No.3) will come into force the day after it receives Royal Assent.

When the Bill comes into force, the Reserve Bank may recommend regulations imposing prudential requirements and approve credit rating agencies. The Reserve Bank may prescribe requirements for the following elements of the regime:

  • Type of credit rating
  • Minimum capital
  • Capital ratio
  • Restriction on related party exposures
  • Liquidity requirements.

Obligations on trustees to report certain information to the Bank will apply.

Other obligations will come into force on later dates as described below.

How much time will be available for NBDTs in order to meet the requirements?

Transition periods will apply for each of the following elements of the regime:

  • Credit rating: NBDTs will be required to have a credit rating by 1 March 2010. This gives them 18 months to obtain a rating.
  • Governance requirements: These will come into force on a day set by Order in Council. At this stage no specific date has been determined.
  • Risk management programme: NBDTs will be required to have a risk management programme by 1 September 2009.
  • For those matters set by regulations (capital, liquidity and related party exposures) the date for compliance with be set by the empowering regulations.

When will the detail of the prudential regulations be made available?

The Bill provides for regulations to be made in relation to credit rating, capital, liquidity requirements and limits on related party exposures. The Bank is now in the process of developing draft regulations for consultation in late 2008 and 2009.

What about licensing and fit and proper tests for directors and senior managers?

In September 2007 Cabinet decided that NBDTs would have to be licensed by the Reserve Bank and directors and managers would be subject to fit and proper tests.

The Reserve Bank of New Zealand Amendment Bill (No 3) does not include licensing or fit and proper procedures. Elements of these procedures are addressed by the Financial Service Providers (Registration and Dispute Resolution) Bill currently before Parliament. This Bill sets up a registration system for all financial service providers that will link with the proposed licensing function of the Bank.

A further Bill to progress these elements of the intended NBDT regime will be developed following the passage of the FSP Bill.