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Purpose and Background
What is the rationale for the Review and what does it cover? In November 2017, the Minister of Finance Hon Grant Robertson announced a review of the Reserve Bank of New Zealand Act 1989 (the ‘Review’).

Much has changed in the 30 years since the Act was first passed, both in the international financial environment and with financial system regulation. The goal of the Review was to modernise New Zealand’s monetary and financial stability policy frameworks and the Reserve Bank’s governance and accountability settings.

The first actions as a result of the Review updated the monetary policy framework, when “Supporting maximum sustainable employment” was added to the economic objectives for the Reserve Bank and a Monetary Policy Committee (MPC) was created with responsibility for formulating monetary policy. This was enacted in 2018 by the Reserve Bank of New Zealand (Monetary Policy) Amendment Act.

The second tranche of work updated the Reserve Bank’s financial stability role and broader governance arrangements, when the Reserve Bank of New Zealand Act 2021 (the 2021 Act) passed into law in August 2021. Our previous legislation, the Reserve Bank of New Zealand Act 1989, was more than 30 years old. The new Act aims to modernise how we operate and are governed. It increases our accountability and transparency and bring us closer to what is required of Crown entities in terms of decision-making, reporting and external monitoring.

The final piece of legislation is the proposed Deposit Takers Act (DTA). It will protect depositors’ money through the creation of a Depositor Compensation Scheme, and increase the overall stability of our financial system by strengthening the Reserve Bank’s supervision and enforcement powers with the aim of enabling action before any entity is under inappropriate stress or at risk of failure. The Act also strengthens the framework for managing and resolving the failure of deposit takers to ensure any adverse consequences for the financial system are minimised.
Who is conducting the Review? A joint Treasury and the Reserve Bank team undertook the review until May 2021, with governance from a steering committee co-chaired by the Treasury and the Reserve Bank. More recently the project has been led by the Reserve Bank, but with Treasury and independent experts continuing on the project’s steering committee.

An Independent Expert Advisory Panel (the Panel) advised on key issues to support the work of the Review team and the steering committee.

Find out more about the Independent Expert Advisory Panel on the Treasury website
What decisions has Cabinet taken on the Deposit Takers Act? On 19 April 2021, Cabinet agreed to a set of recommendations that will design a new prudential framework for deposit taking institutions alongside a strengthened crisis management regime and introduce depositor compensation. Further details on these decisions can be found in the proactive release of materials found on the Treasury website. In October 2021, further decisions were taken by Cabinet regarding more details of the Act.

See the proactive release of materials on the Treasury website

The Reserve Bank published an exposure draft of the proposed final Bill in December 2021 and received feedback as well as undertaking additional technical engagement. This feedback and engagement has informed final advice to the Minister on outstanding matters. The Minister will seek Cabinet approval on some final matters.

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Depositor Compensation Scheme
Why is the depositor compensation limit set at $100,000 per depositor, per included deposit taker? During public consultation, the Review received feedback that the (then) proposed $50,000 coverage limit was low. Small deposit takers (such as small banks, credit unions, building societies and finance companies) submitted that the lower limit posed a threat to their stability and liquidity, as it could prompt some depositors to shift uninsured funds (amounts above the coverage limit) to the large banks (given the perceived greater stability of the large banks). The higher coverage limit is expected to address these concerns by providing greater coverage for New Zealand depositors, supporting public confidence, and enhancing the credibility of resolution tools.
 
Some stakeholders supported a significantly higher limit more in line with the Australian limit of AUD $250,000. However, a limit of this size would be less consistent with the rationale of the depositor compensation scheme to protect ordinary New Zealand depositors (only a small percentage of depositors have deposits over $100,000), and would have questionable impacts on long-run financial stability.
How will the risks associated with moral hazard be addressed in the Depositor Compensation Scheme? Moral hazard arises when people are protected from the consequences of their risky behaviour. When a depositor compensation scheme is introduced, depositors may take less care when assessing the risks associated with their money, and regulated entities may take less care with depositors’ money.

Moral hazard risk will be, to an extent, mitigated through the calibration of the Reserve Bank’s regulatory policy and supervisory approach, and potentially through charging levies that are proportional to the risk posed by deposit takers. It is also not clear that ordinary depositors have the inclination, expertise, nor capacity to thoroughly assess the condition of their deposit taker. In addition, while most depositors will be fully covered under a $100,000 limit (93% in total), a significant percentage of the value of deposits (60%) will remain uninsured (this reflects that a small amount of depositors [around 7%] hold around 60% of total deposits). Holders of uninsured deposits will continue to have incentives to monitor risk.
What are the costs of the Depositor Compensation Scheme and who will bear these costs? The Depositor Compensation Scheme will have costs associated with building up the fund over time, and subsequently replenishing the fund when a payout event occurs. In addition, there will be ongoing operational costs. These costs will be covered over time by levies charged to deposit takers. Deposit takers may also need to upgrade their systems to implement the scheme and ensure that eligible depositors can be promptly reimbursed. Depending on decisions made by individual deposit takers, it is possible these costs could be passed on to customers. 
How will the Depositor Compensation Scheme be funded? Cabinet has agreed that the scheme will be fully funded by levies on licensed deposit takers. The scheme will also be supported by a Crown funding backstop, which will act as a temporary source of funding for the scheme if it does not have sufficient funds to meet its obligations. Any funds provided by the Crown will be recovered from the industry over time through levies. 

The Minister of Finance will set the funding approach through a funding strategy, which may include specification of a ‘target fund’ size, and the timeframe to build the fund.
 
Public consultation is required on the funding framework before the scheme is implemented.
When will the Depositor Compensation Scheme be introduced? The Depositor Compensation Scheme provisions of the proposed DTA will come into effect shortly after (around 6 months) the Bill is passed, with a target timeframe for the  scheme to ‘go live’  in early 2024. The implementation of the scheme has been prioritised so that depositors can have confidence that their funds are protected as soon as possible.
What are the governance and institutional arrangements for the Depositor Compensation Scheme? The objective of the scheme will be to protect depositors to the extent they are covered by the Depositor Compensation Scheme and thereby contribute to financial stability. The Reserve Bank, as operator of the scheme, will also have a purpose to promptly reimburse depositors after a specified event (including liquidation and resolution measures), and duties to collect and manage levies, monitor risks to the scheme and raise public awareness. The function of operating the depositor compensation scheme will likely be structured as a separate legal subsidiary of the Reserve Bank.
What type of products and depositors will be eligible for coverage by the Depositor Compensation Scheme? The scheme will cover transactional, savings and term deposits currently offered by registered banks, and the equivalent products offered by non-bank deposit takers (NBDTs). These products are widely held by everyday New Zealanders and are more likely than other products to destabilise the financial system if they are subject to strong demand for cash – or a ‘run’ by their depositors. 

A clear and consistent boundary will be defined between these insured products and other retail debt securities, such as bonds and capital notes, which will not be eligible. Excluding these other types of debt securities from the depositor compensation scheme allows for the continued existence of higher risk and return debt products that can be offered to retail investors.

Coverage for the scheme will apply on a per depositor, per institution basis. Amounts held in joint accounts at a single institution will be split equally across account holders and count towards eligible deposits, up to the coverage limit for each depositor at that institution. Financial institutions, related parties of the deposit compensation scheme members and government bodies will be ineligible for scheme coverage.

In order to support the durability of the legislative boundary over time, the Minister of Finance will be able to bring products within the scope of the scheme via regulations provided that they are substantially the same as other products covered by the scheme. The Minister will also have the power to define detailed eligibility rules (for example, the treatment of trusts, sole proprietors, unincorporated and incorporated societies, partnerships and custodians).  
What is the process for giving depositors their money in the event of a failure? The Reserve Bank will have responsibility to ensure people are promptly reimbursed, up to the protection limits, in the event of failure. As cheques will soon be phased out from the banking system, reimbursement will likely be carried out through some form of electronic transfer of protected deposits to another deposit taker. However, these operational details will be worked out in greater detail over the coming months and years.

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Regulatory perimeter
Why is the regulatory regime for banks and non-bank deposit takers being combined? A single regime supports a more coherent approach across the banking and NBDT sectors so that similar firms and activities are regulated, where possible, in the same way.

This will bring New Zealand’s framework into line with similar models in most other jurisdictions, including Australia, where all deposit-taking lenders are regulated as ‘authorised deposit-taking institutions’ (ADIs). 
What types of entity will be subject to prudential regulation and supervision? Under the DTA, prudential regulation and supervision will apply to firms that are in the business of ‘borrowing and lending’, unless they are specifically excluded from the regime. This will include banks, credit unions, building societies, retail-funded finance companies, and some wholesale funded lenders. The Reserve Bank will establish a policy on which deposit takers can call themselves ‘banks.’ 

Some wholesale funded lenders will not be required to be licensed under the new regime, for example those that solely borrow by raising funds on wholesale capital markets. However, the Reserve Bank will be able to collect information and set lending standards for prescribed categories of non-deposit taking lenders.

Designation and exemption powers will provide the Reserve Bank with significant flexibility in applying the framework, as is the case with other financial sector regulatory regimes.
How will small deposit takers be treated within the regulatory regime? The prudential framework will have the required flexibility to accommodate the full range of deposit taking institutions, from very small NBDTs to the largest banks. For instance, the Reserve Bank will be able to calibrate regulatory settings for different classes of deposit taker. The framework will also provide discretion for the Reserve Bank to impose institution-specific requirements to reflect the underlying risk profile of that institution (‘supervisory adjustment’). When exercising its powers under the DTA, the Reserve Bank will need to take account of certain statutory principles that recognise (amongst other things) the importance of maintaining competition and preserving diversity in the deposit taking sector. 

The regime should not impose unnecessary barriers to entry to the deposit-taking sector and should allow for competition and innovation within the sector. A flexible and proportionate regulatory regime should provide a responsive regulatory environment for new business models. 
 
How will finance companies be regulated under the new regime? Finance companies that borrow from retail investors will continue to be prudentially regulated and will be required to be licensed as deposit takers. Prudential standards, Reserve Bank supervision, and risk-based deposit levies will seek to mitigate any risks associated with depositor compensation applying to finance companies that choose to issue protected products. 

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Purposes and decision-making principles
How will the DTA’s purposes and decision-making principles guide the exercise of powers and duties under the DTA? The purpose clauses will set out the way in which the Reserve Bank intends to protect and promote the stability of New Zealand’s financial system. The purpose statement will explain ‘why’ the legislation is being enacted, while the substantive provisions in the Act will provide for ‘what is required’. In doing so, it will shape how the legislation is interpreted when there is uncertainty and the way in which the functions and powers provided for under the DTA are exercised.

A set of decision-making principles also provides an opportunity to bring in a range of other considerations for the exercise of the powers in the DTA.
Where does efficiency feature in the legislative hierarchy? Efficiency-related principles (such as competition, proportionality, net benefits) are outlined in the decision-making principles. This recognises that efficiency can mean several distinct concepts. Outlining these concepts in the principles allows for efficiency to be described in specific and detailed ways. It also ensures that it is a key consideration for the Reserve Bank when it is exercising its powers and duties under the DTA.

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Standards and licensing
Why will standards be the primary tool for imposing prudential requirements on deposit takers? This model will recognise that prudential requirements are often of a legislative character (i.e. establish legally binding obligations for all deposit takers, or classes of deposit takers in contrast to non-binding guidance a regulator may choose to issue), and provide a more robust statutory framework for setting prudential requirements. More specifically, it will replace Conditions of Registration (CoRs, which define most of the rules that registered banks must adhere to in order to operate in New Zealand) with standards, which are a form of delegated legislation. Standards will be set by the Reserve Bank subject to various process requirements such as public consultation, and be classified as secondary legislation under the Legislation Act 2019. Standards will be subject to Parliamentary oversight and potential disallowance via the Regulations Review Committee. 

This approach maintains the Reserve Bank’s operational independence in setting prudential rules (in line with international best practice), while providing a greater degree of transparency and oversight than the current approach, which primarily uses CoRs.
What is the scope of areas in which the Reserve Bank can issue standards? The Act will outline the range of matters over which the Reserve Bank can set standards, including those areas currently provided for via Conditions of Registration (CoRs), but with more clarity where required (for example, the addition of liquidity requirements and lending standards, which are currently provided for under the broader heading of ‘risk management systems and policies’). The scope of standards is also intended to be broad enough to enable the Reserve Bank to set standards in relation to the full range of matters covered by the Basel Committee on Banking Supervision’s Core Principles, should it choose to do so.

The specified matters standards may relate to are set out in the draft DTA and may be extended via regulations. This approach aims to provide a balance between clarity on the scope of the powers being delegated to the Reserve Bank and the flexibility for these powers to be adjusted in future to accommodate new developments.
How will the Reserve Bank be able to set prudential requirements that affect a regulated entity’s ability to lend? The types of lending that lending standards may apply to (residential property, agricultural, etc.) will be prescribed by regulations, leaving the types of borrowers and the types of macro-prudential instruments used to be set by the Reserve Bank in the standards. Empowering the Reserve Bank to set lending standards that define specific tools is important in supporting the Reserve Bank’s operational independence in setting macro-prudential policy.
What is the role of the Minister of Finance in changing the scope of lending standards? Cabinet has agreed that the DTA will include a requirement that the Minister of Finance can make regulations (following consultation with the Reserve Bank) defining the type of lending that lending standards may relate to. This reflects the legitimate interest of elected representatives in setting the permitted scope of this power given the potentially significant distributional effects it may have, and the potential tensions between the Reserve Bank setting lending restrictions to achieve its financial stability objective and wider governmental objectives.
What will be the process for licensing deposit takers? All regulated entities will need to obtain a licence from the Reserve Bank to undertake the business of borrowing and lending. The DTA will set out the relevant criteria for licensing a potential applicant, as well as the specific process requirements. The Reserve Bank will have powers to establish licensing conditions, specific to licensed deposit takers. 

Licensing criteria will include fit and proper requirements for directors and senior managers of deposit takers. Fit and proper requirements are designed to help ensure that directors and senior management have the requisite skills, experience and integrity to perform their roles. The framework for fit and proper requirements and procedural protections in the DTA broadly aligns with that for insurers under the Insurance (Prudential Supervision) Act 2010, with some of the detail of the requirements specified in standards.

This approach will help ensure the Reserve Bank can flexibly manage the risks presented by particular entities. In addition, it will ensure there are effective due process requirements around licensing decisions and decisions to impose conditions (including appeal rights in certain cases).

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Liability and accountability
How will the DTA improve deposit takers’ assurance to both the Reserve Bank and other external stakeholders that they are prudently managing risks? The DTA will impose on directors of licensed deposit takers a positive and on-going duty to ensure there are adequate systems, processes and policies in place to ensure the entity complies with its obligations. There will be a pecuniary penalty for breaches of this duty by directors, subject to appropriate defences. In addition, directors will be able to take out personal insurance against the potential penalty for such breaches. The entity itself will not be able insure or indemnify the director. This is to ensure the incentive appropriately lies on the director personally, rather than the company. Directors of licensed deposit takers will also be liable for a civil pecuniary penalty if false or misleading information is given to the Reserve Bank or publicly disclosed by a deposit taker.
How do these proposals relate to an executive accountability regime? Cabinet has also agreed that a wider accountability regime be established for directors and senior executives of deposit takers and insurers, one that is integrated across the two ‘peaks’ of New Zealand’s regulatory system (i.e. prudential and market conduct). This work will be progressed outside the Phase 2 Review. It may require future amendments to the DTA at the point that this more encompassing accountability regime is implemented.

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Supervision and enforcement
What changes will the DTA make to the Reserve Bank’s supervisory and enforcement functions? New supervision and enforcement powers will strengthen the Reserve Bank’s ability to act before a financial institution is in trouble, in doing so providing more protections for depositors and increasing the stability of the financial system. The new powers include an ‘on-site inspection’ power to support the monitoring of a deposit takers’ compliance with regulatory requirements, and new enforcement tools to effect corrective action on the part of the deposit taker and to sanction the entity in the event of non-compliance.

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Resolution and crisis management
Why is the DTA changing New Zealand’s legislative framework for bank crisis management? Crisis management is a key part of the regulatory system’s financial safety net, along with prudential regulation and supervision, a central bank’s ability to supply liquidity to the system, and depositor protection.
 
New Zealand’s legislative framework for bank crisis management, being largely based on statutory management, has not been meaningfully reviewed since the late 1980s. Under this framework, the Reserve Bank developed the Open Bank Resolution (OBR) policy to manage the failure of a large bank. The proposed reforms have been informed by international experience and subsequent post-global financial crisis (GFC) reforms. It is therefore timely to consider possible enhancements to New Zealand’s framework.
What are the key changes to New Zealand’s crisis management framework? The Review’s work on reforming the crisis management framework is taking place across two tranches of decision-making.

The first, agreed to by Cabinet, involves setting statutory objectives that the Reserve Bank must achieve in performing its function as the resolution authority, and making available directly to the Reserve Bank existing powers that are currently only available to a statutory manager. Related Cabinet decisions will also give the Reserve Bank broad powers to intervene in the running of licensed deposit takers. Although these are significant regulatory powers, they will be balanced with clear statutory triggers for intervention, and a number of safeguards, including decision points for the Minister of Finance.
 
The new framework will include other supporting elements such as the introduction of an after-the-event compensation mechanism to compensate any creditor that resolution leaves worse off than they would have been in a normal liquidation (the ‘no creditor worse off’ safeguard). 
How will fiscal risk to public funds be managed? The DTA will provide the Minister of Finance with the ability to direct the Reserve Bank on the management of risks to public funds in a resolution so long as this does not compromise financial stability. In other words, the Minister will be able to direct the Reserve Bank to take an action in the course of a resolution provided that it is for the purpose of managing risks to public funds. The intention is that the Minister’s direction power is a residual lever only, to enable the Minister to manage risks to public funds if necessary. It should not be used for day-to-day intervention in a resolution.  
Why are changes needed to the Public Finance Act 1989? The Review will address a long-standing gap in the government’s financial crisis management framework by amending the Public Finance Act 1989 to authorise the Minister of Finance to approve expenditure in a financial crisis whether or not there is an appropriation in place. This authority will be similar to the existing authority to incur expenditure in a civil defence or health emergency. The authority will have several conditions attached to ensure that it does not raise expectations of taxpayer bailouts and will only be used as a last resort to maintain the stability of the financial system and the continuity of critical financial services when all other options were unlikely to succeed or not in the public interest.

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Next steps
Why did the Reserve Bank decline requests for a further consultation round after the exposure draft submission process? Three phases of consultation occurred in development of this work, as well as a formal consultation on the exposure draft of the Bill and additional technical engagement with industry in recent months after the consultation on the exposure draft has closed.

The Parliamentary process will also enable further input to the Bill at select committee stage. 

Additionally, second secondary instruments such as standards will involve future rounds of consultation.
What are the next steps for implementation of the Deposit Takers Act? A draft Bill is being finalised, to be informed by stakeholder feedback on the earlier exposure draft and the Minister’s consideration of final technical matters. The Bill is expected to be introduced into the House in Q3 2022, and receive Royal assent in mid-to-late 2023.

After the DTA has passed through the House, there will be a substantial work programme to implement the new prudential framework for deposit takers. It will take some years for the Reserve Bank to develop and consult on the secondary legislation that will implement the regulatory requirements for the new regime, and complete a licensing process for deposit takers to operate under the regime. The parts of the current Reserve Bank Act relating to the regulation and supervision of registered banks and the Non-bank Deposit Takers Act 2013 will remain in force until the remaining parts of the DTA have been fully implemented.

The Depositor Compensation Scheme provisions of the Act are intended to be in place in early 2024, prior to the rest of the DTA. This is so that arrangements are in place to protect depositors, should a deposit taker come under stress before the full DTA is implemented. 
What are the financial implications for the Reserve Bank of these changes? The changes will have direct financial implications for the Reserve Bank as New Zealand’s prudential regulator. This includes, for example, increasing the operating expenditure of the Reserve Bank to support a broader set of responsibilities associated with a new depositor compensation function. In addition, a significant step shift in the resourcing and funding of the Reserve Bank is required to support a more intensive supervisory and enforcement model. There will also be transition costs tied to implementing the new legislative framework (for example, developing a new rulebook for deposit takers and managing any temporary or interim licensing regime).

To some extent, these expected costs have been anticipated in the 2020-25 Funding Agreement between the Minister of Finance and the Governor of the Reserve Bank signed in June 2020. The new agreement provides for an annual average level of operating expenditure of $115 million over the five-year period. This compares to the $80 million budget for the 2019/20 year.

Decisions around depositor protection will also have indirect financial implications for the Crown (for example, a Government backstop for the depositor compensation scheme  will create an explicit contingent liability).
How do these changes relate to the Reserve Bank of New Zealand Act? Both the Reserve Bank of New Zealand Act 2021 and the proposed Deposit Takers Bill are a result of the Review of the Reserve Bank of New Zealand Act 1989 work programme, initiated by Minister of Finance Hon Grant Robertson in November 2017. The Review was undertaken by a joint team from the Reserve Bank and the Treasury, with the aim of creating a modern monetary and financial policy framework.

The Reserve Bank of New Zealand Act 2021 (the 2021 Act) passed into law in August 2021. Our previous legislation, the Reserve Bank of New Zealand Act 1989, was more than 30 years old. The new Act aims to modernise how we operate and are governed. It increases our accountability and transparency and bring us closer to what is required of Crown entities in terms of decision-making, reporting and external monitoring.

See more information on the Reserve Bank of New Zealand Act 2021

See an overview of the Review of the Reserve Bank work programme on the Treasury website
 

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