NZ banks say bill to meet central bank's new outsourcing rules will top $870m

New Zealand's lenders say they will have to fork out as much as $870 million to meet the Reserve Bank's new plans for what services can be outsourced.

The Reserve Bank final policy decisions on rules defining how banks outsource some functions were announced yesterday after a year and a half of to-ing and fro-ing with the industry, largely settling on the softer approach signalled in its second consultation document from May last year. The new rules for outsourcing are integral to the Reserve Bank's open bank resolution policy, designed to ensure an orderly management when a lender collapses because third-party arrangements could undermine the efficacy of the regime.

The central bank relaxed its initial stance on the policy after lenders said the cost would be too high and, in a regulatory impact statement on the changes, estimated the industry would face initial and continued costs of about $550 million to bring their systems in line with the rules, amounting to 2.8 percent of industry profits over the past five years. A higher cost scenario was established by tallying the costs submitted by the banks, which estimated an industry-wide cost of $870 million, of which $670 million was a capital cost and $200 million in continuing expenses. That equated to about 4.4 percent of industry profits over the past five years.

"Arguments can be made for both approaches; however, the Reserve Bank believes the true industry cost figure is likely to be toward the lower end of the $550-870 million range," it said in the document. "In fact, due to the conservatism built into the calculations, and the availability of more cost-efficient compliance options that some in the industry refer to as business solutions, there is reason to believe industry costs could turn out to be significantly lower."

The Reserve Bank's analysis estimated a net benefit of about $2.2 billion by having the open banking resolution policy in place, or $1.9 billion using the higher cost projection, by reducing the need for a government bail-out and lowering the impact of a banking crisis on the wider economy.

"The Reserve Bank is acutely conscious of the sizeable investments some banks will have to make to become fully compliant with the policy and therefore allow society to realise the full benefits of the proposal," it said. However, it anticipates the "impact on the competitive landscape will be limited", some lenders are already well-aligned to the policy, and those banks "which do have to incur significant costs should be in a good position to absorb these costs."

The central bank will release an exposure draft of the policy next month and expect to settle on a final version in the second quarter of the year. However, a 'white list' of activities that wouldn't be captured by the outsourcing policy, such as phone services and rental leases, is still up for debate, and won't be finalised until the draft is issued.

The biggest bone of contention for 'white list' items has been the treatment of software, with lenders suggesting a number of categories be added to minimise their interactions with the central bank.

"The two most important categories are software licensed in perpetuity (that is, there is no termination rights from the service provider) and licensed software that is hosted on the New Zealand banks' systems and where there is no reliance on a third party for support or maintenance," the Reserve Bank said in its policy decision document. "These categories of software are different from licensed off-the-shelf where they provider could have termination rights in a crisis event."

Cloud-based services are among those at issue, with a joint submission by the four major banks and a separate proposal from industry lobby, the Bankers' Association, both saying the Reserve Bank was "significantly out of step with international precedent," where guidelines in Singapore "clearly set out that cloud is permissible provided appropriate protections applicable to any kind of outsourcing arrangements are in place."

(BusinessDesk)