Non-bank deposit takers FAQs

The Non-bank Deposit Takers Act 2013 (the NBDT Act) defines an “NBDT” as a person, other than a registered bank, that makes an NBDT regulated offer of debt securities, and carries on the business of borrowing and lending money or providing financial services (or both).

NBDTs include finance companies that raise funds from the public, as well as most building societies and credit unions. Managed investment schemes are not included, and nor are finance companies and other entities that fund solely from related parties, or from corporate or wholesale sources.

An NBDT regulated offer is defined in the NBDT Act as a “regulated offer within the meaning of section 41 of the Financial Markets Conduct Act 2013”. The definition generally captures offers of debt securities made to persons who must receive disclosure under the FMC Act. Colloquially it is a “retail offer”. Offers to wholesale investors are not included.

However, an NBDT regulated offer includes offers to persons who meet certain investment activity criteria, and persons who are “eligible investors” (broadly experienced investors who certify that they do not need the protections provided by the FMC Act). Such persons would not receive disclosure under the FMC Act, but NBDTs who make offers open to such persons and meet the other qualifications to be an NBDT will come within the definition of NBDT regulated offer.

In lay terms, debt securities include debentures, bonds, deposits, call accounts and similar transactions.

The Financial Markets Conduct Act 2013 (the FMC Act) requires trust deeds to be in place for regulated offers of debt securities. Trust deeds 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 take action where those terms are breached or threaten to be breached.

The FMC Act refers to trustees as “licensed supervisors”. Trustees are licensed by the Financial Markets Authority under the Financial Markets Supervisors Act 2011.

A trust deed is a legal agreement between a trustee and an issuer of debt securities (e.g. NBDT) that provides for 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 FMC Act and its regulations also provides for content that trust deeds must include, such as the trustees right to enforce the issuer’s payment of interest to debt holders.

The Reserve Bank has the purpose of promoting a sound and efficient financial system for New Zealand. Prudential regulation of this sector aims to raise standards and improve the sector's overall resilience to adverse market conditions in the future. Prudential regulation is not aimed at insulating individual NBDTs from failure, nor does it protect depositors from the consequences of their investment choices.

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 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 distress or failure in others. This suggests the need for enhancements to the standard regulation of debt issuers.

If an entity meets the definition of NBDT then, unless exempted or declared out of the definition by regulations, all requirements under the NBDT Act and regulations 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 persons to be 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 where prudential requirements of the Act and regulations are not appropriate.

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:

• Licences NBDTs;
• prescribes minimum prudential regulatory requirements for NBDTs;
• compliance by trustees and NBDTs with the regulatory requirements; and
• provides advice and recommendations to the Financial Markets Authority relating to trustee performance with respect to NBDTs.

The trustees supervise NBDTs compliance with their trust deeds and have obligations under the NBDT Act to the Reserve Bank, as well as obligations under the FMC Act and the Financial Markets Supervisors Act. Trustees 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;
• 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; and
• reporting breaches of the NBDT Act to the Reserve Bank.

NBDTs are subject to the Financial Markets Conduct Act, which requires them to have a trust deed (and therefore be supervised by a trustee) and a product disclosure statement. In addition, they are required to meet the prudential obligations set under the Non-bank Deposit Takers 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 and is also grounds for the NBDT to have its licence cancelled.

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 27 to 29 of the Non-bank Deposit Takers 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 28). However, if the trustee is not then satisfied, the trustee can ask the NBDT to amend the programme and resubmit it.

Section 29 gives the trustee the power to require an NBDT to have its programme reviewed 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 our Overview of NBDT regime page.

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 Financial Markets Act 2013.

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, 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.