Non-bank deposit takers risk management guidelines released

The Reserve Bank has released its risk management programme guidelines for non-bank deposit takers.

Background

The Reserve Bank of New Zealand Act 1989 (the Act) was amended in 2008 to establish a new framework for the regulation of non-bank deposit takers (NBDTs) by the Reserve Bank. A new Part 5D has been inserted into the Act, which requires NBDTs to comply with various prudential regulatory standards. Prior to the change, these entities were not subject to prudential supervision by a government regulator.

Under the Act, a NBDT includes someone who:

• "offers debt securities to the public of New Zealand" and

• "carries on the business of borrowing and lending money, or providing financial services, or both."

Briefly, under the new regime, NBDTs are required to:

• have at least two independent directors;

• obtain a credit rating from an approved agency;

• observe new limitations on exposures to related parties;

• have a minimum capital ratio requirement of eight per cent; and

• observe new risk management requirements (not yet in force).

Updates

The Reserve Bank has updated its policy position in relation to:

• corporate issuers;

• funding conduits;

• payment facility providers; and

• entities exempted under the Securities Act 1978.

The Reserve Bank has also been working on two class exemptions:

• An exemption from the credit rating requirement if total liabilities are less than $20 million. The exemption, made under Part 5D of the Act, is available to NBDTs whose consolidated liabilities are less than $20 million (measured as an average over a 12 month period). There are certain conditions outlined in the exemption that must be complied with if NBDTs want to take advantage of it. To view a copy of the exemption notice, go to www.rbnz.govt.nz/news/2009/3712168.html

• An exemption from the requirement that the risk management programme must be signed off by a trustee if the NBDT has no trust deed. This will enable risk management programmes to be signed off by an alternative governing body. The Deposit Takers (Non-trustee Entities Risk Management) Exemption Notice 2009 comes into force on 1 September.

Risk Management Programme Guidelines

The Reserve Bank has issued a discussion document relating to the risk management programmes required by section 157M of the Act.

The proposed risk management requirements are expected to come into force at the beginning of September 2009. At that time:

• every NBDT must have a risk management programme, and take all practicable steps to comply with its risk management programme; and

• each NBDT's trustee must be satisfied that the risk management programme meets the requirements of the Act.

The risk management programme must:

• be in writing;

• set out procedures that a NBDT will use for the effective identification and management of credit, liquidity, market and operational risks;

• set out auditable documentation and record keeping requirements; and

• describe the steps that the NBDT will take to ensure that the programme remains current, including procedures relating to identification of deficiencies and review of effectiveness.

The Reserve Bank has noted that the breadth and scope of a NBDT's processes and internal controls set out in its risk management programme will depend on the nature and size of the NBDT's business.

The risk management programmes should:

• cover the four types of risk:

• credit risk (concentration risk, business cycle risk, country risk);

• liquidity risk;

• market risk (interest rate risk, foreign currency risk, equity risk); and

• operational risk;

• quantify exposure to risk (and where not quantifiable, use qualitative measures); and

• include contingency plans for stress events.

The risk management guidelines provide no details as to the penalties that will be imposed for failure to comply with section 157M. However, under the existing sections, failure to comply with the NBDT regime may attract a fine of up to $2 million for a body corporate, or a fine of $200,000 and up to a year imprisonment for directors.

Click here for responses to questions raised in submissions on the draft guidelines.

To read the risk management programme guidelines, go to www.rbnz.govt.nz/finstab/nbdt/regulation/3697899.pdf

Enquiries and information

For more information on any of the cases, articles and features in Financial Services Quarterly, please email Rachel Gowing or call on 64 9 916 8825.