Non-bank deposit takers (NBDTs) will require a licence and be subject to similar prudential requirements to registered banks under legislation introduced to Parliament yesterday.
The measures are intended to boost investor confidence but are clearly too late to prevent the finance company collapses, and it is arguable how effective they would have been had they been in place at that time. However, they do plug a gap in the regulatory framework.
This Brief Counsel explains the new regime.
The NBDT Bill in brief
Key elements of the Bill are:
- NBDTs are to be licensed to ensure that they meet certain minimum requirements
- directors and senior officers must meet a basic ‘proper person’ test
- Reserve Bank of New Zealand (RBNZ) clearance will be required for any transaction which would give the purchaser the power to control 20% or more of an NBDT’s voting securities, or 25% or more of the NBDT’s governing body, and
- new tools for the RBNZ to detect and respond to the distress and/or failure of NBDTs, including information gathering and investigative powers, as well as powers to issue directions.
The Bill also incorporates those provisions of Part 5D of the Reserve Bank of New Zealand Act 1989 which relate to NBDTs, subject to minor amendments.
The RBNZ will have the power to impose conditions on the grant of a licence including requirements as to the appointment of directors and senior officers, and limits on both credit exposures to a single party and significant acquisitions by the NBDT.
There will be a 12 month transition period for NBDTs to obtain a licence.
NBDTs will be at risk of being delicensed should they fail to comply with their legal obligations, the conditions of their licence, any direction issued by the RBNZ or if they are no longer operating as an NBDT and all their debt securities in New Zealand have been repaid.
Director and senior officer suitability
The primary responsibility for ensuring that directors and senior management have suitable skills, experience and integrity will lie with the NBDT’s owners and governing body. Directors will be required to certify that they meet the suitability criteria and the governing body of the NBDT will need to certify that there are no concerns in relation to its senior managers. The suitability concerns will be prescribed by regulation but are likely to include:
- involvement in an entity that has gone into receivership, liquidation or voluntary administration or has been the subject of statutory or judicial management
- criminal offending
- disciplinary action or adverse findings by a professional or regulatory body
- adverse findings or action taken by any other regulatory authority, market operator or government agency, and
- conflicts of interest that could impact on the proper performance of the business.
The Reserve Bank will have the power to remove a director or senior manager if one or more of these suitability concerns apply following licensing.
The thresholds for RBNZ clearance are intended to avoid changes in ownership that increase the risk profile of the entity and the risk of a major shareholder’s problems adversely affecting the NBDT. This is similar, but less restrictive, than the regime that currently applies to registered banks.
Distress and failure
The RBNZ will have wide powers to gather information from, and give directions to, an NBDT and its associated persons. There will also be a range of new offences for non-compliance with any of the requirements of the NBDT Bill. The primary additional power the RBNZ will have in relation to NBDTs will be the power to remove directors. We expect this will be used only in exceptional circumstances and will not have an impact on the day to day operation of most NBDTs.
The wide powers the Reserve Bank will have in relation to persons associated with an NBDT may cause some concerns but are similar to the powers the RBNZ has had in relation to registered banks for some years.
Implications for the NBDT sector
These new provisions were foreshadowed when the original NBDT legislation was discussed in 2007. They will bring the prudential requirements for NBDTs more into line with those for registered banks and, in some respects, insurers.
The measures should help restore confidence and stability to the sector after the turmoil of the last few years. There are now considerably fewer NBDTs operating in New Zealand than there were in 2007, and most of them should have little difficulty in complying with these requirements.