Yesterday, The Reserve Bank of New Zealand – Te Pūtea Matua (RBNZ) released the next stage of its public consultation on the Deposit Takers Act 2023 (Act) with proposals for regulations under the Act that set necessary elements of the Depositor Compensation Scheme (DCS). This stage follows consultation in 2023 on DCS levy settings (see our previous article on that consultation here).
A link to the RBNZ media release can be found here. The consultation can also be found here.
Who should read this? Why?
The Act represents a major modernisation of New Zealand’s regulatory framework for deposit takers and the DCS in particular is a significant change. The proposed regulations are required to set out the necessary elements for the DCS to come into force. Accordingly, all registered banks and licensed non-bank deposit taking entities should be aware of the consultation.
What does it cover?
Public consultation on the regulation proposals covers three topics, being:
- the calculation methodology for levies to fund the DCS;
- the DCS’ scope of coverage and eligibility; and
- other operational details.
Levy calculation methodology
The RBNZ’s intention is that levies charged to deposit-taking entities will fully fund the DCS.
Following on from the first round of public consultation on DCS levies in 2023, RBNZ is now consulting on its proposed regulations for:
- its estimation method for determining the protected deposit base—being the method to determine the total amount of deposits covered by the DCS and the base of which levies are charged; and
- the levy method.
Estimation method
The proposed estimation method for determining the protected deposit base is to use an interim calculation based on applying adjustment factors to data collected from existing RBNZ surveys of banks’ and non-bank deposit takers’ balance sheets. The adjustment factors accommodate differences between types of deposit-taking entities, and that depositors may have multiple accounts totalling over the $100,000 threshold at a deposit taker, or conversely, accounts may have multiple owners.
In any event, the proposed estimation method for determining the protected deposit base is an interim measure until the introduction of the “Single Customer View” standards in 2028 with the non-DCS parts of the Act. The “Single Customer View” standards will specify how deposit takers inform RBNZ of an individual depositor’s protected deposits, removing the need for an estimation method.
Levy method
In respect of the levy method, RBNZ is proposing a composite risk-based approach. Large and medium sized deposit takers mostly favoured this approach in their submissions during the 2023 consultation, with small deposit takers favouring a flat rate approach. Most industry participants did not support the credit rating method.
The proposed composite risk-based approach uses several risk metrics (e.g., capital, liquidity, asset quality, and profitability) to calculate an aggregate risk score for a deposit-taking entity. The proposed composite risk-based approach has been simplified compared to that consulted upon during the 2023 consultation, with changes to the number of risk metrics used and their corresponding weights.
Deposit-taking entities are then grouped into one of four buckets based on their aggregate risk score, with higher levies applying to deposit-taking entities within the riskier buckets.
DCS coverage scope and eligibility
The regulation proposals also include defining protected deposits to include credit balances of specific lending products (e.g., credit cards, revolving credit facilities, and revolving home loans). For example, if a credit card account is in credit balance (because, for example, there has been a merchant refund), then the RBNZ is proposing to include that credit balance as a protected deposit under the DCS. This is because RBNZ considers that credit balances in those specific lending products are in-substance equivalent to current accounts.
The Act defines “protected deposits” to be New Zealand dollar-denominated debt securities that either meet the prescribed requirements or are of a kind specified by the regulations (section 192 of the Act). The RBNZ considers that through the proposed regulations, the definition of “protected deposits” can include the credit balances of specific lending products.
In addition, RBNZ is consulting on other regulation proposals that affect the eligibility for protected deposits in certain circumstances, including:
- reducing any DCS compensation by any amount recovered from a liquidator to avoid double-payment of a protected deposit;
- excluding deposits held on trust when the trust is not an express trust, i.e., deposits held on constructive trust, resulting trust, or any other similar common law trust;
- specifying bank sponsored PIE funds and certain client accounts as “relevant arrangements”, which receive look-through treatment in identifying the underlying beneficial owner of the protect deposit, and not the named account holder, who will be entitled to DCS compensation. The specified client accounts include those held by conveyancers, lawyers, accountants, real estate agents, and retirement villages;
- exempting deposits with whole-sale only branches of foreign-banks from the DCS; and
- adopting the approach taken under RBNZ’s open bank resolution policy in respect of in-flight payments and the “quantification time” for DCS compensation.
Other operational aspects
The RBNZ is also consulting on other regulation proposals in relation to the operational aspects of the DCS levies, including that:
- the interest rate on unpaid levies be set at the Official Cash Rate plus a margin of 4%;
- relief (which might include discounts, waivers, refunds or instalment arrangements) would be available for deposit-taking entities in exceptional circumstances;
- levies are calculated on an annual basis and invoiced annually by default; and
- if information comes to light that would impact the calculation of a levy that has been paid, a reassessment of a levy paid by a deposit-taking entity would be limited to within four years of the original levy payment.
Our view
The regulation proposals represent the next step in the considerable amount of work required to stand up the DCS by RBNZ’s targeted mid-2025 launch. Given the sustainable changes being brought in by the DCS, and the associated costs it will impose on deposit-taking entities, it is important that all deposit-taking entities make submissions so that their views are taken into account. In that respect, it is good to see the RBNZ incorporating the industry’s feedback from the first consultation on the DCS levies in 2023 in these regulation proposals.
What next?
The consultation runs from now until 10 May 2024. In addition, the first round of consultation on the DCS levies in 2023 sat alongside The Treasury’s consultation on the Statement of Funding Approach (SoFA) for the DCS. The Treasury will soon be undertaking its own second round of SoFA consultation.
We encourage all affected deposit-taking entities to engage with the consultation processes to help inform the development of the DCS regulations.
If you have any questions relating to the DCS, or the Act in general, or want to know how it may affect your business, please contact one of our experts.
This article was co-authored by Vijay Chand, a Law Clerk in our Banking and Financial Services team.
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