NZ FINANCE COMPANIES AND LEGAL FRAMEWORK
Description of legal framework governing New Zealand Finance Companies
Definition of terms:
Bank- means anyone that carries on the business of banking (Bills of Exchange Act 1908, Banking Act Repeal Act 1995 etc.)
Business of Banking-means conducting current accounts for customers, where the amounts are repayable to the customer’s order, and the person also either collects cheques payable to the customer or receives funds from the third parties to the customer’s current account (no statutory definition, common law definition. See Tyree’s Banking Law in New Zealand, Second Edition, pages 69-72)
Financial institution-means someone who carries on the business of borrowing and lending money, providing services, or both (Reserve Bank of New Zealand Act, section 2, see also Financial Transactions Reporting Act 1996 (a more broad definition)
Security-means an equity security, a debt security, a unit in a unit trust, an interest in a superannuation scheme, a life insurance policy or a participatory security. (Securities Act 1978) Issuer-general definition is a person who issues securities, however for the purpose of the Securities Act 1978 a special more complex definition applies, resulting in being an issuer in the general sense and Approved issuer under the Approved issuer levy (AIL) scheme but not an issuer for the purposes of the Act.
Approved Issuer-means an issuer of debt securities that is approved by the IRD for the purpose of the AIL scheme.
Registered bank-means a financial institution registered by the Reserved Bank of New Zealand (may or may not be a bank under the common law definition).
The NZ Finance Company is a financial institution (if it borrows and lends money or provides financial services or both) if it conducts a current account for its customers and makes and receives payments from such accounts.
And issuer of securities (but not an issuer for the purpose of the Securities Act 1978) an Approved Issuer (for the purposes of the Approved Issuer Levy scheme) but not a registered bank.
The NZFC may carry on the business of banking and provide financial services and may issue securities to the public outside New Zealand also. The NZFC may not use the restricted words ‘bank, banker, bancorp or banking’ in its name or title and may only use them in its advertising if it also includes a disclaiming statement that the NZFC is not a registered bank. The NZFC may not issue debt securities to the public in New Zealand without a registered prospectus, a supervisory trustee and the use of investment statements as per the requirements of part 11 of the securities Act 1978. The NZFC may not carry on the business of insurance without placing a deposit with the Public Trust in New Zealand as required by the Insurance Companies (Deposits) Act. The NZFC may not carry on business as a futures dealer unless authorized by the Securities Commission. Share brokerage requires a sharebroker license under the Sharebrokers Act 1908, however this does not apply if the sharebroker is also a bank.
Entitlement to carry on Business of Banking
Documented sources showing that financial institutions are free to carry on the business of banking include:
Most English common law jurisdictions entry into the business of banking through a Banking Act e.g. the Banking Act 1987 in the UK and the Banking Act 1959 in Australia. However in New Zealand the Banking Act 1982 was repealed by the Banking Act Repeal 1995.
2. Regulatory authorities and official sources
Reserve Bank of New Zealand, in the article summarizing the regulatory framework for the New Zealand financial sector, prepared in the consultation also with the Securities Commission and the Ministry of Economic Development: Unlike in many countries, where the licensing of the bank determines what the bank can do, bank registration in New Zealand does not determine the permissible activities of the bank. In most respects a non- (registered) bank financial institution can conduct banking business (including deposit-taking and lending on current account) without being registered bank. Registration as a bank merely enables the entity to include ”bank” or a derivative of that word in its name. Bulletin Volume 66, number 4, page 26 of the attached, or accessible at http://www.rbnz.govt.nz/research/bulletin/2002 2006/2003dec66 4mortlock.pdf Reserve Bank in New Zealand”- We do not license the business of banking per se”.
Financial Institutions do not have to be registered banks in order to take deposits and make loans. A financial institution can conduct the business of banking without being subject to the Reserve Bank’s prudential requirements of registered for the banks, so long as it does not use word “bank” in its name.
(Alan Bollard, RBNZ Governor, Financial System Regulation in New Zealand, Financial Sector Ombudsman Conference, 25 July 2003, page 5, http://www.rbnz.govt.nz/finstab/banking/supervision/0137359.pdf
Reserve Bank of New Zealand: Bank registration does not involve the licensing of the business of banking or deposit taking. It is only if an institution wishes to call itself a bank that there is a requirement for it to be registered for it to be registered by the RBNZ. Hence non-licensed institutions are able to take deposits and conduct other aspects of the banking business in New Zealand. (The Role of the Reserve Bank of New Zealand in Supervising the Financial System, RBNZ, March 2001, http://www.rbnz.govt.nz/finstab/banking/supervision/role financialsys.pdf –Note: this paper is no longer current as some aspects of our banking supervision policy have change.
Banking business is not, however, restricted to registered banks. While registered banks’ business must compromise of borrowing and lending money and/or the provision of financial services, any non-(registered) bank institution may conduct business that is traditionally regarded as banking business- such as deposit taking, the provision of credit and the offer of cheque accounts and may be regarded as a “banker” for the purposes of mutual common law rights and duty of the banker- costumer relationship. Tyree’s Banking Law in New Zealand. Second Edition. Pages 8-9
The NZFC status as an approved issuer will be obtained and documented in each instance, as in the example company documents above. The Approved Issuer levy (AIL) scheme enables the issuer to pay interest on registered debt securities to non-residents of New Zealand for tax purposes without disclosure to the IRD and without deduction of Non-Resident Withholding tax (NRWT). We register Saving Account and Term Deposit as classes of securities for the purpose of the scheme for each NZFC, as in above example. Note: this scheme only applies to debt securities, equity securities are subject to NRWT and the company itself is subject to income Tax. The issuer must pay a 2% AIL on the interest on such securities in lieu of NRWT. See http://www.ird.govt.nz/resourses/file/ebc1eb4f43d41f3/ir395pdf for the official guide from the IRD about the scheme.
Entitlement to Borrow and Lend Money and Provide Financial Services
Documents showing that most types of financial institutions need not be registered, licensed, approved or authorized
Various entity related legislation exist for different types of financial entities, including:
. Reserved Bank of New Zealand Act 1998-for registered banks and their prudential supervision by the Reserved Bank of New Zealand
. Unit Trusts Act 1960-for Unit Trusts for the regulation of Unit Trusts and requires registration of the trust deed with the District Registrar (of Companies)
. Life Insurance Act 1908- for life insurance companies, includes requirements to make deposit with Public trust
. Building Societies Act 1965-requires the registration of Building Societies
. Insurance Companies’ Deposits Act 1953-requires insurance companies to make deposit with the Public Trust
. Friendly Societies and Credit Unions Act 1982-requires the registration of Credit Unions and the similar entities.
. Securities Markets Act 1988-requires the registration of stock exchanges and the authorization of futures dealers.
. Superannuation Schemes Act 1989-requires registration of superannuation schemes.
. Secondhand Dealers and Pawnbroker Act 2004-requires pawnbroker to be licensed (other types of lenders need not have a license, and the licensing only relates to non-objection by the Police)
There is no requirement for companies that carry on the business of borrowing and lending money and/or providing financial services to register or obtain approval or license if they do not want to use the word Bank in their name and do not carry on the business of insurance or pawn brokerage.
Some roles in registered or authorized entities are restricted e.g. manager and custodians of unit trust must be approved by the Securities Commission.
Activities related legislation includes the Securities Act 1978 in relation to issue of securities to the public in New Zealand, the Credit Contract and the Consumer Finance act 2003 in relation to consumer credit.
2. Regulatory authorities and official sources
See table 3 of http://www.rbnz.govt.nz/research/bulletin/2002 2006/2003dec66 4morlock.pdf as showing that ‘finance companies’ are not subject to registration by RBNZ’ supervision by RBNZ’ or other registration requirement. This table also show that there no ‘deposit or other insurance’ and no required actuarial assessment’ special insolvency arrangement or mandatory credit rating requirement’ For the Securities Act 1978 requirements shown in the table see below for how they do not apply to the NZFC either.
Entitlement to Issue Securities to the Public outside New Zealand
Documents Showing that securities can be offered to the public in New Zealand by issuers incorporated, resident or carrying on business in New Zealand without part 2 of Securities Act, concerning requirements for registered prospectus, statutory trustee, investment statement etc, applying.
(1) Part 2 applies to securities offered to the public in New Zealand regardless of-
(a) Where any resulting allotment occurs:
(b) Where the issuer is resident, incorporated, or carries on business.
(2) For the purpose of this Act, a security is offered to a person in New Zealand if an offer of that Security for subscription is received by a person in New Zealand. Unless the issuer demonstrates that it took all reasonable steps to insure that members of the public in New Zealand may not accept the offer.
(3) Section 38B and 58 (except section 58(3) and (4) also apply to any advertisement that contains or refers to an offer of securities to the public outside New Zealand and that is distributed or to be distributed to a person outside New Zealand by,—–
(a) in case of section 38B, a person resident or having a place of business in New Zealand:
(b) in case of section 58, a person resident a principal place of business in New Zealand.
(4) For the purpose of subsection (3), the definition of advertisement and offer extend to communication or offers received by persons outside New Zealand.
(5) The territorial scope of Part 2 may be further extended under Part 5
(6) For the avoidance of doubt, nothing in Part 2 applies to a security or an advertisement unless it applies under subsections (1) to (5), (Securities Act 1978, Section 7)
This section show that securities offered by New Zealand issuers to the public outside New Zealand are outside the scope of the Act, and that requirements of the Act do not apply in such case. However criminal liability for untrue statements in prospectuses or offers of securities remains.
Securities offered overseas: Nothing in Part 11 of the Act applies in respect of any security that is offered for subscription only to person outside New Zealand and persons in New Zealand who can properly be regarded as having been selected otherwise than as member of the public. Guidebook to New Zealand companies and securities law, 7th Edition, CCH, Andrew Beck and Andrew Borrowdale, page 211.
The material above has been taken from material put together by CAPITAL CONSERVATOR SAVINGS & LOAN LIMITED and credit is given to them for its assembly. We have reformatted the material into a different sequence.