Non-bank deposit takers Questions and Answers
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The Reserve Bank of New Zealand Act 1989 (the Act) refers to non-bank deposit takers (NBDTs) as “deposit takers”. In the Act, 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 1978 (the Securities Act), and carries on the business of borrowing and lending money or providing financial services (or both).
The definition explicitly includes building societies and credit unions.
The definition captures finance companies that raise funds from the public, as well as building societies, credit unions, 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. The Reserve Bank endeavours to provide general guidance on whether types of NBDTs meet the definition of deposit taker. This guidance is available from policy positions.
In this website, we use either label (NBDT or deposit taker) when referring to these entities.
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.
A trust deed is a private contractual agreement between a trustee and an issuer (e.g., NBDT) that forms the basis of the trustee’s supervision and oversight. Trust deeds typically contain a number of covenants designed to ensure that the affairs of the issuer are managed prudently, and often include provisions relating to maximum exposure concentration, minimum capital, and liquidity requirements.
The Reserve Bank is tasked with promoting a sound and efficient financial system for New Zealand. Prudential regulation of this sector is aimed at raising standards and improving the sector's overall resilience to adverse market conditions in the future. Prudential regulation is not aimed at insulating individual deposit takers from failure.
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 NBDT meets the definition of a deposit taker then, unless exempted, 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 designate 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 designate 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.
No. It is neither possible nor desirable to try to prevent institutional failure. The prudential rules are intended to improve overall standards and to make the risks and rewards of investing more transparent to investors. NBDTs will continue to be able to pursue a range of business strategies according to the risk appetite of their shareholders and investors. Ultimately, the risk of particular investments will still lie with investors.
As the prudential regulator of NBDTs, the Reserve Bank is the authority that:
- 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.
What are the existing obligations of NBDTs under Part 5D of the Reserve Bank of New Zealand Act and the Securities Act?
NBDTs are subject to the Securities Act, which requires them to have a trust deed (and therefore be supervised by a trustee), a prospectus, and an investment statement. In addition, they are required to meet the prudential obligations under Part 5D of the Reserve Bank of New Zealand Act. NBDTs and trustees must ensure that NBDT trust deeds include provisions required by prudential regulations made under the Act. It would be a criminal offence for an NBDT to fail to comply with the regulatory requirements.
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.
No, the requirements in relation to risk management programmes are set out in sections 157M to 157O of the Reserve Bank of New Zealand Act. The risk management programme guidelines (PDF 129KB) are intended to provide guidance on the key components of any risk management programme, and are cast in a manner intended to accommodate the diversity of operations in the NBDT sector. NBDTs have, since 1 September 2009, been required to have, and comply with, a risk management programme.
When a trustee receives a risk management programme from an NBDT, the trustee must satisfy itself that the programme meets the requirements set out in the legislation (section 157M(2)). However, if the trustee is not then satisfied, the trustee can ask the NBDT to amend the programme and resubmit it.
Section 157O gives the trustee the power to require an NBDT to have its programme audited at the NBDT's expense. However, the Reserve Bank expects that this power would be exercised only on rare occasions, and generally only in relation to the particular aspects of the programme that the trustee is not satisfied with (after giving the NBDT the opportunity to amend and resubmit its programme).
A summary of the prudential requirements that are in force is available from the Reserve Bank website. The latest of these requirements came into force on 1 December 2010.
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.
Is there an overlap or duplication in functions between the Reserve Bank and the Financial Markets Authority?
The functions of the Reserve Bank and the Financial Markets Authority are distinct and do not involve duplication of responsibility. The Reserve Bank’s role relates to prudential regulation setting, while the Financial Markets Authority’s roles include regulation of market conduct, trustee licensing (from 1 October 2011), and disclosure. In order to ensure effective coordination between the Financial Markets Authority and the Reserve Bank, there are information-sharing and coordination arrangements in place between the two agencies.