Reserve Bank has published its Enforcement Principles and Criteria Guidelines which provide insights into how the new Reserve Bank Enforcement arm will exercise its enforcement discretion.
Who needs to read it? Why?
All banks, non bank deposit takers, insurers and financial markets infrastructure providers. These Guidelines provide a lens through which the Reserve Bank will evaluate enforcement matters.
What does it cover?
The Bank has developed three Enforcement Principles and four Criteria. The key aspects of the three enforcement principles are:
- Risk based: ensuring that resources are used where the risk is greatest and where they can have the greatest impact. This involves considering the nature of the regulated entity, the seriousness of the non-compliance, significance of the issue and the circumstances of non-compliance. The Bank plans to prioritise issues that will likely have a greater impact on its objectives, a high risk of error or involve a high risk to the Bank’s own reputation.
- Proportionality: the burden and cost of enforcement should be proportionate to the non-compliance, level of harm involved, any expected benefits from that enforcement response both to the Bank and the regulated entities. This also takes into account, any aggravating and mitigating circumstances, the broader compliance context and internally developed precedent. The Bank also plans to have regard to other regulators’ responses to similar instances of non-compliance. Size, the nature of the regulated entity, the features of non-compliance, the entity’s general attitude to compliance, the risk posed by non-compliant activity and the public interest will all be taken into account.
- Transparency: the Bank plans to be transparent about its processes and outcomes. This involves publishing and applying the Bank’s enforcement framework and the Relationship Charter which sets out how it will interact with regulated entities. The Bank plans to generally not make an investigation public unless it is appropriate to do so because (for instance) the investigation is due to a public complaint. Transparency of outcome may involve publication of an enforcement response in order to deter non-compliance but the principle of proportionality will be exercised.
The Bank has also set four enforcement criteria: seriousness of conduct, responsiveness, public trust and confidence and efficacy:
Principles: Risk-based, Proportionality and Transparency
|Criteria||Seriousness of coduct||Responsiveness||Public trust and confidence||Efficacy|
|Factors:||Prevalence of non-compliance||Cooperation with RBNZ in relation to non-compliance||Public confidence||Strength of evidence|
|Magnitude and impact of non-compliance||Compliance history||Deterrence value||Available defences|
|Executive or operational knowledge||Conduct in resolving the non-compliance||Consistent and fair||Support other regulatory bodies|
|Promote maintenance of the law||Potential outcomes|
The Bank is starting with a clean slate for its enforcement arm and these Guidelines provide some helpful indications of how the Bank will make enforcement decisions. Regulated entities should ensure that when interacting with the Bank regarding non-compliance, the regulated entity’s communications focus on the Principles and Criteria as these are the standards against which the entity will be measured.
While the Bank will forge its own path, it has acknowledged that it will take stock of the approach taken by other regulators. Therefore, regulated entities who are investigated should be keeping a close eye on what other regulators do with similar types of non-compliance.
It is also interesting that the Guidelines specifically consider how non-compliance or a particular enforcement action would affect the Bank’s reputation or benefit the Bank. That is not something we see other regulators acknowledging openly but it clearly is a matter that other regulators take into account. The Guidelines also emphasise that proactivity in dealing with the RBNZ will be a significant factor. We consider that specifically identifying this is an encouraging step from the RBNZ, and should encourage entities to be more forthcoming about any non-compliance issues they have, confident that this openness will be taken into account by the RBNZ when it is considering enforcement options.
These Principles and Criteria will be adapted to the different regulatory areas for which the Bank is responsible on a case by case basis. In particular, the Bank acknowledges that there will be unique considerations for distinct areas such as FMI regulation, AML/CFT monitoring and prudential supervision.
If you have any questions in relation to the Guidelines, please contact one of our experts.
 At page 6.
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