Overview of non-bank deposit takers regime
This page explains the role of non-bank deposit takers in the finance system. It details their obligations under the Non-bank Deposit Takers Act 2013 (the NBDT Act), including the role of trustees and trust supervisors as well as the various founding documents.
What are non-bank deposit takers
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. Nor are finance companies and other entities that fund solely from related parties, or from corporate or wholesale sources.
More information on how to identify a non-bank deposit taker.
NBDT's obligations under the NBDT Act
NBDTs are subject to the Financial Markets Conduct Act 2013 (the FMC Act), which requires them to have a trust deed (and therefore be supervised by a trustee) and a product disclosure statement.
Licensed NBDTs are also required to comply with prudential requirements outlined in the NBDT Act and associated regulations. 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.
NBDTs and trustees must ensure NBDT trust deeds include provisions required by the NBDT Act's prudential regulations. It is a criminal offence for an NBDT to fail to comply with the regulatory requirements and is also grounds for its licence to be cancelled.
Why we need to regulate NBDTs
Our role is to promote 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. It 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 assists with providing funding to wider sectors of the economy, 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 payments services. These functions suggest NBDTs should be regulated in some respects in a manner similar to banks, while still facilitating continued diversity, flexibility and competition in the NBDT sector.
- NBDTs lend to many clients, unlike corporate bond and other debt issues where the funds raised are used to finance an issuer’s own business. This makes it difficult for depositors to work out the true risk of an NBDT and justifies extra prudential and disclosure-based regulation.
- NBDTs are potentially vulnerable to 'contagion' risk. This is where 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.
The role of trustees
The FMC Act refers to trustees as 'licensed supervisors'. Trustees are licensed by the Financial Markets Authority under the Financial Markets Supervisors Act 2011 (the FMS Act).
The trustees supervise NBDTs' compliance with their trust deeds and have obligations under the NBDT Act, the FMC Act and the FMS 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 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 us and the Registrar of Companies of any significant breaches of trust deed covenants or emerging financial difficulties
- reporting breaches of the NBDT Act to us.
About trust deeds
A trust deed is a legal agreement between a trustee and an issuer of debt securities (for example, an NBDT) that provides for the trustee’s supervision and oversight.
Trust deeds typically contain a number of covenants designed to ensure the affairs of the issuer are managed prudently, and often include provisions relating to maximum exposure concentration, minimum capital and liquidity requirements.
Trust deeds provide some protection to depositors and investors, whereby an independent person (the 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
When NBDT requirements do not apply
We have the power to exempt entities or classes of entity from some or all of the NBDT Act requirements in circumstances where it would be unduly onerous or burdensome to apply the requirements.
We can grant exemptions on the basis of any terms and conditions that we think fit.
We may also recommend regulations to declare persons to be NBDTs for the purposes of the NBDT Act, where these entities are NBDTs in substance but are not captured by the definition.
Similarly, we can recommend regulations to declare entities as not being NBDTs for the purposes of the NBDT Act, where these entities are captured by the definition, but where prudential requirements of the NBDT Act and regulations are not appropriate.