Role of the Reserve Bank
Credit Contracts
Securities Act
Personal Properties Securities Act
Code of Banking Practice


The New Zealand banking sector has undergone significant reform in the last 15 to 20 years, moving from a highly regulated environment to one of the most liberally managed financial sectors in the world. Market deregulation is in line with government economic policy, which has sought to promote investment and competition in order to create economic growth.

The deregulated environment has encouraged overseas investment, with the result that nearly all of New Zealand's banks are majority-owned by overseas financial institutions. In particular, New Zealand's banking sector has close ties with Australian interests. Four of New Zealand's largest banks are controlled by major Australian banks.

New Zealand banking law is based largely on the English common law model. The legislative framework provides something of a New Zealand flavour and reflects the drive for favourable economic conditions, balanced by the need for consumer protection. Relevant statutes include:

  • Reserve Bank of New Zealand Act 1989;

  • Credit Contacts Act 1981;

  • Securities Act 1978; and

  • Personal Properties Securities Act 1999.

This overview briefly examines these statutes, and one or two others, to provide a summary of the existing banking climate in New Zealand.

Role of the Reserve Bank

The Reserve Bank of New Zealand was constituted by the Reserve Bank of New Zealand Act 1989. It is entrusted with the tasks of operating monetary policy, maintaining a sound and efficient financial system, and meeting the nation's currency requirements. Although the Reserve Bank is a government organization with operational independence, it negotiates with the government on policy targets.

Monetary policy
The primary function of the Reserve Bank is to formulate and implement monetary policy in order to maintain the stability of general price levels. Its aim is to achieve sustainable growth in the economy without 'boom-and-bust' cycles. This objective is implemented through policy target agreements between the Reserve Bank and the government. The latest agreement was signed in 1999 and seeks to limit inflation to between 0% and 3% per year.

Supervision of registered banks
The Reserve Bank is also given the responsibility of supervising all registered banks in New Zealand. This supervision requires certain disclosures from registered banks in order to demonstrate the continued viability of individual banks and the stability of the financial marketplace. These disclosure statements give necessary details of each registered bank's finances, and are intended to warn depositors if a bank is at risk.

The Reserve Bank does not guarantee or support any registered bank and is not a lender of last resort. The Reserve Bank will only intervene where such action is required to maintain the soundness of the financial system as a whole.

The Reserve Bank Act gives the Reserve Bank the sole right to issue New Zealand's notes and coins. It also controls the design and printing of New Zealand currency, and is able to withdraw damaged or unusable currency.

Credit Contracts

The single most important regulator of lending activities in New Zealand is the Credit Contracts Act 1981. This act is designed to:

  • prevent oppressive contracts and conduct;

  • ensure that all the terms of credit contracts are disclosed to borrowers before they become committed to the contracts;

  • ensure that the cost of credit is disclosed on a uniform basis; and

  • prevent misleading credit advertisements.

These objectives are achieved through mandatory disclosure of all the terms of the credit contract and the applicable finance rate, enabling comparison with alternative sources of credit. The act also provides an opportunity for borrowers to consider a credit proposal before it becomes binding. The act exempts certain contracts from its disclosure requirements, most notably any contract greater than NZ$250,000 and loans to larger corporate borrowers.

The courts are given wide powers to re-open loan contracts which are oppressive, or where the lender is acting in an oppressive manner.

The implications for the banking sector under the act have been significant, due to the disclosure required throughout the lending process. Some commentators have criticized the legislation for impinging on routine transactions, but a 1998 review deemed few changes necessary.

The Fair Trading Act 1986 also provides protection for borrowers in the marketplace, holding banks and other financial institutions liable for any misleading or deceptive conduct.

Securities Act

The Securities Act 1978 regulates offers of securities to the public, requiring any such offer to be described in a registered prospectus and accompanied by an investment statement. Although the definition of 'securities' in the act covers debt securities, registered banks are exempt from a number of the act's requirements. The act is enforced by the Securities Commission, which operates as a watchdog over the securities market.

Personal Properties Securities Act

When it comes into force, the Personal Properties Securities Act 1999 will provide for the creation and enforceability of security interests in personal property. It will also regulate their priority through a system of registration and provide for their enforcement.

The act is particularly important for retention of title clauses and hire purchase agreements, which may have priority under the current system but will not under the new act unless they are registered. Banks will have to adjust their practices to ensure that subsequently granted interests registered under the act do not defeat their security interests.

Banks must also be aware of 'super priorities' under the act, which can defeat an interest even if they are registered after a security has been perfected. The most common super priorities are purchase money security interests, which enable a security taken over goods for payment of the purchase price to defeat a prior general interest over the property.

All registered securities will be held on an electronic register accessible through the Internet. These records will contain descriptions of the personal property in order to ensure priority of the interest. Unlike land in New Zealand, which is governed by the Land Transfer Act 1952, registration of personal securities will not guarantee title.

The act is not expected to come into force before the second quarter of 2001.

Code of Banking Practice

In 1992 a Code of Banking Practice was established, setting out the minimum standards for New Zealand Bankers Association members when dealing with personal customers. The code deals with the rights and responsibilities of banks and their customers in the provision of banking services. The code does not have the force of law, but is a set of voluntary guidelines to assist both banks and customers. The code also informs banking customers of the available recourse to the banking ombudsman, who deals with disputes about banking services and products that have not been resolved by a bank's internal procedures.

The assistance of Ben Gerritson is acknowledged with appreciation.

For further information on this topic please contact Michael Dineen at Buddle Findlay by telephone (+64 9 358 2555) or by fax (+64 9 363 0709) or by e-mail ([email protected]).

The materials contained on this web site are for general information purposes only and are subject to the disclaimer