Guidance for identifying a deposit taker

Introduction

The definition of “deposit taker” in section 157C of Part 5D Reserve Bank of New Zealand Act 1989 (“the Act”) is straightforward to apply for typical finance companies, credit unions and building societies. However, the breadth of the definition means that in some cases there is uncertainty as to whether a particular entity is a deposit taker.

In particular, the following elements are important to consider when applying the definition:

What is the business of the person issuing debt securities; and

The meaning of “carries on the business”.

Purpose of this guidance

The purpose of this guidance is to explain the Bank’s approach to the issues listed above in order to assist trustees, deposit takers and other stakeholders in identifying entities that come under Part 5D of the Act where there may be uncertainty.

“Deposit taker” defined

The Act defines a “deposit taker” as follows-

157C

(1) For the purposes of this Part, deposit taker —

(a) means a person who—

(i) offers debt securities to the public in New Zealand; and

(ii) carries on the business of borrowing and lending money, or providing financial services, or both; and

(b) includes—

(i) a building society as defined in section 2(1) of the Building Societies Act 1965, unless the building society is a registered bank; and

(ii) a credit union as defined in section 2 of the Friendly Societies and Credit Unions Act 1982; and

(iii) a person or class of persons that is declared by regulations to be a deposit taker for the purposes of this Part; but

(i) an issuer of a collective investment scheme:

(ii) a registered bank:

(iii) a local authority:

(iv) the Crown (as defined in section 2(1) of the Public Finance Act 1989):

(v) a person or class of persons that is declared by regulations not to be a deposit taker for the purposes of this Part.

[...]

Who is the person identified in section 157C(1)(a)?

When identifying a deposit taker, one of the issues is to identify the person who is issuing debt securities and carrying on the business of borrowing and lending or providing financial services. Isolating this person from other corporate relationships explains the distinction between the treatment of “corporate issuers” and “funding conduits”.

Take the example of a manufacturing business that wishes to raise debt to fund its operations and potentially the operations of other members of its corporate group:

The manufacturer could issue the debt itself (“corporate issuer”); or

It could establish a subsidiary that issues the debt and lends funds to the manufacturer and members of its corporate group (“funding conduit”).

The corporate issuer does not get captured by s 157C(1). While it issues debt securities, it uses the funds itself. The funds are not used for on-lending or other investment activity into another entity. Thus the corporate issuer does not carry on the business of borrowing and lending money or providing financial services.

The funding conduit would meet the “deposit taker” definition. It issues debt securities and on-lends or otherwise invests (e.g. through preference shares) in another person, whether its parent and/or members of the group. The funding conduit is therefore considered to be in “the business of borrowing and lending money”. In addition, in some circumstances a funding conduit may also provide financial services to members of the group.

While the economic substance of the two models may be the same, the funding conduit is a separate legal person from its parent and must be treated in its own right. Its activities in general terms are the same as a typical finance company.

The Bank considers that the following are not relevant to the identification of a deposit taker:

The fact of a guarantee by another person of the deposit taker’s debt securities.

The identity of the person to whom the deposit taker on-lends the proceeds of its debt securities.

That the funding conduit’s purposes in raising funds was for a non-financial services enterprise carried on by a group member.

All of these matters may be taken into account in designing policy or considering exemption applications, but do not have a bearing on how the Bank interprets the plain words of section 157C. For instance, The Bank has published on its website its exemption policy for funding conduits, in particular, that they may be exempt from related party, governance, risk management, liquidity and minimum capital ratio requirements (subject to meeting the prescribed criteria).

Carrying on business

As well as issuing debt securities to the public, to be a “deposit taker” a person must “carry on the business” of borrowing and lending money, or providing financial services, or both.

The Bank considers that the “carries on the business” test can be satisfied by a person if:

There is more than an isolated or one-off transaction.

The activities are carried on with a view to earning a return in respect of those activities.

The business need not be the only or the primary activity carried on by the entity, but it should be a separate and identifiable business which is materially more than an occasional activity.

Applying this test means that a person may be a deposit taker even though it carries on other business which may even be a more important aspect of the person’s overall enterprise, i.e. deposit taking does not have to be the core business, but it does have to be a distinct and ongoing business.

However, incidental activities are unlikely to meet the “carrying on the business test”. For example, isolated and incidental extensions of credit to purchasers of goods sold by a person do not normally mean that person carries on the business of lending money or providing financial services.

Borrowing and lending within corporate group

Lending and/or the provision of financial services in the nature of intragroup corporate support is likely to considered incidental to the primary business carried on by a person. Examples include lending from a parent to a subsidiary so the subsidiary can overcome a cash flow problem, or underwriting a rights issue by a subsidiary.

However, if one group member (A) lends money to another member (B) for the purpose of funding further lending by B, A’s lending would be regarded by the Bank as more than an incidental activity. If A was issuing debt securities to the public and lending to B in these circumstances A would be considered to be in the business of borrowing and lending and would be caught as a deposit taker. The interposition of B as the person undertaking further lending activity would not be relevant to identifying A as a deposit taker.

Note: This material provides guidance only. It is not a substitute for legal advice for the benefit of a deposit taker, a trustee or any other person. It does not purport to be definitive as the issues have not been considered by a court. It is always open to the Bank to revise its approach in light of new information, although it does not expect to have to do so in the absence of a judicial ruling.

The determination of whether a given person is a deposit taker must be assessed on a case by case basis.

August 2010