Gustavo Pessoa argues for better disclosure on which financial products are protected by the Depositor Compensation Scheme

By Gustavo Pessoa*

The promise of a higher return is easy to see when comparing savings products. The boundary of government protection should be just as visible. New Zealand has had deposit compensation since July 2025, but knowing that a safety net exists is different from knowing whether the product in front of you falls inside it. That distinction belongs beside the interest rate, before money changes hands.

The Reserve Bank's explanation of the Depositor Compensation Scheme (DCS) sets out the basic promise: eligible deposits are protected up to NZ$100,000 per depositor, per deposit taker if that deposit taker fails. The scheme began on 1 July 2025. Coverage is automatic for money in protected accounts. It does not turn every financial product offered by a bank into a protected deposit.

The product distinction is substantial. The RBNZ's coverage guide identifies transaction, savings and term deposit accounts among the products that can be protected. Bonds and other tradable products are excluded, as are foreign currency accounts and KiwiSaver and other superannuation schemes that are managed investment schemes. Money lost through scams, fraud or hacking is not covered by the DCS. Deposit-taker failure and a fraudulent transfer are different events, requiring different protections.

Tax treatment is not a reliable shortcut either. Some cash and term portfolio investment entities, or PIEs, that invest only in the debt of the bank offering them may be covered. The RBNZ recommends checking the specific product. A saver should not have to infer protection from the word cash, the familiarity of a bank's name or the tax advantages in an advertisement.

The limit also follows the depositor and deposit taker, rather than each account. A hypothetical customer with NZ$80,000 in a protected term deposit and NZ$30,000 in a protected savings account at the same deposit taker has NZ$110,000 across those accounts. Ignoring interest for simplicity, the scheme's cap would leave NZ$10,000 outside DCS compensation. Opening a second account at that institution does not create a second limit. The RBNZ's scenarios explain this aggregation.

Ownership matters. Joint accounts are assessed through each depositor's share, alongside that person's other protected deposits with the same deposit taker. A sole trader's business and personal accounts do not automatically create separate customers. An incorporated company is treated differently because it is a separate customer. These distinctions deserve clear explanations at account opening and when a customer moves a substantial balance.

Digital convenience adds another layer. The RBNZ's guidance on non-regulated entities explains that money held through a fintech may depend on a trust arrangement with an underlying licensed deposit taker. If a fintech that is not a licensed deposit taker fails, its customers do not receive DCS compensation merely because it holds funds with a bank. If the underlying deposit taker fails, entitlement depends on the arrangement. An account number inside an app does not settle those questions.

These rules do not make an uncovered product inherently unsuitable. They make it a different proposition. A bond may offer a return a depositor cannot obtain elsewhere, but its issuer's financial strength and the terms of the investment then matter in ways a protection label cannot replace. Savers should be able to recognise that change in risk without first mastering the legal vocabulary of every product.

Deposit takers are already required to maintain lists of protected products on their websites. They could make those lists easier to use at the point of comparison: place coverage status beside the advertised rate and maturity, link to the relevant conditions and identify the deposit taker responsible for the account. Where possible, account screens could show how existing balances contribute to the customer's total under the limit. Complex ownership or trust arrangements would still need specific explanation.

There is a commercial reason to do this well. Clear protection information lets customers compare a covered deposit with another covered deposit, or knowingly consider an investment outside the scheme. It reduces the chance that a higher return is chosen on the mistaken assumption that the public safety net is unchanged. The resulting competition would be easier to understand and more honest about what each offer contains.

New Zealand has established a useful protection system. Its practical value will be greater when customers can recognise its scope in the products they are actually choosing. Providers should display the coverage information where they display the return, and explain how the limit applies to the customer's accounts. A saver should discover the boundary before relying on it.

*Gustavo Pessoa is a professor of Economics and Finance at Fundação Getulio Vargas in Brazil. His work focuses on financial stability, regulation and public policy. The views expressed are his own.