Reserve Bank revamps rules for bank outsourcing to avoid failures

The Reserve Bank has released its revised policy for banks which outsource services, tightening the rules to ensure the banks continue to function in the event of failure.

The revised policy means foreign-owned banks have to produce separation plans showing what they would do if they abruptly lost access to services from their parent or another related party, and share those plans with the Reserve Bank.

The central bank began consultation on tightening up the policy in 2015 after a 2014 stocktake found that the banks' interpretation and application of the outsourcing policy varied, and it wasn't clear how banks would continue to operate in the event of a supplier or bank failure,

A second consultation document was released in May 2016 and the Reserve Bank published an exposure draft of the new policy in March this year.

A regulatory impact statement from the central bank, published in February this year, put the compliance cost of the revised policy at between $550 million and $870 million, with an expected benefit of between $1.9 billion and $2.2 billion. The Reserve Bank said the banks should be able to absorb that cost over the five-year transition without a material impact on their profitability and so shouldn't have a significant impact on customers.

New Zealand's four largest banks - ANZ, ASB, BNZ, and Westpac - all have Australian parent companies, and cumulatively hold about 86 percent of total bank assets in New Zealand.

Under the old rules, it was unclear how banks could prove their outsourcing arrangements would work as there was no formal process, which led to inconsistent application by the banks.

The revised policy introduces a formal process, making the banks subject to annual external reviews of their compliance over the five-year transition. After that, they will need to secure formal non-objection from the RBNZ before making any new outsourcing arrangements, unless they come under exemptions made by the central bank.

The revised policy also more clearly sets out the expected services a bank should provide for customers if there is a failure. The banks also need to keep compendiums recording basic information about all outsourcing arrangements, and "robust back-up arrangements" for functions they outsource to a related party.

(BusinessDesk)