By Gareth Vaughan
The Reserve Bank wants both beefed up powers to oversee payment and settlement systems, and tougher penalties to enforce for those caught offending including potential gaol terms of up to 18 months.
The central bank issued a consultation paper on Friday afternoon entitled Strengthening Statutory Payment Oversight Powers.
A recent review of the Reserve Bank's oversight powers for payment and settlement systems, or payment oversight powers, conducted by the Reserve Bank itself, has concluded that the central bank’s existing payment oversight powers are insufficient and need to be strengthened.
The review was based on the Reserve Bank's experience with the payments industry over the past decade and a changing payments landscape, both domestically and internationally. The review was also conducted against the backdrop of recent international regulatory developments brought about by the Global Financial Crisis (GFC).
"The review concludes that the Reserve Bank’s existing payment oversight powers are insufficient and need to be strengthened," the consultation document says. "The proposals in this consultation paper are focused on seeking additional powers for the Reserve Bank’s oversight of systemically important systems in New Zealand. The Reserve Bank has consulted with the Ministry of Business, Innovation and Employment and the Treasury during the course of developing the proposals."
Five 'systemically important' systems
The Reserve Bank says there are five systemically important systems being the Exchange Settlement Account System, or ESAS, the Continuous Linked Settlement, or CLS, NZ Clear, the NZCDC settlement system, and the Settlement Before Interchange (SBI) arrangements.
ESAS provides real time gross settlement of interbank transactions across the exchange settlement accounts held with the Reserve Bank. It's owned by the Reserve Bank.
CSL provides payment versus payment settlement of foreign exchange transactions and is owned by CLS Bank International.
SBI oversees arrangements for the progressive exchange during the day of retail payment instructions (cheques, direct debits and credits, automatic payments, ATM settlement transactions, internet banking and telephone banking). Payments are exchanged using SWIFT and settlement of net interbank positions occurs in ESAS. Arrangements are governed by rules administered by Payments NZ, a company owned by eight registered banks including the big four.
NZCDC is used to clear and settle trades on NZX markets. The system includes a central counter party and securities depository and is owned by NZX. NZ Clear, which is Reserve Bank owned, lets members settle fixed interest and equity transactions and make cash transfers with interbank payments occurring directly in ESAS.
Reserve Bank Deputy Governor Grant Spencer says the proposals include formally recognising systemically important payment and settlement systems and subjecting them to increased oversight; giving the Reserve Bank powers to impose conditions and give directions to system operators, and setting up a tailored statutory management regime for such systems.
“The need for formal strengthened powers has become more important over recent years, because of the fast-changing payments landscape and the increasingly critical roles played by systemically important payment and settlement systems in the financial system," Spencer says.
“Improved oversight would also help to avoid any significant damage to the financial system that could result from the failure of a participant in a payment system, unlikely though that might be.”
The Reserve Bank is also proposing the adoption of a co-regulatory model with the Financial Markets Authority for securities settlement systems.
“These additional powers will bring the Reserve Bank into line with other central banks, and better reflect the international regulatory developments in the payment oversight area, brought about by the global financial crisis,” adds Spencer.
Tougher penalties sought
The consultation paper notes that under the part of the Reserve Bank of New Zealand Act 1989 used to enforce its payment oversight powers, Part B, the potential penalties are lighter than the potential penalties elsewhere in the Act for bank supervision.
"Given the wider ranges of offences that could occur, and the more serious nature of the offences, the Reserve Bank believes it appropriate to amend the penalties accordingly."
Current penalties for offences are - for an individual - imprisonment for a term of up to three months or a fine not exceeding NZ$50,000, and for a body corporate, a fine not exceeding NZ$500,000.
But 'amending" the penalties would see potential imprisonment for a term of up to 18 months or a fine not exceeding NZ$200,000 for individuals, and a fine of up to NZ$2 million for a body corporate.
Meanwhile, the Reserve Bank also bemoans that it can't give directions to an operator of, or participant in, a payment or settlement system unless it is also a registered New Zealand bank.
"The fast-changing payments landscape has generated a wave of new payment operators, many of them non - banks. Having the power to direct relevant payment operators and participants ensures consistent treatment and provides a level playing field with respect to the prudential requirements for banks, non-bank deposit takers (NBDTs) and other non-bank entities."
The Reserve Bank also notes it currently doesn't have any crisis management powers in relation to a payment and settlement system.
The consultation document concludes that: "While the Reserve Bank can disallow a rule change, it currently has no other measures to initiate rule changes except through moral suasion. After considering the issues and gaps with the existing payment oversight powers, the Reserve Bank believes it should establish a clear and robust framework for payments sector oversight that reflects its risk - based approach."
"In particular, the re is a need for more explicit powers for the oversight of systemically important systems. When seeking additional powers, the Reserve Bank should focus on developing a well-designed set of graduated powers for the oversight of these systems, which will support the effectiveness of its oversight function and ensure the right incentives for industry and participants to act prudently, cooperate and progress in a timely manner. This will also bring the Reserve Bank more in line with many central banks around the world and meet the responsibilities set out by the new PFMIs (principles for financial market infrastructures)."
The Reserve Bank is calling for submissions by May 3.
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