Non-bank deposit takers (NBDTs) – credit unions, building societies, and finance companies - may be in line for a new supervisory regime, as a result of the Government’s review of the Reserve Bank of New Zealand Act 1989 (RBNZA).  The review is required as part of the governing coalition agreement signed between Labour and New Zealand First in October 2017.  Its political flavour was outlined by finance minister Grant Robertson in a news media release of November 2017:

“The current Reserve Bank Act is now nearly 30 years old. While it has served New Zealand well in general, now is the right time to undertake a review to ensure our monetary policy framework still provides the most efficient and effective model for New Zealand.

“This Government is determined to focus on creating more jobs and higher wages for New Zealanders. It is in our DNA to ensure Kiwis have the best possible quality of life through the best employment opportunities. Every part of the economic apparatus needs to play its part in this, including monetary policy.”

Consultation 2 of the Reserve Bank Act Review’s Phase 2, Safeguarding the future of our financial system, is now underway.  Public submissions are open until 16 August 2019.  The government is working to a tight timeframe in aiming for completion of both Consultation 2 and the final Consultation 3 in 2019, with new legislation to follow in 2020. Thereafter, a phase-in period might be expected.

“Supervision and enforcement” is one of the nine key topics examined by Consultation 2.  In a June 2019 media release Mr Robertson announced ,“Cabinet has decided that the next consultation in Phase 2 of the RBNZ review will look at whether the Reserve Bank’s supervisory regime is sufficiently strong. It will also review the enforcement tools the Reserve Bank has, including whether penalties are tough enough to discourage certain behaviour.”

Of significance to the NBDT sector is that it appears the present supervisory system as practised under the Non-bank Deposit Takers Act 2013 (NBDTA) is intended to be replaced.  Under the NBDTA, a debt securities offeror is required to have a licensed supervisor who supervises the NBDT, with the RBNZ operating in the background as the regulator and only stepping in as required.

It is this two-tier mode of oversight, with a supervisory trustee interposed between the NBDT and the RBNZ that looks set to change.  In Treasury’s Questions and Answers guide to Consultation 2, it is asked, “What preliminary decisions have been taken?”.  Part of the answer is given as, “Consultation Document 2A outlines a number of in-principle decisions that have been taken following the first public consultation. These include … combining the separate regulatory regimes for banks and non-bank deposit takers (institutions that are not registered banks, such as finance companies and building societies) into a single ‘licensed deposit taker’ perimeter”.

The core discussion of the single perimeter model is found in Chapter 4 of Consultation Document 2A Phase 2 of the Reserve Bank Act Review (pp. 72-81).  The summary description of what is planned states:

“The Minister has made an in-principle decision to bring the bank and NBDT regulatory regimes together into a single ‘licensed deposit taker’ framework. This decision was unanimously supported by the Independent Expert Advisory Panel, the Reserve Bank, and the Treasury.

This single framework will:

1. Centre on an activities-based definition of deposit taking (to be developed), capturing firms that are in the business of borrowing and lending
2. Be regulated and supervised by the Reserve Bank under a single piece of legislation
3. Retain the restrictions on the use of certain words such as ‘bank’ and ‘banking’
4. Provide for a risk-based licensing and regulatory framework by aligning entities’ compliance requirements with the scale of their activities and the risks they pose to the financial system.”

The reference to “a single piece of legislation” makes plain the intention that the RBNZA will be overhauled and the NBDTA likely abolished.

Significant changes will be required at the RBNZ as an institution in order to impose and operate the new unified direct supervisory regime.  In a June speech entitled “Renewing the RBNZ’s approach to financial stability”, RBNZ deputy governor Geoff Bascand stated:

“Regulated entities can expect our supervision to be more intrusive, in seeking evidence that attestations are merited and verifying compliance, and that we will intervene and enforce our requirements. We will be more pro-active in holding directors and managers to account, particularly in areas where we have already identified shortcomings.”

Mr Bascand went on to describe the new regime for RBNZ supervision of financial institutions, including NBDTs in terms of an expanded “regulatory perimeter”:

“The government’s decision to merge our regimes for regulating banks and non-bank deposit takers into a single regime for deposit takers will create a simpler, more unified regime, more clearly aligned with our financial stability objective. It will minimise duplication and treat similar activities on the same basis, while continuing to allow our risk-based approach to supervision. It will also help future-proof the regime against a shift in lending and deposit taking activity from banks to finance companies that are currently outside of our banking perimeter, although in a sector as dynamic as the finance industry perimeter issues will never be settled entirely. More work will be required to design the details of this new regime, particularly to ensure that it can be applied proportionately to the biggest Australian-owned bank or the smallest credit union.” 

The planned single unified regulatory perimeter for lending and deposit taking entities and an accompanying intensification of supervision by the RBNZ imply a substantial capability that the central bank will need to build within itself in addition to its present extensive supervisory activities.  There could be significant regulatory compliance costs entailed by the proposed new regime and it remains to be seen where those costs will fall and if supervised firms and/or their customers will have to bear them.  In any event, costs will probably increase for finance sector entities from compliance with “more intrusive” RBNZ supervision and any intervention and enforcement actions resulting.  These costs could be regressive for smaller NBDTs, impacting profitability and even business viability, and potentially raise barriers to entry into the sector for new competitors.

It is possibly no coincidence in light of the proposed supervisory regime change that the RBNZ published in the Bulletin of May 2019 a paper entitled, “A tale of small branches: NBDT sector performance under increased regulatory scrutiny.”  The paper is an excellent starting point for those who wish to acquire a better understanding of the NBDT sector in its present condition. There are now only 24 credit unions, building societies and finance companies licensed to operate, down from 31 as at May 1, 2015, and this number will reduce further this year as a result of credit union mergers.

The paper could also be expected to provide any available evidence that the current supervisory system, wherein corporate trustees act as supervisors on behalf of the RBNZ, has any shortcomings, but none is reported.  In the wake of the NBDTA, the RBNZ licensed NBDTs in 2014 and 2015, and therefore there are several years of recent data relating to the period when corporate trustees have served as NBDT supervisors.

The authors state that, “This paper looks at the 2010-2018 period to see how the NBDT sector has adjusted to new regulations.” The evident purpose of the document is to demonstrate that if NBDTs have not benefitted from increased regulation and supervision, they are at least no worse off for it.  Thus the reassuring conclusion that:

“Taken together, the indicators we have examined point to an NBDT sector that appears to have adjusted reasonably well to increased regulation since 2009, and there are no obvious indications that excessive regulatory costs are adversely affecting the sector. However, there are some lingering concerns about sector consolidation trends and the ability of smaller NBDTs to keep pace with technology and cover strategic risks from a relatively low profit base, but at this stage we do not see need for further intervention. Overall, we conclude that the sector has performed relatively as expected between 2009 and 2018.”

This conclusion, particularly with its reference to “excessive regulatory costs” needs to be squared with the ministerial in-principle decision discussed above.  As previously argued, regulatory compliance costs are likely to increase under the RBNZ’s more intensive and intrusive supervisory regime proposed to be legislated for in 2020. If regulatory costs are now sufficiently significant as an issue for the Bulletin article to examine their impact on NBDTs under the present supervisory regime, then it can hardly be expected that this same issue will pale when the new regime comes into full force.

The paper’s authors state:

“Regulations impose costs but also deliver benefits. Regulation can be costly for a sector, and even well-designed regulations impose some costs. These have to be measured against benefits, such as improved confidence and resilience. This is the lens through which we judge the health status of the sector in this paper. Throughout, we must distinguish between barriers that are necessary to promote resilience and those that impose unnecessary costs on competition and efficiency in making this assessment.”

Some risks to the NBDT sector are identified in the paper.  It is noted that participation in the sector is shrinking, with no new entrants. Profitability can be low or volatile, depending on the type of business involved.  “Fintech” financial intermediary services such as peer-to-peer (P2P) lending platforms and pay-later platforms like Afterpay have entered the New Zealand market and made inroads into small loans.  Perhaps of greater challenge is the need for NBDTs to invest more in their own technology requirements.  Trends have emerged for larger finance companies to exit the retail depositor market and for credit unions to undertake mergers.

The Trustee  Corporations Association of New Zealand Incorporated (TCA), of which Trustees Executors is a member, submitted in the first consultation round of Phase 2 of the Reserve Bank Act Review.  With respect to the role of supervision of NBDTs, the TCA’s submission argues for continuation of the current system with some enhancements.  The TCA’s submission noted that the current supervisory model is focussed on the underlying investors in the particular NBDT, for whom the supervisor acts. This is different to the macro-prudential supervisory role that the RBNZ has.  The TCA is likely to be submitting again for Consultation 2 that is presently underway.

“The NBDT sector has undergone a lot of change through increased regulation and supervision in recent years, with more such changes slated to come in the near future,” said Shahazad Contractor, Head of Client Supervision of Corporate Trustee Services at Trustees Executors. “As an experienced  supervisor of NBDTs under the terms of the NBDTA, we believe that the current system works successfully and affordably for NBDTs to the benefit of investors.  This view is only reinforced by the Bulletin paper of May 2019.  NBDTs can expect increased compliance-related costs under the new ‘more intrusive’ RBNZ supervision regime proposed, which could place financial and other stresses on some and further reduce participation in the sector. There should be commensurate investor benefits if regulatory costs are to increase through intensified supervision of NBDTs,” he said.