The Reserve Bank has published the first regulations to be made under the Deposit Takers Act 2023. The Deposit Takers Regulations 2025 (Regulations) prescribe some detail for the operation of the Depositor Compensation Scheme (DCS). The Regulations are broadly consistent with the policy proposals that the Reserve Bank consulted on in March 2024 (see our previous insight here).
In this insight, we make some observations on:
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- the exemption for overseas deposit takers;
- the treatment of in-flight transactions;
- the DCS-Open Bank Resolution integrated solution; and
- the treatment of non-bank deposit takers (NBDTs).
If you would like to discuss any aspects of the Regulations, or the Deposit Takers Act more generally, please get in contact with one of our experts listed below.
DCS Regulations
The DCS will protect deposits of up to $100,000 per eligible depositor, per deposit taker in the event of the deposit taker's failure. The legal framework for the DCS is primarily set out in Part 6 of the Deposit Takers Act, which provides for regulations to prescribe most of the detail necessary to operationalise the scheme.
The Regulations prescribe the detail for:
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- the definition of a "protected deposit";
- an exemption for overseas deposit takers;
- the additional types of relevant arrangements that will receive "look-through" treatment;
- the types of trusts that will not be treated as eligible depositors for the purposes of the scheme; and
- maintaining records and providing information to the Reserve Bank in respect of trusts and accounts held by 1 or more persons other than jointly.
The Regulations also set out the methodology to calculate the levies payable by deposit takers. These regulations reflect the Minister's announcement last year that levies will be risk-based, except that NBDTs that are credit unions, building societies and registered charities will pay a flat levy during a transitional period.
Our Observations
Exemption for overseas deposit takers
In March 2024, the Reserve Bank consulted on an exemption from the DCS for overseas deposit takers on the basis that the branch policy review will soon limit branches' business in New Zealand to wholesale customers only (see our previous insight here).
The Reserve Bank proposed the exemption on the basis that the financial stability benefits of including wholesale-only branches in the DCS are limited relative to the operational costs of such branches complying with the DCS. The Reserve Bank also proposed that branches that have not wound down their retail deposit books by the time the DCS commences will need to comply with the scheme until such time as they have fully divested and qualify for the wholesale exemption.
The Regulations provide for a wholesale exemption by specifying that a debt security issued by an overseas deposit taker that mainly provides services to wholesale clients is not a protected deposit (emphasis added).
"Mainly" is not a qualification that is commonly used in financial services legislation. This phrase appears to have been lifted from section 459 of the Deposit Takers Act, which prescribes mandatory considerations that the Minister must have regard to when making regulations for the DCS. "Mainly" is used in tax legislation (eg in the context of charities) and the IRD has issued an interpretation statement on its meaning.[1] However, the meaning of 'mainly' is not certain and it may not be clear in all cases whether an overseas deposit taker will need to comply with the DCS.
In-flight transactions
The Reserve Bank also consulted on the treatment of "in-flight transactions" (partially completed payments to or from a deposit taker at the time of failure, which include "on us" transactions, inter-bank transactions and card payments). Understanding the treatment of in-flight transactions is necessary so that the balance of an eligible depositor's protected deposits and therefore their entitlement to compensation can be determined with certainty. The Reserve Bank proposed that the treatment of in-flight payments under the DCS should be aligned with the treatment under the Open Bank Resolution (OBR) policy with some amendments.
The Regulations do not provide for the treatment of in-flight transactions. In the summary of submissions, the Reserve Bank noted that some legal issues still need to be resolved before regulations can be issued. In the interim, the Reserve Bank seems comfortable relying on DCS entitlements being determined based on an eligible depositor's protected deposit balances at the quantification time (ie in-flight transactions will be disregarded).
OBR-DCS integrated solution
In August last year, the Reserve Bank consulted on a number of changes to the OBR pre-positioning policy to integrate OBR with the DCS (see our previous insight here). Under the proposed changes, the OBR pre-positioning requirements would be amended so that a deposit taker would be required to be able to estimate each eligible depositor's notional DCS entitlement on failure. DCS funds could then be used to provide depositors with next day access to 100% of their protected deposits that are directly held (ie not subject to "look-through" treatment).
Section 214 of the Deposit Takers Act provides for regulations to be made to take into account any protected deposits that are withdrawn, or made available to be withdrawn, by eligible depositors following the quantification time (ie the protected deposits made available to eligible depositors under the OBR-DCS integrated solution).
The Reserve Bank is still considering how OBR will be integrated with the DCS, and a decision is not expected before 2026. Therefore, the Regulations do not contain any regulations for the purposes of section 214.
Treatment of NBDTs
The transitional arrangements in the Deposit Takers Act provide that registered banks and licensed NBDTs will be treated as licensed deposit takers for the purposes of the DCS prior to the Act fully coming into force. This means that eligible everyday banking products issued by both registered banks and licensed NBDTs will be protected when the DCS commences.
The Deposit Takers Act will also amend the exclusion for offers of certain financial products by registered banks in clause 21 of Schedule 1 to the Financial Markets Conduct Act 2013 (FMC Act) to refer to offers made by licensed deposit takers. The clause 21 exclusion currently provides that registered banks are not required to prepare product disclosure statements under Part 3 of the FMC Act to offer certain financial products (including some everyday banking products that are protected deposits). When clause 21 is amended by the Deposit Takers Act, licensed deposit takers will not be required to prepare product disclosure statements for their everyday banking products that are prescribed financial products or debt securities.
Together with the Regulations, the Reserve Bank has also published the Deposit Takers Act Commencement Order 2025 (Commencement Order) which "switches on" specific provisions in the Act that are necessary for the DCS to commence. The Commencement Order does not "switch on" the amendment to clause 21. This means that for the time being NBDTs must continue to prepare product disclosure statements for offers of their everyday banking products, despite the fact they may be protected under the DCS.
Interestingly, the Regulations do not amend clause 44 of Schedule 8 to the Financial Markets Conduct Regulations 2014, which prescribes the kinds of financial products that do not require disclosure under Part 3 of the FMC Act for the purposes of the clause 21 exclusion. This means the definition of "protected deposit" in the Regulations does not perfectly align with the list of financial products in clause 44. For example, the list of financial products in clause 44 does not currently include financial products issued by credit unions (eg a call credit union share) that will be protected deposits under the DCS.