Update Depositor Compensation Scheme Implementation

1 DCS Implementation update Ref #22621354
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REFERENCE: 6291
DATE: 12 June 2025
TO: Hon Nicola Willis, Minister of Finance
FROM: Angus McGregor, Acting Assistant Governor Financial Stability Angus.McGregor@rbnz.govt.nz, MAIN CONTACT: Kerry Beaumont, Director of Enforcement & Resolution, Senior Responsible Officer of Depositor Compensation Scheme, Kerry.Beaumont@rbnz.govt.nz, Update: Depositor Compensation Scheme Implementation ___________________________________________________________________________

Purpose

1. On 23 April, you were briefed on the implementation of the Depositor Compensation Scheme
   (the DCS). This memo provides an update on material aspects since that previous briefing, and it is our final briefing prior to the implementation of the DCS on 1 July 2025. Background
2. The DCS is implemented under Part 6 of the Deposit Takers Act (the DTA). The DTA requires
   the Reserve Bank to manage and administer the scheme, and to prepare audited financial statements, with Treasury as the monitoring agency. All costs of the DCS are funded by levies paid by deposit takers. The scheme provides eligible depositors with compensation of up to $100,000 per deposit taker in the event of the failure of a deposit taker. Key updates There are no material concerns for the implementation of the DCS on 1 July 2025...
3. The core roles, responsibilities, processes, and technology for the DCS payment functionality
   have been built, tested and will be available from 1 July 2025.
4. The DCS Transitional Standard was issued by the RBNZ on 15 May 2025 and published on 21
   May 2025. The Standard requires deposit takers to preposition a public-facing depositor webpage through which depositors can provide account details about another account to which compensation can be paid. Industry have been fully consulted on this requirement and the Standard provides sufficient flexibility to keep compliance costs to a necessary minimum.
5. An independent quality assurance (IQA) report by Grant Thornton expressed a “high degree of
   confidence” in the DCS implementation project, and that the Reserve Bank was on track to meet its DCS obligations. It concluded that were no “significant gaps or red flags” in the s 9(2)(a) s 9(2)(a) Proactively Released

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SENSITIVE operational readiness of the DCS to execute a payout. Treasury have been provided a copy of the report. … but the baseline functionality will be improved post July …
6. We estimate that it will take approximately 6 weeks minimum to process compensation
payments for most customers of a failed entity. Some complex cases could take longer.
7. There are technological, data and depositor-behavioural factors driving the 6-week timeframe.
The main ones are:
i. Single Depositor View (SDV) maturity in the New Zealand financial system. To calculate a
depositor’s DCS entitlement, the RBNZ requires SDV information from the failed deposit taker. The ability to compile a SDV varies across deposit taker systems. Industry is working on this and will need to comply with an SDV standard from 2028 (industry have been consulted).
ii. New account onboarding times. DCS entitlements must be paid through the banking
system. This means depositors of a failed entity must nominate an alternative account to receive a DCS payment from the RBNZ. If the depositor does not have an alternative account, they will need to open an account at another deposit taker before they can receive their DCS payment. Industry needs to be prepared to onboard depositors of a failed entity quickly, if required. We plan to continue our dialogue with industry on this issue.
8. The RBNZ has built baseline technology to facilitate a DCS payout, although some manual
processes would likely still be required for a DCS payout. For example, ID verification by phone if something has gone wrong with the automated process or manual intervention if something is wrong in a data file received from the failed entity.
9. Improvements to baseline technology are being planned from 1 July to reduce operational
risks, decrease payout times and improve customer experience. This work aligns with the key recommendations of the IQA and will be led by the DCS Operations Team over the coming months. We will also continue to monitor technological developments and use innovative solutions, where appropriate, to drive efficiencies. … and clear expectation setting is key.
10. A key benefit of the DCS is the protection it offers depositors and the faster access it provides
them to their funds, when compared to liquidation. A DCS payout time of 6 weeks compares to depositors receiving a proportion of their funds in 6 to 12 months’ time under a normal liquidation. It is important we are clear and transparent about the process and timelines involved in a payout.
11. It is possible some people will find themselves in hardship if they suddenly lose access to their
accounts. While this issue is not new, the introduction of the DCS may raise expectations that there will be Reserve Bank and Government support to facilitate on-going access to banking services. Given the RBNZ's limited responsibilities and relevant tools in this area, we are open to working with other agencies to preposition cross-government support to those in hardship Proactively Released

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SENSITIVE because of a deposit taker failure. This is likely to require your support including to discuss possibilities with your ministerial colleagues. Promotion of the DCS will be balanced and informative…
12. In the lead up to 1 July 2025, we are executing a range of communications initiatives targeting
various audiences. A second drop of DCS material to assist deposit takers to engage with their customers about the DCS was released on 29 May. Interest by the public is growing as evidenced by an increase in queries received by RBNZ.
13. We will be doing media and press interviews ahead of the introduction of the DCS, and we
have media activity planned around the ‘go-live’ date. We will share our communications plan with your office before 1 July to coordinate any joint activities or material.
14. We have contacted your office and will be coordinating our communications activities with any
you might be planning.
15. Post 1 July we will continue to promote the DCS through ongoing awareness activities and
further engagement with industry bodies and other stakeholders.
… and RBNZ continues to monitor deposit taker and system liquidity.
16. Our promotional approach to the introduction of the DCS aims to strike a balance between
providing information to the public and managing the risk of people becoming unnecessarily concerned about financial stability. As discussed in our briefing of 23 April 2025, we are monitoring liquidity among deposit takers. While the risk of liquidity stress at individual deposit takers or at a systemic level is very low, we want to be prepared. It is, however, each deposit taker’s responsibility to manage their liquidity. So far, there have been no signs of any liquidity pressures. Work with Treasury continues…
17. RBNZ is in the process of agreeing ongoing legislative and financial reporting requirements
with Treasury, to be in place by 30 June 2025. This will be supplemented by agreed DCS Event reporting (being either a payout under DCS or funding to support resolution activities) to provide visibility of recovery activities undertaken by the receiver/liquidator on behalf of the DCS fund.
18. We have informed Treasury of our approach to funding initial DCS operating activities. This
involves the RBNZ internally financing the DCS’s operating costs until sufficient receipt of the levy funds. Further investment in the build out mentioned above has also been included in future year forecasts. Treasury have noted these proposals and have not raised any objections.
19. Work is also underway with Treasury on setting up the terms of the Crown Backstop for the
DCS (which would be called upon if the DCS fund does not have sufficient money built up to pay compensation in a deposit taker failure). We understand that Treasury will brief you Proactively separately on the terms of the backstop shortly. Released

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… and we are strengthening our relationships with key stakeholders and overseas counterparts
20. We have submitted our application to join the International Association of Deposit Insurers
(IADI). The IADI is the international body of deposit insurers and issuer of the Core Principles for Deposit Insurance.
21. Recent interactions with the UK and Dutch deposit insurance schemes have proven extremely
valuable. Our payment solutions are aligned with international leading practice, and it appears that our set up, number of FTEs and operating expenditure forecast compare favourably in terms of efficiency and cost. We will be doing more work on this over the coming weeks.
22. Domestically, we have strengthened our relationship with insolvency practitioners. We are
currently working on agreeing expectations as, in the event of a deposit taker failure, the DCS will rely on insolvency practitioners to supply key information about the depositors in the failed deposit taker and communicating with them. Role clarity, expectations and close coordination is key. Next Steps
23. We will be liaising with your office to share communications material and coordinate activities
accordingly.
24. Our next DCS update will be provided in 3 months’ time. This will include observations on
liquidity impacts. Any emerging liquidity stress in the meantime will be brought to your swift attention.
25. Please let us know if you would like more regular updates.
Angus McGregor
Acting Assistant Governor Financial Stability
Reserve Bank of New Zealand
Email: Angus.McGregor@rbnz.govt.nz, Mob:
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