Non-bank deposit takers FAQs
The Non-bank Deposit Takers Act 2013 defines an “NBDT” as a person, other than a registered bank, that offers debt securities to the public, within the meaning of the Securities Act 1978 (the Securities Act), and carries on the business of borrowing and lending money or providing financial services (or both).
The definition captures finance companies that raise funds from the public, as well as most building societies and credit unions. The definition excludes most kinds of managed investment schemes as well as 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.
Under the Securities Act, a trustee is required for offers of debt securities to the public. This includes debentures issued by NBDTs. The purpose of this requirement is to provide some protection to depositors and investors, whereby an independent person (trustee) supervises the issuer’s compliance with the terms of the trust deed on behalf of depositors and investors, and has the capacity to intercede where those terms are breached.
Trustees are now required to be licensed by the Financial Markets Authority.
The NBDT sector is an important component of the broader financial system because it provides funding to sectors of the economy that the mainstream banks often avoid, and provides alternative investment options for individuals and organisations.
NBDTs have special features that warrant a form of regulation that goes beyond that required for other debt issuers. These features include the following:
- Many NBDTs perform bank-like functions, including providing on-call or short-term deposit facilities and the provision of payments services. These functions suggest that NBDTs should be regulated in some respects in a manner similar to that applicable to banks, while still facilitating continued diversity, flexibility and competition in the NBDT sector.
- Unlike corporate bond and other debt issues, in which the funds raised are used to finance an issuer’s own business, NBDTs lend to many clients. This makes it difficult for depositors to ascertain the true risk of an NBDT and provides a justification for additional prudential and disclosure-based regulation.
- NBDTs are potentially vulnerable to contagion risk, whereby the distress or failure of some NBDTs could trigger acute distress or failure in others. This suggests the need for enhancements to the standard regulation of debt issuers, such as in respect of public disclosure requirements, ratings and distress management arrangements.
If an entity meets the definition of NBDT then, unless exempted or declared out of the definition by regulations, all requirements apply to it.
The Reserve Bank has the power to exempt entities or classes of entity from some or all of 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 Reserve Bank thinks fit. For further information, read about exemptions from the NBDT regime.
The Reserve Bank may also recommend regulations to declare entities as NBDTs for the purposes of the Act, where these entities are NBDTs in substance but are not captured by the definition. Similarly, the Reserve Bank can recommend regulations to declare entities as not being NBDTs for the purposes of the Act, where these entities are captured by the definition but are not NBDTs in substance.
It is unlawful for an NBDT to not comply with the requirements of the Act or regulations, unless exempted from those obligations by the Reserve Bank.
As the prudential regulator of NBDTs, the Reserve Bank is the authority that:
- Licences NBDTs;
- prescribes minimum prudential regulatory requirements for NBDTs;
- monitors compliance with credit rating and governance requirements; and
- provides advice and recommendations to the Financial Markets Authority relating to trustee performance with respect to NBDTs.
The trustees continue to be the front-line supervisors for NBDTs. Their functions include:
- establishing a trust deed for particular offers of securities, in agreement with the NBDT;
- prescribing the financial, reporting and other covenants in the trust deed;
- ensuring that provisions in the trust deed comply with regulatory requirements, where applicable;
- enforcing trust deed covenants and supervising and monitoring NBDTs; and
- taking remedial actions in response to breaches of trust deed requirements or financial distress in an NBDT, including advising the Reserve Bank and the Registrar of Companies of any material breaches of trust deed covenants or emerging financial difficulties.
Under the Act, trustees have the following obligations to the Reserve Bank:
- Trustees may be required by the Reserve Bank to attest as to the NBDT’s compliance with requirements.
- Trustees are required to report material non-compliance or likely non-compliance with legislation on the part of the NBDT to the Reserve Bank.
- Trustees are required to disclose information to the Reserve Bank, if requested to do so or if they become aware of information that leads them to form an opinion that the NBDT is unable to pay its 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 is likely to breach, the terms of its trust deed, or the terms of any offer of debt securities to which the trust deed relates.
The Financial Markets Authority was established in 2011 under the Financial Markets Authority Act 2011. It replaced the Securities Commission and took over some roles of the Ministry of Economic Development.
As in the case of other aspects of trustee-based supervision (e.g., for debt issuers), the Financial Markets Authority has responsibility for licensing trustees. It also has responsibility for enforcing NBDT disclosure and advertising requirements under the Securities Act 1978.