New Zealand

Author: | Published: 30 Sep 2004
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Legislation governing the authorization and regulation of banking activities in New Zealand

The Reserve Bank of New Zealand Act 1989 (the RBNZ Act) confers powers on the Reserve Bank of New Zealand to register banks and to undertake prudential supervision of registered banks. Registration under the RBNZ Act, or authorization from the Reserve Bank, is required if an institution wishes to use the words bank, banker or banking in its name. Registration is not, however, a requirement for an institution to conduct banking business or deposit taking.

Financial institutions, including registered banks engaging in banking activities in New Zealand, will be subject to legislation that generally applies in New Zealand, including:

  • The Companies Act 1993, which regulates the formation, powers and activities of New Zealand incorporated companies. Overseas companies that carry on business in New Zealand must be registered under, and become subject to certain provisions of, this Act.
  • The Securities Act 1978, which regulates the offering and allotment of securities to the public.
  • The Fair Trading Act 1986, which prohibits misleading and deceptive conduct in trade.
  • The Consumer Guarantees Act 1993, which deems certain guarantees to be given where goods or services are supplied to a consumer.
  • The Credit Contracts Act 1981, which regulates the provision of credit, including by prohibiting oppressive contracts and conduct, requiring full disclosure of credit contracts and preventing misleading advertisements. With effect from April 1 2005, the Credit Contracts and Consumer Finance Act 2003 will replace the Credit Contracts Act 1981 and the Hire Purchase Act 1971. It aims to provide a modernized framework for regulating credit transactions and consumer leases, by simplifying the law for both creditors and debtors.
  • The Financial Reporting Act 1993, which provides for issuers of securities to file financial statements that comply with generally accepted accounting practice and that present a true and fair view.
  • The Financial Transactions Reporting Act 1996, which provides for financial institutions to verify the identity of facility holders, to report suspicious transactions and to retain verification and transaction records.
  • The Investment Advisers (Disclosure) Act 1996, which requires the disclosure of certain information by persons who give investment advice to the public or receive money or property for investment from the public as intermediaries.
  • The Privacy Act 1993, which governs the collection of personal information from individuals.
  • Other legislation regulating specific areas, such as life insurance, unit trusts and superannuation.

Recent regulatory issues for New Zealand

The RBNZ Act was amended with effect from August 20 2003. Principal changes include:

  • extending the class of persons who may use the words bank, banker and banking in their name or to describe their activities;
  • improving the Reserve Bank's investigative and information gathering powers and its powers where there is a bank failure;
  • broadening the grounds for cancellation of a bank's registration to include a change of ownership considered materially adverse to the standing or financial position of the registered bank;
  • broadening the factors that might be relevant when considering an application for registration and providing additional factors to be considered if the applicant is an overseas person or a subsidiary of an overseas person; and
  • empowering the Reserve Bank to regulate payment systems.

Other changes to the RBNZ Act are discussed below.

The Securities Markets (Disclosure of Relevant Interests by Directors and Officers) Regulations 2003 came into force on May 3 2004. These regulations require all directors and officers of public issuers to disclose their relevant interests, and any dealings, in the securities of the public issuer. Disclosure must be made to the registered exchange with which the public issuer is listed, and in the interests register of the public issuer, within five trading days of the disclosure rules becoming applicable or the acquisition or disposition occurring (as relevant). Certain directors and officers are exempt from some of these requirements if their relevant interest is in a debt security that is unlisted, unquoted, or for which there is no established market, or in certain other specified circumstances. (For example, the definition of security is broad and would extend to bank accounts and term deposits. However, an exemption has been granted from the requirement for a director or officer of a public issuer that is a registered bank to disclose relevant interests in bank accounts with that bank.)

Activities for which authorization is required in New Zealand

No financial institution may use the words bank, banker or banking in its name or in any promotional material unless it is a registered bank, is authorized to use the word by the Reserve Bank or, in the case of an advertisement, the advertisement contains a statement in the prescribed form. It is an offence for a person to use any name, title, trade mark, style or description that represents or implies it is a registered bank (unless that person is a registered bank). Banking business itself does not require authorization in New Zealand, and any institution can take deposits and conduct other banking activities. However, registration under the RBNZ Act brings with it certain advantages in respect of the disclosure requirements for deposit taking.

Any offer of securities to the public must be made in accordance with the Securities Act 1978. Registered banks are not required to register a prospectus for the issue of debt securities (as the disclosure requirements of a prospectus are substituted by the Reserve Bank's disclosure regime), but still must prepare an investment statement (other than for call debt securities).

Investment in New Zealand by overseas persons is subject to the Overseas Investment Act 1973 (OIA) and regulations made under the OIA. This establishes the Overseas Investment Commission, which has responsibility for supervising investment by overseas parties. Consent is required, for instance, where those investments exceed NZ$50 million ($32 million) (and NZ$10 million in respect of land). The government ordered a first-principles review of the OIA last year and intends to incorporate the results of that review into legislation later this year. The proposed changes include the disestablishment of the Overseas Investment Commission and the formation of a dedicated unit within Land Information New Zealand to administer the OIA.

Overseas companies carrying on business in New Zealand must be registered as overseas companies under the Companies Act 1993.

The listing of companies with New Zealand Exchange Limited (NZX) is governed by the NZX Listing Rules.

A person wishing to engage in conduct that is or might be otherwise prohibited by the Commerce Act 1986 (for example, a restrictive trade practice or the acquisition of an asset) may apply for an authorization or clearance from the Commerce Commission.

Sharebrokers must be licensed under the Sharebrokers Act 1908. Futures exchanges and futures dealers must be authorized by the Securities Commission in accordance with the Securities Markets Act 1988.

Sanctions available to the regulators in New Zealand

The Reserve Bank has the power to:

  • recommend the deregistration of a bank to the Treasurer, the Minister responsible for administering the RBNZ Act;
  • require a bank to supply information, data or forecasts or a report on its financial and accounting systems;
  • require a bank to obtain a credit rating;
  • enter a bank's premises to obtain information;
  • require consultation with a bank or give written directions to a bank to take any action, including cease to carry on business, after consultation with the Treasurer;
  • remove, replace or appoint a director of a bank;
  • investigate the affairs of a bank and recommend to the Treasurer that the bank be put into statutory management;
  • require a person to change its name or title to one that does not include a restricted word; and
  • authorize home country supervisors of overseas banks to conduct an inspection of an overseas bank's New Zealand operations.

The Securities Commission has the power to:

  • cancel a prospectus or prohibit an advertisement for securities that is false or misleading;
  • require a person to supply it with documents for inspection;
  • issue a summons to a person requiring that person to appear before it;
  • order a public issuer to disclose information to comply with the continuous disclosure obligations under the Securities Markets Act 1988; and
  • take court action to seek civil penalties for insider trading.

The Overseas Investment Commission has the power to:

  • apply to the High Court to seek an order for disposal of property acquired in contravention of the OIA and regulations within two years of the contravention; and
  • require the production of information and documents that relate to a suspected offence under the regulations.

The Commerce Commission has the power to:

  • either with consent or after a hearing, impose a cease-and-desist order against a person who is engaged in conduct prohibited by the Commerce Act 1986;
  • request documents or information from any person, and to require persons to appear before the Commerce Commission;
  • search under warrant for the purpose of determining whether a person has contravened the Commerce Act 1986; and
  • apply to the High Court to seek an order for a person who has contravened the Commerce Act 1986 to pay a pecuniary penalty or for an injunction restraining a person from engaging in conduct that contravenes or would contravene the Commerce Act 1986.

The Registrar of Companies has the power to:

  • inspect for the purposes of ascertaining compliance of companies or directors with the Companies Act 1993 or the Financial Reporting Act 1993;
  • request information from, and to investigate, a corporation for the purposes of the Corporations (Investigation and Management) Act 1989;
  • prohibit certain persons from being directors or promoters of companies; and
  • de-register a company.

The Registrar of Companies must consult with the Reserve Bank before exercising any of its powers if the purpose of exercising the power relates to a company that is a registered bank.

Rules governing a bank's obligations to its customers

The banking industry regulates itself to a large degree through the Code of Banking Practice and the Banking Ombudsman Scheme. These specify minimum standards of practice for banks dealing with their customers. However, they do not impose legal obligations on banks, unless those obligations are specifically incorporated into contracts between banks and their customers. Banks enter into both the Code of Banking Practice and the Banking Ombudsman Scheme on a voluntary basis (all of the main retail banks in New Zealand are participants in these schemes).

Supervisory requirements

The supervisory regime for banking business in New Zealand includes regulatory capital requirements based on the Basel Accord

The Reserve Bank is responsible for supervising the financial system in New Zealand. All New Zealand incorporated banks are required to comply with the minimum standards specified in the Basel Capital Accord. These requirements are imposed as a condition of registration. However, the Reserve Bank has not ruled out the possibility of variance in capital requirements for particular classes of bank if systemic risk characteristics are seen to warrant this.

Overseas-incorporated banks may comply with the capital adequacy requirements of their home country, provided that those requirements as a minimum meet the Basel Capital Accord requirements.

The effect Basel II will have on banking transactions in New Zealand

All four of the main banks in New Zealand are subsidiaries of Australian banks. Given this, the effect of Basel II in New Zealand will be largely influenced by the approach the parents of the New Zealand banks adopt. We understand that the four major banks are preparing to achieve advanced IRB status.

The Reserve Bank has expressed concerns about Pillar 2 of Basel II, which requires regulators to supervise the review of financial institutions' capital adequacy requirements relative to their risks. The requirement to supervise does not fit well with the Reserve Bank's practice of placing the responsibility for validating this risk with bank directors. The Reserve Bank has indicated that it has a preference for New Zealand banks to meet the standardized IRB approach.

Rules and operational and organizational requirements in New Zealand relating to internal controls and operational risk

One of the requirements for registration of a bank in New Zealand is that the Reserve Bank must be satisfied that the bank has, or will have, internal controls and accounting systems that are appropriate for a registered bank.

The emphasis in New Zealand is for directors, rather than supervisors, to take responsibility for the adequacy of internal controls. All registered banks are required to publish a disclosure statement on a quarterly basis. Disclosure is made in two main forms:

  • a key information summary, which contains brief financial and corporate information on a bank;
  • a general disclosure statement, which contains more comprehensive financial and corporate information on a bank.

If not contained in the general disclosure statement, a bank must publish a supplemental disclosure statement with details of guarantee arrangements (if applicable) and its conditions of registration.

Each disclosure statement must contain certain attestations signed by every bank director or their agent. The attestations include statements:

  • as to whether exposures to connected persons are contrary to the interests of the banking group;
  • as to whether the bank's conditions of registration are being complied with;
  • as to whether the bank has implemented systems to monitor and control the banking group's risks and whether those systems are being properly applied.

The Reserve Bank has clarified its policy in relation to local incorporation and outsourcing. The Reserve Bank will require any systemically important bank that is applying for registration to be incorporated in New Zealand (although the Reserve Bank has stated that it is considering whether a so-called buttressed branch is an acceptable option). Applicants will be required to satisfy the Reserve Bank (among other things) that:

  • there will be no transfer of the bank's business to the balance sheet of a bank incorporated overseas; and
  • any proposed movement or outsourcing of the bank's functionality and managerial capacity, including to the parent bank or entity within the parent group, will not compromise the ability of the bank to operate as a going concern on a stand-alone basis if its parent bank, or other supplier of services or functionality to the bank, fails or becomes dysfunctional.

The requirements for controllers and major shareholders of regulated banking institutions to be approved by the supervisory authority

The Reserve Bank must have regard to the following factors when considering an application for registration as a registered bank:

  • the incorporation and ownership structure of the applicant;
  • the size and nature of the applicant's business or proposed business;
  • the suitability for their positions of the directors and senior managers of the applicant;
  • the standing of the applicant and its owner in the financial markets;
  • the ability of the applicant to carry on business in a prudent manner; and
  • if relevant, the corresponding laws in the applicant's or controller's home jurisdiction.

Where the applicant is a branch or subsidiary of an overseas bank, the Reserve Bank will seek comments from the home supervisor before determining the application.

Under the RBNZ Act, parties seeking to acquire a significant influence over a registered bank are required to obtain written consent from the Reserve Bank before doing so. A significant influence includes the ability to appoint 25% or more of the directors or an interest in 10% or more of the voting securities of the registered bank.

Investor protection scheme

Changes to insolvency legislation in New Zealand

In April 2004, the government released the draft Insolvency Law Reform Bill for public consultation. The Bill amends insolvency procedures for both corporates and individuals. The main changes to the existing law are:

  • to introduce a business rehabilitation regime based on the Australian voluntary administration provisions;
  • introducing further criminal penalties and restrictions on the re-use of insolvent company names by company directors to address problems with phoenix companies;
  • to provide a mechanism to enable streamlined procedures to be implemented under the UNCITRAL Model Law for Cross-border Insolvency. The Model Law will not apply to registered banks that are subject to statutory management under the RBNZ Act;
  • the introduction of a no-assets procedure as an alternative to bankruptcy for individuals with few or no assets; and
  • replacing the existing legal tests for setting aside transactions with tests based on net effects that are modelled on Australian law.

The new regime is likely to be more favourable to borrowers due to mechanisms such as the no-assets procedure as an alternative to bankruptcy for individuals, and the new business rehabilitation model for corporates.

There is no deposit protection or guarantee scheme protecting retail depositors from loss if an authorized bank becomes insolvent

Neither the government nor the Reserve Bank underwrites or guarantees the financial soundness of individual registered banks. Instead, the bank registration, disclosure and supervision provisions of the RBNZ Act are intended to facilitate market discipline and director responsibility as the main elements in ensuring financial soundness of registered banks and their sound management.

The auditor of a registered bank, or an associated person of a registered bank (in essence, defined as a person who controls or has an interest in more than 20% of the voting securities of, the registered bank) must advise the Reserve Bank if a registered bank is insolvent, is likely to become insolvent, or is in serious financial difficulties. A registered bank, or an associated person of a registered bank, may be placed into statutory management by Order in Council on the recommendation of the Reserve Bank, which can only be given if certain statutory criteria are satisfied.

Ombudsman schemes, arbitration schemes and similar schemes for the resolution of disputes between a bank and its retail customers other than through formal legal proceedings

The Banking Ombudsman Scheme is a self-regulatory scheme established by trading banks in New Zealand to appoint an ombudsman to consider complaints about the provision of banking and other financial services by participating banks, and to facilitate the satisfaction, settlement or withdrawal of complaints by recommendation, awards or other means. Under the Banking Ombudsman Terms of Reference, the Banking Ombudsman has no power to consider a complaint that relates to a bank's commercial judgment in decisions about lending and security, or its interest rate policies. Awards may not exceed NZ$120,000 or, in relation to a complaint about the provision of banking services relating to insurance, NZ$150,000.

The Insurance and Savings Ombudsman Scheme is a voluntary scheme consisting of participants that provide insurance and savings services. The Insurance and Savings Ombudsman facilitates the resolution of disputes between consumers and providers of insurance and savings services. The decisions of the Insurance and Savings Ombudsman are binding on the participants in the scheme. Awards may not exceed NZ$100,000 or, in the case of a claim relating to a policy of disability insurance that provides for regular payments to the insured, NZ$750 a week.

Author biographies

Prue Flacks

Russell McVeagh

Prue Flacks is a leading practitioner in her area as evidenced by recognition in numerous independent directories, including Chambers Guide, the Asia Pacific Legal 500, IFLR and AsiaLaw Profiles, The Client's Guide to Law Firms in New Zealand, and Who's Who Legal.

With over 20 year's experience in the New Zealand market, she specializes in major corporate finance, capital markets, structured finance transactions and asset-backed finance (including securitization).

Alan A'Court

Russell McVeagh

Alan A'Court is one of New Zealand's leading banking lawyers with particular experience in structured finance; asset-based finance (including cross-border leasing and securitization); corporate finance; capital markets; corporate restructuring and workouts. He is regularly named as a leading practitioner in the finance area by many international directories, including Chambers Guide, the Asia Pacific Legal 500, IFLR and AsiaLaw Profiles, The Client's Guide to Law Firms in New Zealand, and Who's Who Legal.

Guy Lethbridge

Russell McVeagh

Guy Lethbridge is an associate in Russell McVeagh's financial services group. Guy returned to Russell McVeagh in 2000 after working in London for a number of years. He specializes in corporate and structured finance, capital markets and general banking and regulatory advice.

Russell McVeagh
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