Reserve Bank expands conduct regulation capabilities as deposit takers reform looms

23 April 2021

Yesterday, the Government announced that drafting will commence for the new Deposit Takers Act. The proposed Act will combine the regulation of banks and non-bank deposit takers under a single overall regime.

It will impose duties on directors to ensure there are adequate systems, processes and policies in place to ensure compliance with the prudential requirements and obligations and give the Reserve Bank “on-site" inspection powers to monitor compliance.

Along with the recent announcement that it will be establishing an enforcement department, it is apparent the Reserve Bank is entering a new phase of more active regulation of the financial sector.

Deposit Tak​​ers Act

The underlying policy settings for the new Act have already been the subject of three rounds of consultation. Cabinet has now approved the high-level features of the proposed regime, which include:

  • A single regime for all deposit takers (being defined as firms in the business of “borrowing and lending").​
  • An ability to tailor requirements to different classes of entities and for RBNZ to manage entities close to the boundary.
  • A new deposit insurance scheme (expected to be funded by levies on deposit takers with a Crown backstop). The Government had initially proposed a limit of NZ$50,000 per depositor per deposit taker, but has agreed to lift the cap to NZ$100,000 after a number of submissions called for the increase.
  • The introduction of standards (to be set by the Reserve Bank within the general framework under the Act or determined by the Minister of Finance) to impose prudential requirements.
  • A duty on directors to ensure that there are “adequate systems, processes and policies in place to ensure the deposit taker complies with its prudential requirements and obligations". A breach of this duty will only attract civil penalties (and not the criminal liability originally proposed).
  • A possible requirement on all licensed entities to report breaches of their obligations to the Reserve Bank.
  • “On-site inspection" powers by the Reserve Bank of deposit takers (and all other licensed entities such as insurers) to ensure compliance with the standards and duties.

The next step is for an exposure draft bill to be released for consultation later this year. It is expected that a bill will be introduced into Parliament before the end of this year and the deposit insurance scheme to come into force in 2023. The implementation of the rest of the regime will follow.

New enforcement capa​​bility

Separately, the Reserve Bank has announced the establishment of an enforcement department that will be tasked with transforming the Reserve Bank into a “flexible and proactive regulator" that reflects its “evolving responsibilities, legislative powers and expectations". The department will be operationally separate from the Reserve Bank's existing supervision team. It will be led by the former senior manager of the Australian Prudential Regulation Authority's litigation team.

The Reserve Bank's desire for dedicated enforcement capability is not surprising. The Bank's regulatory remit is steadily expanding (see our update of year ahead) and its existing supervisory and enforcement responsibilities are coming under increased scrutiny.

In the coming days, the Financial Action Task Force (FATF), which sets and monitors global standards to combat money laundering, is expected to report that New Zealand needs to be doing more to strengthen supervision of AML compliance. These recommendations (and any subsequent response) directly impact the Reserve Bank (as one of New Zealand's three AML supervisors).

For more detail on likely trends in the enforcement of AML/CFT obligations, see our Big Picture released late last year.

Bell Gully is closely monitoring regulatory developments across the financial ​​services sector and will provide further updates to our clients. If you have any questions about the matters raised in this article, please get in touch with the contacts listed or your usual Bell Gully advisor.​​

Disclaimer: This publication is necessarily brief and general in nature. You should seek professional advice before taking any action in relation to the matters dealt with in this publication.