Guidance for identifying a deposit taker

Introduction

The definition of "NBDT" in the Non-bank Deposit Takers Act 2013 ("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, NBDTs and other stakeholders in identifying entities that come under the Act where there may be uncertainty.

"Deposit taker" defined

Section 5 of the Act defines an "NBDT" as follows-

  • (1) In this Act, NBDT means any of the following:
    • (a) a person that—
      • (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:
    • (b) a person, or a member of a class of persons, that is declared by regulations made under section 73(1)(c) to be an NBDT for the purposes of this Act:
    • (c) a person that—
      • (i) is, or has been at any time since this section came into force, an NBDT; and
      • (ii) has debt securities that were issued to the public in New Zealand and that remain unpaid:
    • (d) a person that—
      • (i) was a deposit taker (as defined in section 157C of the Reserve Bank of New Zealand Act 1989) on or after 3 August 2011 but before this section came into force; and
      • (ii) has debt securities that were issued to the public in New Zealand before this section came into force and that remain unpaid.

(2) Despite subsection (1), the following are not NBDTs:

  • (a) a bank that is a registered bank under the Reserve Bank of New Zealand Act 1989:
  • (b) a local authority:
  • (c) the Crown (as defined in the Public Finance Act 1989):
  • (d) an entity that is in receivership (provided that no debt securities are being offered to the public in New Zealand by, or on behalf of, the entity):
  • (e) an entity that is in liquidation (whether under Part 16 of the Companies Act 1993 or under any other enactment):
  • (f) a person, or a member of a class of persons, declared by regulations made under section 73(1)(d) not to be an NBDT for the purposes of this Act.

[...]

Who is the person identified in section 5(1)(a)?

When identifying an NBDT, 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 5(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 "NBDT" 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.

However, as the economic substance of the two models is the same, the decision has recently been made to make regulations declaring funding conduits out of the definition of NBDT. These regulations are likely to come into force in the next few months.

Carrying on business

As well as issuing debt securities to the public, to be a "NBDT" 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.

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 (updated October 2014)