Deposit scheme reduces risk, boosts trust
Designed to safeguard up to $100,000 per depositor, per licensed institution, in the event of a bank or deposit-taking institution's failure, the DCS brings New Zealand in line with international standards, particularly those of OECD nations.
Brent King, managing director of General Finance, calls this 'a very positive development' for investors and deposit-takers alike. Together with greater access to the Exchange Settlement Account System (ESAS), which enables licensed non-bank deposit takers to settle directly with the Reserve Bank, the DCS reshapes the landscape for smaller financial institutions.
Mandated under the Deposit Takers Act 2023, the DCS ensures that if a licensed deposit taker – such as a bank, credit union, building society, or finance company that accepts retail deposits – fails, eligible depositors receive up to $100,000 of their savings quickly. This coverage is per depositor, per licensed deposit taker, and applies to accounts like savings, transaction and term deposits, covering individuals, companies and trusts.
Unlike investments such as shares, the scheme focuses solely on deposits, offering automatic protection without requiring registration. 'In simple terms, DCS protects investors, making deposits in companies offering returns more attractive because risk is reduced,' explains King. 'But this only covers the first $100,000, so some investors might spread their money across multiple companies to protect more of their investment.'
Funded by levies paid by deposit takers, the DCS builds a reserve over time, with the Reserve Bank of New Zealand (RBNZ) overseeing its management. Should the fund fall short during a crisis, the Government steps in as a backstop – though the long-term goal is industry self-sufficiency.
King emphasises its practicality: 'The idea is that protecting a portion of a DCS qualifying investment gives people enough to get through the next stage in the event of a company failure. It's not about making you whole, but ensuring you can pay groceries, rent, or power bills.'
Finance company failures are rare but not unheard of. Echoes of Hanover Finance still linger. Lacking the capital access of the 'big four' banks (ANZ, ASB, BNZ and Westpac), smaller or innovative players in the financial sector face greater risk.
King describes the DCS as overdue, addressing a long-standing gap in New Zealand's financial system. Previously, the country relied on mechanisms like the Open Bank Resolution (OBR) policy, which could freeze accounts during a bank failure, leaving depositors stranded. 'For example, if your pay was going into a frozen account, things would quickly become very difficult,' King notes. The DCS prevents such scenarios, ensuring liquidity while authorities assess broader solutions.
The absence of such a scheme created an implicit assumption that the Government would bail out major banks, tilting the market heavily toward the 'big four'. Smaller players, including General Finance, faced a trust deficit despite offering competitive rates.
The DCS changes this dynamic. 'It may not entirely level the playing field, but it tilts it toward smaller finance companies seeking to innovate and compete,' King says. 'Investors can now place money with downside risk of basically zero for the protected amount.'
Bank failures are erratic, often tied to rare events like the Global Financial Crisis, occurring roughly every 15–17 years. The RBNZ is still refining the levy system, which deposit takers like General Finance will fund to build the DCS reserve.
The DCS dovetails with other RBNZ developments, adds King, including ESAS, which enables direct settlements with the Reserve Bank for non-bank deposit takers. This aids capital management, reducing overheads for more market players and further stimulating competition in the financial services sector.
As the DCS prepares to launch on July 1, its rollout reflects careful planning. Delayed from earlier targets to ensure readiness, the scheme promises to bolster confidence without destabilising the market. King, with a touch of humour, remains optimistic: 'The Government is doing the right things with DCS and ESAS. We all like to complain about various goings-on, but there's good news here for the sector as a whole.'
Investors should look for the official RBNZ DCS logo to identify financial institutions that are included in the scheme or contact the RBNZ if in doubt.
Effective 1 July 2025, General Finance's secured term deposits are covered by the DCS, up to $100,000 per depositor.
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