Current status
In 2017, the Reserve Bank of New Zealand (Reserve Bank) and the Treasury embarked on a comprehensive review of the Reserve Bank of New Zealand Act 1989 (RBNZ Act), with the first phase focusing on monetary policy and the second phase focusing on the Reserve Bank's governance arrangements and funding model.
Both phases of the review have now been completed. As a result of the review, the Government decided to replace the RBNZ Act with two new pieces of legislation - a new ‘Reserve Bank Act’ and a ‘Deposit Takers Act’.
The first of the two proposed pieces of legislation, the Reserve Bank of New Zealand Act 2021 (Reserve Bank Act 2021), came into force on 1 July 2022. The Reserve Bank Act 2021 repeals and replaces the provisions in the RBNZ Act that set out the Reserve Bank's high-level objectives, functions, powers, governance arrangements and funding model.
The remainder of the RBNZ Act, which provides for a framework for the registration and prudential supervision of banks, remains in force but has been renamed the 'Banking (Prudential Supervision) Act 1989'.
The second of the two proposed pieces of legislation, a Deposit Takers Bill, is expected to be introduced into Parliament in the third quarter of 2022.
If you would like assistance in understanding how these changes might impact you, please contact a member of our financial services regulation team.
Background
On 7 November 2017, the Government announced that it would undertake a review of the RBNZ Act to modernise and improve the efficiency of New Zealand’s monetary policy framework.
The review was split into two phases:
- Phase 1 was completed in 2018. As a result, 'supporting maximum sustainable employment' has been added to the economic objectives for the Reserve Bank and a Monetary Policy Committee (MPC) has been created with responsibility for formulating monetary policy.
- Phase 2 was completed in 2022. This review was carried out by a joint team comprising of members of the Treasury and the Reserve Bank. Following this phase, the Government decided to create two new acts - a 'Reserve Bank Act' and a 'Deposit Takers Act'. The Reserve Bank Act 2021 came into force on 1 July 2022. A draft version of the Deposit Takers Bill was published in December 2021 for public consultation. The Deposit Takers Bill is expected to be introduced into Parliament in the third quarter of 2022.
Consultation with stakeholders
On 7 November 2017, the Government released a Terms of Reference document for Phase 1 of the review (Phase 1 Review) and began a process of consultation, publishing a summary of stakeholder engagement on 22 February 2018. An Independent Expert Advisory Panel (the Panel) was also established to provide independent advice to the Minister of Finance on the changes to the RBNZ Act and published its final report on the Phase 1 Review on 31 January 2018.
The Reserve Bank released documents that were produced during the process of the Phase 1 Review in stages, with the final release of documents released in March 2019.
Reserve Bank of New Zealand (Monetary Policy) Amendment Act 2018
As a result of the Phase 1 Review, the Reserve Bank of New Zealand (Monetary Policy) Amendment Act 2018 (Monetary Policy Amendment Act) was passed (attaining royal assent on 20 December 2018), following which the Minister of Finance appointed the members of the MPC. The full provisions of the Monetary Policy Amendment Act came into force on 1 April 2019, amending Parts 2, 3 and 6 of the RBNZ Act.
The Monetary Policy Amendment Act implemented two key changes to New Zealand’s monetary policy framework:
- Amended the objective of monetary policy to require consideration of maximum sustainable employment alongside price stability in monetary policy decision-making
- Created the MPC to formulate monetary policy.
The Monetary Policy Amendment Act also introduced three new instruments to support the monetary policy framework:
- Remit: Sets the operational objectives of monetary policy (for example, specifying a numerical inflation target)
- Charter: Sets the decision-making process and transparency requirements for the MPC
- Code of Conduct: Sets out the minimum standards of ethical and professional conduct that must be adhered to by members of the MPC.
The Reserve Bank Act 2021 repealed, amongst other things, Parts 2, 3 and 6 of the RBNZ Act and largely incorporated these provisions. The key changes made by the Monetary Policy Amendment Act (including the new objective of monetary policy as well as the MPC's remit, charter and code of conduct) now sit under the Reserve Bank Act 2021.
Scoping Phase 2
The Government sought written submissions and hosted stakeholder meetings to inform on the scope of the Phase 2 of the review (Phase 2 Review), publishing a summary of stakeholder engagement on 21 March 2018. The Panel met on 2 March 2018 and 16 March 2018 on the scope of the Phase 2 Review, publishing panel papers on its recommendations.
On 5 April 2018, the Reserve Bank and the Treasury published a joint report to the Minister of Finance on the proposed scope of the Phase 2 Review that informed the Minister’s paper to cabinet seeking agreement to the scope of the Phase 2 Review.
Phase 2
On 7 June 2018, the Government announced the commencement of the Phase 2 Review and released a Terms of Reference document setting out the scope of the Phase 2 Review.
Consultation Round 1
On 1 November 2018, the Government announced the first round of public consultation and released the first consultation document, ‘Safeguarding the future of our financial system: The role of the Reserve Bank and how it should be governed’.
Round 1 was closed on 25 January 2019. In February 2019, the Treasury published the summary of submissions from the second round of public consultation along with other supporting documents.
Consultation Round 2
On 24 June 2019, the Government announced the second round of public consultation and released a number of supporting documents, most notably the second consultation document. The Government released this second consultation document in two parts:
- Consultation Document 2A: 'Safeguarding the future of our financial system: In-principle decisions and follow-up questions on: The role of the Reserve Bank and how it should be governed'
- Consultation Document 2B: 'Safeguarding the future of our financial system: The Reserve Bank’s role in financial policy'.
Round 2 was closed on 16 August 2019.
On 17 December 2019, the Treasury published a document, 'Safeguarding the future of our financial system: Update on the Reserve Bank Act Review providing an update on Phase 2'. This document set out Cabinet's key decisions on the governance and accountability framework as well as in-principle decisions on the regulation of deposit takers and the deposit insurance scheme.
On 2 March 2020, the Treasury proactively released the summary of submissions from the second round of public consultation along with other supporting documents.
Consultation Round 3
On 13 March 2020, the Government announced the third round of public consultation and released a number of supporting documents, most notably the consultation document, ‘Safeguarding the future of our financial system: Further consultation on the prudential framework for deposit takers and depositor protection’.
Round 3 was initially scheduled to close on 23 April 2020, however, due to disruptions caused by COVID-19, the deadline for submissions was extended to 23 October 2020.
Introduction of two new Bills - the Reserve Bank of New Zealand Bill and the Deposit Takers Bill
The Government decided to replace the RBNZ Act with two new pieces of legislation – a new ‘Reserve Bank Act’ and a ‘Deposit Takers Act’.
On 28 July 2020, the Reserve Bank of New Zealand Bill (Reserve Bank Bill) was introduced to Parliament. This was the first of two bills resulting from the Phase 2 Review.
The Reserve Bank Bill passed its third reading in Parliament on 10 August 2021 and the Reserve Bank Act 2021 came into force on 1 July 2022.
The Reserve Bank Act 2021 repeals and replaces the provisions in the RBNZ Act that set out the Reserve Bank's high-level objectives, functions, powers, governance arrangements and funding model. This Act also incorporates the changes made by the Monetary Policy Amendment Act.
The remainder of the RBNZ Act, which provides for a framework for the registration and prudential supervision of banks and sets out remains in force but has been renamed the 'Banking (Prudential Supervision) Act 1989'.
The new Reserve Bank Act 2021 focuses on reforming the overall institutional, governance, accountability, and funding arrangements of the Reserve Bank. Key provisions include:
- Reframing of the overarching financial stability objective to “protecting and promoting the stability of New Zealand’s financial system” to complement the recently updated monetary policy objectives
- Moving from a ‘single decision maker’ model to a ‘board’ model of governance with the Governor of the Reserve Bank as a member of this board
- Amending the Reserve Bank’s funding model to allow for recovery of costs through industry levies and fees
- Amending the Reserve Bank’s accountability and reporting frameworks (eg by introducing a new framework for management of foreign reserves) and providing more ministerial guidance on matters the Reserve Bank must consider when setting and implementing its strategic approach.
On 6 December 2021, a draft version of the Deposit Takers Bill was released for consultation which closed on 21 February 2022. The Deposit Takers Bill is intended to introduce a single regulatory regime for both banks and non-bank deposit takers (NBDTs) that aims improve the stability of New Zealand's financial system by making two key changes:
- Establishing a 'Depositor Compensation Scheme' which would protect deposited funds in the event of an entity failing up to a total amount of $100,000 per depositor, per deposit-taker
- Strengthening and broadening the Reserve Bank's supervision and enforcement tools by:
- introducing new director accountability provisions
- strengthening and clarifying the Reserve Bank's crisis resolution framework (which sets out the Reserve Bank's special powers in the event of a deposit taker being in financial distress)
- providing the Reserve Bank more inspection powers and an amended penalty framework.
A more detailed explanation of the exposure draft of the Deposit Takers Bill can be found here.
Next steps
The Reserve Bank's website sets out that the Deposit Takers Bill 'is expected to be introduced into Parliament in Q3 2022, and come into force as law after receiving Royal Assent in mid-to late 2023'.
The Reserve Bank has also noted that, once a Deposit Takers Act comes into force, 'there will be a transition period' to allow both the Reserve Bank and regulated entities to adapt to the new regime.
We regularly publish updates on developments relating to the review of the RBNZ Act. Please subscribe to receive these updates.
