Fintech firms could be swept by decree into the regulatory arms of the Reserve Bank of NZ (RBNZ) under proposals floated last week.
The proposals – contained in phase two of the government’s review of the Reserve Bank Act – would allow the RBNZ to regulate fintech firms, and others, if it deemed them a threat to the country’s financial stability.
Current rules require legislation to bring new entities under the RBNZ’s ambit, which “creates a potential deficit” if the country’s financial stability was threatened by a fast-moving rogue fintech, for example.
According to the new RBNZ review consultation document: “… one option would be to create a mechanism to allow the regulatory perimeter to flex over time.
“On the rare occasions when threats to financial stability occur outside the perimeter, this would allow the Reserve Bank to bring relevant entities or activities under its remit, and hence subject to prudential regulation.”
If the change is adopted, the finance minister and RBNZ would have the power to designate systemically-risky firms as subject to prudential regulation, the consultation document says.
The enhanced powers would “future proof the regime to potential new risks”, the document says, including those posed by fintech.
“Although FinTech has not yet created any systemic threats to financial stability, this may not be the case in the future,” the RBNZ review paper says, citing examples such as:
- new payment technologies (e.g. Apple Pay or digital currencies) become systemic in scale; and,
- fintech providers moving more directly into maturity transformation, such as deposit taking.
“The growing use of technology (both inside and outside the regulatory perimeter) has also seen the emergence of new threats, such as cyber risks,” the paper says.
However, the ‘Safeguarding the future of our financial system’ consultation document says fintech offers opportunities as well as risks.
“A more diffuse and dynamic financial sector presents a challenge for regulators to keep up with developments, but also provides opportunities for a more efficient financial system,” the paper says.
Meanwhile, the government was already moving to bring financial market infrastructures (FMI) – or the “plumbing” system that channels, clears, settles and records payments, securities, derivatives, or other transactions – explicitly within the RBNZ regulatory boundary.
FMIs are “currently subject to a combination of monitoring and information-provision requirements”, the consultation paper says.
“Bringing FMIs more clearly inside the prudential regulatory perimeter reflects growing recognition that they can be sources of systemic risk given their essential role in the smooth functioning of the economy and strong connections to banks and other financial institutions.”
The regulatory perimeter issue, though, is just one part of the mooted RBNZ reforms that include: setting new ‘high level’ objectives; introducing bank deposit insurance; different governance structures for the central bank; and, stripping the RBNZ of its prudential regulation and supervisory duties.
For instance, the paper says government could establish a new agency – dubbed the New Zealand Financial Services Authority (NZFSA) – to “assume responsibility for the Reserve Bank’s prudential role and the [Financial Markets Authority’s] market conduct mandate.”
Submissions are due on the first round of the phase two RBNZ reform proposals by January 25 next year followed by a further tranche of consultation covering:
- the legal basis for bank regulation;
- the approach to supervision and enforcement of bank regulation;
- macro-prudential policy;
- crisis management; and,
- the Reserve Bank’s resourcing and funding.
“A third and final consultation later in 2019 will seek feedback on the preferred options developed from the second consultation,” the paper says.
Phase one of the RBNZ reform consultation process completed this March with the decision to include “‘maximum sustainable employment’ to ‘price stability’ as an objective of monetary policy” as well as introducing a Monetary Policy Committee to guide interest rate decisions.
“The legislative changes needed to support Phase 1 are now underway,” the document says.
Former NZ Superannuation chief, Adrian Orr, took over as RBNZ governor in March this year.