Questions and answers - Deposit Takers Act

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Deposit Takers Act

Get answers to common questions you may have about the Deposit Takers Act and the Depositor Compensation Scheme.

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If you have a question or would like to contact the Implementation Team, please email dta@rbnz.govt.nz.

Purpose and background

In November 2017, the Minister of Finance Grant Robertson announced a review of the Reserve Bank of New Zealand Act 1989 (the Review).

Much had changed in the 30 years since the Act was first passed — both in the international financial environment and with financial system regulation.

The goal of the Review was to modernise:

New Zealand’s monetary and financial stability policy frameworks

the Reserve Bank’s governance and accountability settings.

The first actions as a result of the Review updated the monetary policy framework including:

adding supporting maximum sustainable employment to the economic objectives for the Reserve Bank

creating a Monetary Policy Committee (MPC) with responsibility for formulating monetary policy.

This was enacted in 2018 by the Reserve Bank of New Zealand (Monetary Policy) Amendment Act.

The maximum sustainable employment objective has since been reversed.

Reserve Bank of New Zealand (Economic Objective) Amendment Bill | legislation.govt.nz

The second tranche of work updated the Reserve Bank’s financial stability role and broader governance arrangements when the Reserve Bank of New Zealand Act 2021 (the 2021 Act) passed into law in August 2021. Our previous legislation, the Reserve Bank of New Zealand Act 1989 was more than 30 years old. The new Act aims to modernise how we operate and are governed. It increases our accountability and transparency and brings us closer to what is required of Crown entities in terms of decision-making, reporting and external monitoring.

The final piece of legislation is the Deposit Takers Act (DTA) which:

protects depositors’ money

increases the overall stability of our financial system by creating a Depositor Compensation Scheme (DCS)

strengthens the Reserve Bank’s supervision and enforcement powers with the aim of enabling action before any entity is under inappropriate stress or at risk of failure.

More information about the Reserve Bank of New Zealand Act 2021

Review of the Reserve Bank Act | treasury.govt.nz

The Deposit Takers Bill was introduced to Parliament on 22 September 2022 and the Deposit Takers Act received Royal Assent on 6 July 2023.
This follows the Finance and Expenditure Committee's consideration of the Bill. This material can be found on the New Zealand Parliament website .

Read a copy of the Deposit Takers Act | legislation.govt.nz

An exposure draft of the Deposit Takers Bill was released on 6 December 2021, with the deadline for submissions closing 21 February 2022. As part of the submission process, we ran workshops with banks and Non-Bank Deposit Takers (NBDTs) and met with several firms to address their queries on the Bill.

Read a summary of submissions

We have also published submissions in full with the exception of one submission where the submitter requested the submission be withheld. Alongside submissions, we have also published a suite of documents that support the introduction of the Bill.

Find out more about the submissions made on the exposure draft

On 19 April 2021, Cabinet agreed to a set of recommendations that designed a new prudential framework for deposit taking institutions alongside a strengthened crisis management regime and depositor compensation. You can find further details on these decisions in the proactive release of materials on the Treasury website. Later in October 2021 and June 2022 Cabinet took further decisions regarding more details of the Act.

Significant changes that were made to the Deposit Takers Bill following consultation on the exposure draft are outlined in the Regulatory Impact Statement, which can be found on the Reserve Bank website.

Read the Cabinet papers and Regulatory Impact Statement

Proactive releases | treasury.govt.nz

A joint Treasury and Reserve Bank team undertook the Review, with governance from a steering committee co-chaired by the Treasury and the Reserve Bank.

An Independent Expert Advisory Panel (the Panel) advised on key issues to support the work of the Review team and the steering committee.

Find out more information about the Independent Expert Advisory Panel | treasury.govt.nz

Depositor Compensation Scheme

During public consultation, we received feedback that the proposed $50,000 coverage limit was low. Small deposit takers such as small banks, credit unions, building societies and finance companies, submitted that the lower limit posed a threat to their stability and liquidity. This could prompt some depositors to shift uninsured funds — amounts above the coverage limit — to large banks given the perceived greater stability of large banks.

The higher coverage limit addresses these concerns by:

providing greater coverage for New Zealand depositors

supporting public confidence

enhancing the credibility of resolution tools.

Some stakeholders supported a significantly higher limit more in line with the Australian limit of AUD $250,000. However, a limit of this size would be less consistent with the rationale of the DCS to protect ordinary New Zealand depositors. This is because only a small percentage of depositors have deposits over $100,000.

The DCS covers most transaction, savings, notice, and term deposit accounts offered by deposit takers that are regulated by the Reserve Bank.

Deposit takers are required to maintain a list of DCS-covered deposits on their website. Section 192 of the DTA defines DCS-protected deposits.

Financial institutions, related parties of the Depositor Compensation Scheme, members and government bodies are not eligible for scheme coverage. Section 191 (1) of the DTA defines eligible depositors. Section 191 (1) b lists non-eligible depositors.

Deposit Takers Act 2023 | legislation.govt.nz

The DCS comes into effect on 1 July 2025.

Compensation payments are calculated on a per depositor basis for each deposit taker. See some examples of how this works in different scenarios .

In the event of a deposit taker failure, depositors of the failed deposit taker will be required to submit an alternate bank account with an alternate deposit taker.

This part of the process will be done either via the deposit taker’s online banking platform, the Reserve Bank’s DCS Portal, or by calling the DCS call centre that would be stood up in the event of a failure. Depositors would receive communications, either from the liquidator/receiver of the failed deposit taker or the Reserve Bank (or both) that instructs them on how and where to submit their alternate account details.

The Reserve Bank would work to process DCS payments as quickly as possible, but it could take some time, especially for more complex cases. It will take the Reserve Bank time to process data received from a failed deposit taker, and to make sure payment to all eligible depositors is for the correct amount.

Over time the costs of the DCS will be covered by levies charged to licensed deposit takers. If the DCS fund does not have enough money to cover the cost of a DCS payment event, there is the option of using a Crown funding backstop, which will act as a temporary source of funding.

Any funds provided by the Crown under the scheme will be recovered from the industry over time through levies. Depending on decisions made by individual deposit takers, it is possible these costs could be passed on to customers to some extent. The Reserve Bank has no involvement or oversight in the decision making.

The Minister of Finance will set the funding approach through the Statement of Funding Approach, which is to be published at least every 5 years. The Statement of Funding Approach and the Levy Regulations involved public consultation. You can view the consultation feedback on The Treasury website .

The DCS will have ongoing operational costs.

In the event of a deposit taker failure, the DCS could be faced with the costs of compensation payments.

Moral hazard occurs when people are protected from the consequences of their risky behaviour. When the Depositor Compensation Scheme is introduced depositors may take less care when assessing the risks related to where their money is held. Deposit takers may also take less care with depositors’ money.

Moral hazard risk will be mitigated through the Reserve Bank's existing regulatory policy and supervisory approach, and through charging deposit takers levies that are proportional to the risk they pose.

The objective of the scheme is to protect depositors to the extent they are covered by the DCS and to contribute to financial stability.

The Reserve Bank’s function is to manage and administer the scheme. This includes:

making sure depositors are compensated as promptly as possible if a deposit taker fails

collecting and managing levies

monitoring risks to the scheme

raising public awareness.

Regulatory perimeter

Finance companies that borrow from retail investors continue to be prudentially regulated and are required to be licensed as deposit takers. Prudential standards, Reserve Bank supervision, and risk-based deposit levies will seek to mitigate any risks if finance companies seek to issue products eligible for depositor compensation.

A single regime supports a more coherent approach across the banking and non-bank deposit taking (NBDT) sectors so that similar firms and activities are regulated with proportionality, where possible.

This brings New Zealand’s framework into line with similar models in most other jurisdictions.

The prudential framework has the required flexibility to accommodate the full range of deposit taking institutions, from very small non-bank deposit takers (NBDTs) to the largest banks.

For example, the Reserve Bank is able to calibrate regulatory settings for different classes of deposit taker. The framework also provides discretion for the Reserve Bank to impose institution-specific requirements to reflect the underlying risk profile of that institution (supervisory adjustment).

When exercising its powers under the DTA, the Reserve Bank needs to take account of certain principles that recognise (amongst other things) the importance of maintaining competition, preserving diversity in the deposit taking sector, and the desirability of taking a proportionate approach to regulation and supervision. In relation to the proportionality principle, the Reserve Bank must prepare and publish a proportionality framework when developing standards.

Under the DTA, prudential regulation and supervision applies to firms that are in the business of borrowing and lending unless they are specifically excluded from the regime. This includes banks, credit unions, building societies, and finance companies. The Reserve Bank will establish a policy on which deposit takers can call themselves banks.

Wholesale funded lenders are not expected to be required to be licensed under the new regime, for example those that solely borrow by raising funds on wholesale capital markets. However, the Reserve Bank will be able to collect information and set lending standards for prescribed categories of non-deposit taking lender

DTA purpose and decision-making principles

The purpose clauses sets out the way the Bank intends to protect and promote the stability of New Zealand’s financial system. The purpose statement explains why the legislation was enacted, while the substantive provisions in the Act provide for what is required. In doing so, it shapes how the legislation is interpreted when there is uncertainty and the way in which the functions and powers provided for under the DTA are exercised.

A set of decision-making principles also provides an opportunity to bring in a range of other considerations for the exercise of the powers in the DTA.

The Bank must have regard to the need to avoid unnecessary compliance costs.

Standards and licensing

The types of lending that lending standards may apply to (for example, residential property, agricultural) are prescribed by regulations, leaving the types of borrowers and the types of macro prudential instruments used to be set by the Reserve Bank in the standards. Empowering the Reserve Bank to set lending standards that define specific tools is important in supporting the Reserve Bank’s operational independence in setting macro-prudential policy.

All regulated entities need to obtain a licence from the Reserve Bank to undertake the business of borrowing and lending. The DTA sets out the relevant criteria for licensing a potential applicant, as well as the specific process requirements. The Reserve Bank has powers to establish licensing conditions, specific to licensed deposit takers.

Licensing criteria include fit and proper requirements for directors and senior managers of deposit takers. Fit and proper requirements are designed to help ensure that directors and senior management have the requisite skills, experience and integrity to perform their roles. The framework for fit and proper requirements and procedural protections in the DTA is along the lines of that for insurers under the Insurance (Prudential Supervision) Act 2010, with some of the detail of the requirements specified in standards.

This approach helps ensure the Reserve Bank can flexibly manage the risks presented by particular entities. In addition, it ensures there are effective due process requirements around licensing decisions and decisions to impose conditions (including appeal rights in certain cases).

This model recognises that prudential requirements are often of a legislative character by establishing legally binding obligations for all deposit takers, or classes of deposit takers in contrast to non-binding guidance a regulator may choose to issue and provide a more robust statutory framework for setting prudential requirements.

More specifically, once the relevant provisions are in force, it will replace Conditions of Registration (CoRs), which define most of the rules that registered banks must adhere to in order to operate in New Zealand, with standards, which are a form of delegated legislation. Standards set by the Reserve Bank are classified as secondary legislation under the Legislation Act 2019, which means they will be subject to parliamentary oversight and potential disallowance via the Regulations Review Committee.

This approach maintains the Reserve Bank’s operational independence in setting prudential rules (in line with international best practice), while providing a greater degree of transparency and oversight than the current approach, which primarily uses CoRs.

Standards issued under the DTA can cover a range of matters currently provided for via Conditions of Registration (CoRs), but with more clarity where required — for example, the addition of liquidity requirements and lending standards, which were formerly provided for under the broader heading of risk management systems and policies.

The scope of standards is also intended to be broad enough to enable the Reserve Bank to set standards in relation to the full range of matters covered by the Basel Committee on Banking Supervision’s Core Principles, should it choose to do so.

The specified matters standards may relate to are set out in the DTA and may be extended via regulations. This approach aims to provide a balance between clarity on the scope of the powers being delegated to the Reserve Bank and the flexibility for these powers to be adjusted in future to accommodate new developments.

The DTA provides that the Minister of Finance can make regulations (following consultation with the Reserve Bank) defining the type of lending that lending standards may relate to. This reflects the legitimate interest of elected representatives in setting the permitted scope of this power given the potentially significant distributional effects it may have, and the potential tensions between the Reserve Bank setting lending restrictions to achieve its financial stability objective and wider governmental objectives.

Liability and accountability

The DTA imposes on directors of licensed deposit takers a positive and on-going duty to ensure there are adequate systems, processes and policies in place to ensure the entity complies with its obligations. There are pecuniary penalties for breaches of this duty by directors, subject to appropriate defences.

In addition, directors are able to take out personal insurance against the potential penalty for such breaches. Directors of licensed deposit takers may also be liable for a penalty if false or misleading information is given to the Reserve Bank or publicly disclosed by a deposit taker.

Supervision and enforcement

New supervision and enforcement powers under the DTA will strengthen the Reserve Bank’s ability to act before a financial institution is in trouble. This provides more protections for depositers and increases the stability of the financial system.

Resolution and crisis management

The DTA addresses a long-standing gap in the government’s financial crisis management framework by amending the Public Finance Act 1989 to authorise the Minister of Finance to approve expenditure in a financial crisis whether or not there is an appropriation in place. This authority is similar to the existing authority to incur expenditure in a civil defence or health emergency.

The authority has several conditions attached to ensure that it does not raise expectations of taxpayer bailouts and will only be used as a last resort to maintain the stability of the financial system and the continuity of critical financial services when all other options were unlikely to succeed or not in the public interest.