The Reserve Bank has issued a consultation paper as part of its review of the operation of the prudential regime for non-bank deposit takers (NBDTs). The consultation paper seeks industry feedback on a range of potential changes to the regime, including widening the scope to include entities that do not offer debt securities to the public.
The current prudential regulation of NBDTs is contained in Part 5D of the Reserve Bank Act. This includes the requirement to have a credit rating, maintain a minimum capital ratio, limit related party exposures, and other requirements relating to governance, liquidity and risk management. NBDTs issue debt securities to the public, and so they are also required to appoint a licensed trustee and have a trust deed. The supervisory function of the trustee under these arrangements reduces the monitoring role of the Reserve Bank.
The Non-bank Deposit Takers Bill is currently before Parliament. The Bill replicates 5D of the Reserve Bank Act and also provides for a licensing regime for NBDTs, fit and proper testing of directors and senior officials, and enhanced investigation powers for the Reserve Bank. Part 5D of the Reserve Bank Act will be repealed by the Bill.
Potential changes to the prudential regulation of NBDTs raised in the consultation paper include:
Amending the definition of NBDT
- The Reserve Bank notes that the current definition of NBDT is to an extent under-inclusive in that it does not necessarily identify all entities that may raise systemic risks in the sector. In particular, entities that are in the business of borrowing and lending but do not issue debt securities to the public are not currently caught by the definition. On the other hand, the definition is over-inclusive in the sense that it can catch activities (such as intergroup borrowing and lending or acting as a payment facility provider) that do not require prudential supervision of the nature provided for in Part 5D.
- The Reserve Bank's preferred options are to retain the current definition or alternatively to remove the requirement in the current definition for debt securities to be offered to the public. In either case the Reserve Bank supports making greater use of statutory exceptions that carve out of the regime entities carrying on businesses of kinds that do not require prudential supervision. It is not clear from the consultation paper whether, if the requirement in the current definition for debt securities to be offered to the public was removed, it would be necessary in order to be caught under the regime for an entity to be in the business of borrowing and lending money, or whether it would be sufficient to be in the business of providing financial services.
Changing the supervisory arrangements for NBDTs
- The Reserve Bank is considering whether trustees should be retained as frontline supervisors or whether a better option would be for NBDTs to be directly supervised by the Reserve Bank. The Reserve Bank also discusses whether additional powers for trustees and/or itself would be desirable (such as statutory powers for trustees to require information).
Changing the mechanism for setting prudential requirements
- The Reserve Bank is considering whether it would be better for some or all prudential requirements to be set through conditions of licences or standards published by the Reserve Bank (as is the case now for registered banks and licensed insurers) rather than through regulations.
Alternative options for disclosure requirements for NBDTs
- The Reserve Bank is considering whether prudential disclosures should be added to the public disclosures NBDTs are currently required to make under securities laws or whether a standalone disclosure regime based on the current disclosure statement regime for banks would be preferable.
Introducing a statutory management regime tailored to NBDTs
- There is no tailored statutory management regime available for NBDTs under Part 5D or the Bill. The Reserve Bank notes that this decision was originally based on the view that NBDTs are less systemically important than banks such that a more hands-off approach is appropriate. However, the Reserve Bank considers that there may be a case for revisiting that decision so that it is able to exercise some oversight over the resolution of a failure of a NBDT.
The consultation paper also requests feedback on:
- the statutory objectives of the NBDT regime;
- offences and penalties; and
- the licensing process, the process for assessing suitability of directors and senior officers, and the requirements for changes in ownership in NBDTs.
A copy of the consultation paper is available here. Submissions close on 17 May 2013.