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

Brief Counsel
Last Updated: 9 February 2012
Article by Alan Lester, Ross Pennington and John Holland

Most Read Contributor in New Zealand, September 2016

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, can exploit.

The RB's policy positions have arguably exacerbated these effects; in particular the RB's presumption that:

"all entities that clearly fall within the definition of a deposit taker will be subject to prudential requirements, and that exemptions – especially class exemptions – should be the exception, not the rule."

The exemptions regime

There are in theory two ways one can be exempted from the NBDT regime if the "deposit taker" definition applies:

  • total exemption - exclusion from being a "deposit taker" under a section 157C(5) regulatory declaration, and
  • partial exemption - exclusion of a deposit taker from particular aspects of the regime pursuant to section 157G.

In practice, the RB does not use section 157C and instead relies exclusively on section 157G. But the tests under section 157G are weighted strongly in favour of regulation. Deposit takers must be able to demonstrate that each and every particular requirement of the regime is "unduly onerous and burdensome" and that any exemption granted is no broader than what is "reasonably necessary".

There are no rights of appeal against RB decisions or any other practical recourse for the putative deposit taker.

This is discouraging high quality companies from issuing debt securities to the New Zealand public. The RB does not identify it as a cost in the Regulatory Impact Statement to the Bill, but the damage to New Zealand's capital markets will be no less real for being invisible.



The RB should have the power to assign non-NBDT status where a person is technically a deposit taker but is not in substance a finance company or similar credit institution. Note that this would apply only to individual entities - not to classes of organisations, which would invoke wider policy considerations.

Clearer guidance to the RB in respect of its gate-keeping function and the intended boundaries of the regime would also be helpful.

Defining 'financial institutions'

In a leading case in the United Kingdom Court of Appeal, Harman LJ observed:1

it is notoriously difficult to define the business of banking and no statute has attempted it.

Despite this difficulty, we recommend the following changes to the way "NBDT" is defined in the Bill:

  • clarify that the test is an in substance one, relating to persons who are or should be regarded as finance companies or credit institutions
  • permit the RB to exempt particular persons from the NBDT regime in its entirety on the basis that they are not in substance a finance company or credit institution
  • include a non-exhaustive list of factors relevant to the substance test, including:
  1. if the entity (or, where the entity is guaranteed, the credit group) should be regarded as a corporate issuer rather than a finance company on the basis that its financing activities are ancillary to its primary business
  2. an assessment of the financial statements of the entity or credit group. A feature of true finance companies is that their balance sheets are dominated by loan receivables and their income statement is dominated by interest income and other finance charges – usually about 90%+ in each case. Where this is not the situation, that would be a strong indication that it is not in substance a finance company or credit institution
  3. an assessment of the nature and terms of the debt securities being issued. Relevant factors here would include:
  1. a history of continuous issuance (corporate issuers tend to offer debt securities only through discrete offer periods, rather than keeping their offers continuously open)
  2. whether the debt securities are in the nature of a deposit or a bond. The former will usually have a maturity of two years or less and may be rolled over. The latter will usually have a maturity of three or more years and a fixed maturity date

(We note that there are currently criteria in the existing (unused) section 157C(6) of the RBNZ Act, which, while a step in the right direction, we submit do not go far enough.)

  • delete from the definition of NBDT the words "or providing financial services, or both", since they are not necessary in order to capture true finance companies but generate a lot of false positives, including brokers' cash management accounts
  • provide an explicit exclusion for "licensed insurers" within the meaning of the Insurance (Prudential Supervision) Act 2010, on the basis that they are subject to their own distinct prudential regime
  • tidy up grey areas such as lending within a group. The regime should only apply if the proceeds are ultimately lent to external borrowers, not lent within a group whose activities do not substantially involve being a finance company.

Conclusion about the threshold issue

We consider that the current approach of having the broadest possible definition and leaving it to the regulator to police the boundaries of its own regime is demonstrably not working (a fact alluded to in the Cabinet Paper leading to this reform but not addressed in the Bill).

Much better, in our view, would be to have greater prescription around who is and, just as importantly, who is not an NBDT. Issues around avoidance can be dealt with by bestowing on the Minister a "call-in" power.

The regime in context

The prudential regime now encapsulated in Part 5D of the RBNZ Act and to become part of an NBDT Act is simpler, but not necessarily less exacting, than the regime applying to registered banks.

In its original conception, it was to be a targeted regime, recognising the second-tier nature of finance companies.2 Specifically, there were to be two levels: the first involving Authorised Deposit Takers (or ADTs), which would be larger finance companies subject to a bank-like prudential regime, "but pitched at a somewhat lower level".3 Then there would be Tier 2 NBDTs, subject to enhanced trustee-based supervision but with only limited capital adequacy requirements.

The Ministry's rationale for this treatment was:4

"Requiring all NBDTs to be licensed and supervised to a uniform level would impose substantial efficiency costs on the financial system"

The efficiency costs, according to the Ministry, would come both in the constraint on investor choice and in the reduction of the NBDT sector to meet the needs of the economy in niche markets not readily serviced by banks.

This policy consideration seems to have disappeared from view, which is perhaps unfortunate in a climate of tightening lending standards in the banking sector and reducing growth forecasts in the economy. Notably, lending from finance companies has been in freefall since late September 2007, with credit growth in the sector hovering for each of the past two years at around minus 20%.5

Much of this no doubt reflects an unwind of the credit-fuelled property development bubble, but equally the question should be asked about the productive and dynamic efficiency effects of this trend.

Practical impacts

It goes without saying with respect to the aims of this reform that the horse has already bolted. The majority of significant finance companies are and will continue to be exempt from prudential requirements because they are already bust.6

Among those finance companies that remain, some have chosen to abandon the retail deposit model because compliance costs are too high. Others have chosen to become fully fledged registered banks, sometimes after merging with others for critical mass.

In practice, then, there is not much left to be regulated under this regime.

The law of unintended consequences

Leaving aside specific questions about the sustainability of the NBDT sector and any potential economic impacts of its downscaling, the consequences of the NBDT Bill for capital markets participation and choice must not be ignored.

It is time to acknowledge that the failed finance companies and their captive financial advisers were a sector unto their own. The outsized growth of this sector exactly coincided with a global credit binge and asset bubble and, ultimately, the sector was brought down by the same forces that created it.

To some degree, the law of unintended consequences will attend any attempted reform. But a reform designed to improve the retail capital market which acts as a deterrent to the participation in that market of high quality issuers is not a step in the right direction.

For further information, please contact the lawyers featured.


1 United Dominions Trust Ltd v Kirkwood [1966] 2 QB 431 at 457.
2See the Ministry of Economic Development Discussion Document Review of Financial Providers: Non-Bank Deposit Takers (September 2006) (RFPP Paper).
3RFPP Paper, para 80 on pg 24.
4RFPP Paper, para 74 on pg 22.
5Reserve Bank of New Zealand Financial Stability Report (November 2001), pg 33.
6Refer Deposit Takers (Moratorium) Exemption Notice 2009 and the Deposit Takers (In Receivership or Liquidation) Exemption Notice 2009.

The information in this article is for informative purposes only and should not be relied on as legal advice. Please contact Chapman Tripp for advice tailored to your situation.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Mondaq Advice Centre (MACs)
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.