Non-Bank Deposit Takers Bill: solving yesterday's crisis, and creating tomorrow's?

On the face of it, little in the Non-Bank Deposit Takers Bill (NBDT Bill) would excite the non-specialist. But the prudential regime it envisages goes well beyond the finance companies it was designed to regulate.

We hope that the Finance and Expenditure Select Committee addresses this before the Bill becomes law.

This Brief Counsel outlines the problems and suggests some practical solutions.

Problem diagnosis

The Bill, which was introduced into the last Parliament and released for submissions late last year, will replace Part 5D of the Reserve Bank of New Zealand Act 1989 (RBNZ Act) and so provides an important opportunity to deal with Part 5D's defects.

Instead, it carries them over into the new legislation.

Unless remedial action is taken the NBDT regime's reach will continue to extend well beyond the finance companies which were the intended target and will continue to discourage highly rated and high quality issuers from going into the retail bond market. This will reduce choice to investors, the exact opposite of what this reform was meant to achieve.

A glimpse at the exemptions page on the Reserve Bank (RB) website shows how far the NBDT regime has veered from its objective of cleaning up the finance company sector. Not only are several retail brokers' cash management schemes exempted, although a purer example of compliance cost without benefit is hard to envisage, but there is even an exemption for a supermarket.

Key problems are:

the definition of NBDT is far too wide (indeed, wider than that in any regime that we have checked) there is not enough guidance on purpose, so the RB has adopted a literal interpretation which gives no regard to whether an entity is in substance a finance company, and the exemption regime is too narrow and is heavily stacked in favour of regulation. The definition debate

The definition of "deposit taker" (now "NBDT") exercised the minds of lawmakers when Part 5D of the RBNZ Act was enacted and Parliament basically kicked for touch by leaving it to the RB to decide which entities should be covered and which exempted.

The weaknesses of this approach are that:

the RBNZ Act talks of "borrowing and lending" without being clear that this borrowing and lending must be 'of the nature carried out by a credit institution' as opposed to, say, lending money within one's one group of companies, and the RB is naturally reluctant to get into a situation where, by excluding a particular entity, it creates a precedent or even a loophole that others, who should be covered...