Yesterday, the Reserve Bank of New Zealand (RBNZ) released the first stage of its public consultation on the Deposit Takers Act 2023 (Act) with proposals for the Proportionality Framework and the levies to fund the Depositor Compensation Scheme. The levy framework sits alongside the Treasury’s consultation on the Statement of Funding Approach: both Treasury and the RBNZ will share submissions from these consultations.

A link to the RBNZ media release can be found here. The consultations led by the RBNZ can also be found here and here. The Treasury’s consultation can be found here.

Who should read this? Why? 

The Act represents a major modernisation of New Zealand’s regulatory framework for deposit takers and so the consultation documents should be read by all registered banks and licensed non-bank deposit taking institutions, including credit unions, building societies and retail deposit-taking finance companies. 

What does it cover?

Public consultation on the Act covers three different topics:

• The Proportionality Framework;
• The Depositors Compensation Scheme (DCS) Levies;
• The Statement of Funding Approach (SoFA).  

The Proportionality Framework

The Act requires that the RBNZ prepare a proportionality framework which will set out how they take into account a proportionate approach when developing standards under the Act. 

The framework is intended to help consistently and transparently balance the cost and benefits of the prudential standards in relation to different types of deposit takers, by grouping similar deposit takers together when tailoring the requirements of the standards. 

The Framework consultation document proposes the: 

• scope and purpose of the proportionality framework; 
• approach to tailoring standards;
• grouping of deposit takers into three groups based on total assets for the purpose of developing and applying standards; 
• approach to making variations to deal with firm-specific circumstances; and
• approach to transitioning deposit takers between groups. 

The Depositors Compensation Scheme Levies

The Act introduces a new Depositor Compensation Scheme which is intended to give confidence to depositors in the event of depositor failure. Under the DCS, depositors are eligible for compensation up to $100,000 per depositor, per institution. 

The DCS will be funded for by an industry levy set by the Ministry of Finance which is intended to commence by late 2024 – well ahead of the rest of the legislation which is expected to be fully in force by 2028. 

The DCS consultation focuses on two key issues to support the introduction of the DCS. 

• the protected deposit base – how to determine the total amount of deposits covered by the Scheme and the base on which levies are charged; and
• the DCS levy rate – the approach to setting the levy charged with respect to those protected deposits.

The consultation paper considers two approaches to the DCS Levy itself, either a flat-rate approach (where levies are paid as a uniform percentage of the amount of protected deposits a deposit taker holds) or a risk-based approach (where the levies are based on the risk a deposit-taker poses to the DCS and likelihood of a pay-out event). 

Under the risk-based approach, the RBNZ are seeking feedback on two options: reliance on credit ratings to assess the risk posed by a firm, or alternatively, using a composite risk indicator approach using risk indicators of capital, liquidity, asset quality, profitability, and concentration of exposures to calculate an aggregate risk score of a firm. 

RBNZ is looking for consultation of the difference methods of applying a levy. 

There will be a further consultation in the future before any levy regulations are confirmed.

The Statement of Funding Approach 

The Act requires the Minister of Finance to publish a SoFA for the DCS at least every five years. While Treasury is leading the consultation on this topic, as the funding approach and the levy framework are related matters, people who wish to make submissions on both consultation papers can choose to send their submissions to either agency. 

The focus of the SoFA is on the approach to building the DCS fund, the estimated costs of the fund, determining a target size of the DCS fund and a timeframe for reaching any target. The consultation paper seeks feedback on the approach to setting the funding strategy for the DCS.

Our view

The newly enacted Deposit Takers Act significantly modernises the regulatory framework for deposit taking in New Zealand. Consultation on the implementation of the Act will be a multi-year programme of work for the RBNZ and a considerable amount of work needs to be done to stand up the new DCS by late 2024.

The Act is a positive step forward that will bring New Zealand’s regime closer to international practice – New Zealand is currently the only OECD jurisdiction without a DCS scheme or equivalent, for example. 

However, while the DCS is designed to protect consumers in the event of depositor failure, it might come at a cost as deposit takers may seek to pass on the costs of the levies onto consumers. Further, the systems and processes which deposit takers will need to put in place to support the DCS will be substantial – to ensure that they are able to correctly identify single customers. There are also significant questions about how associated entities of a depositor, for example, a family trust would be dealt with. 

For those reasons it is very important that all registered banks and licensed non-bank deposit taking institutions make submissions so that their views are taken into account. 

What next?

Consultation on all three documents runs from now until 25 September 2023.

We encourage all affected deposit-taking entities to read through the consultation documents and engage with the RBNZ (and Treasury) to help inform the policy development and eventual implementation of the regime.

If you have any questions relating to the Act, or the DCS, or want to know how it may affect your business, please contact one of our experts. 

This article was co-authored by William Ma, a Law Clerk in our Banking and Financial Services team.