Legislative changes proposed by the Trans-Tasman Council on Banking Supervision
Introduction
This note explains the legislative changes proposed by the Trans-Tasman Council on Banking Supervision, the background to those changes and their impact on banks.
Background
The Trans-Tasman Council on Banking Supervision (TTC) comprising representatives of the Australian and New Zealand Treasuries, the Reserve Banks of Australia and New Zealand and the Australian Prudential Regulation Authority (APRA) was formed in February 2005 as the next major step towards the development of a single trans-Tasman economic market in banking services. The terms of reference for the TTC require it to:
· Enhance co-operation on the supervision of trans-Tasman banks and information sharing between respective supervisors;
· Promote and review regularly trans-Tasman crisis response preparedness relating to events that involve banks that are common to both countries;
· Guide the development of policy advice to both governments, underpinned by the principles of policy harmonisation, mutual recognition and trans-Tasman co-ordination; and
· In the first instance, report to Ministers on legislative changes that may be required to ensure APRA and the RBNZ can support each other in the performance of their current regulatory responsibilities at least regulatory cost.
In August 2005 the TTC made recommendations to the Australian Treasurer and the New Zealand Minister of Finance on legislative changes that may be required to ensure APRA and the RBNZ support each other in the performance of their current regulatory responsibilities. These recommendations now have the support of Governments in both countries.
The Trans-Tasman Council on Banking Supervision's proposals for legislative change
The key elements of the TTC's proposed legislative changes are as follows:
· a general provision requiring each regulator to support the other in fulfilling its statutory objectives and, wherever reasonably possible, to avoid actions that could have a detrimental effect on financial system stability in the other country;
· a specific reference in the definition of `actions likely to have a detrimental effect' to actions that interfere with or prevent the provision of outsourced services to a related party in the other country;
· a requirement that, where reasonably practicable, the regulators consult each other before exercising a power that is likely to have a detrimental effect on financial system stability in the other country; and
· a requirement that an administrator or statutory manager in Australia advise APRA if the administrator or statutory manager has reasonable cause to believe that the proposed exercise of a function or power by the administrator or statutory manager is likely to have a detrimental effect on financial stability in New Zealand.
The proposals reflect the high level of interdependence of the Australian and New Zealand banking systems and are designed to facilitate the development of the single economic market objective while still ensuring that national interests are protected and that regulators in each country can continue to meet their existing statutory objectives.
Impact of the legislative changes
The changes are of immediate relevance to the Reserve Bank of New Zealand's new policy on outsourcing, released in January 2006, in particular because intervention in outsourcing arrangements is explicitly defined as an action which is detrimental to financial stability in the other country.
The Reserve Bank of New Zealand's outsourcing policy is outcomes focused. The outcomes required are that the registered bank has legal and practical ability to control and execute any outsourced functions sufficient to ensure that, under normal business conditions and in the event of stress or failure of the bank or a service provider, it can continue providing essential services on a timely basis.
The proposed legislative changes will provide more legal certainty for trans-Tasman outsourcing arrangements thereby giving banks greater flexibility about the trans-Tasman location of some of their functions. However, it is possible that there will still need to be some restrictions on outsourcing of core functions, because of the need to ensure practical ability to control core functions within the tight timeframes set out in the policy.
Next steps
It is intended that the legislative changes will progress through the normal parliamentary process of legislation in each country.
In the interim the Reserve Bank intends to proceed with the implementation of the outsourcing policy on the basis that the legislative changes proposed by the Trans-Tasman Council on Banking Supervision (TTC) will be passed by 31 December 2007. In order to allow for the possibility that the legislative changes do not proceed for some reason banks have also been asked to provide indicative contingency plans for achieving compliance with the outsourcing policy in the absence of the legislative changes.
For further information contact:
Mike Hannah
Head of Communications
Ph 04 471 3671, 021 497 418, mike.hannah@rbnz.govt.nz
