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Non-Bank Deposit Takers Bill (Consistent) (Sections 14, 21, 25(c)) [2011] NZBORARp 22 (4 July 2011)

Last Updated: 29 April 2019

Non-Bank Deposit Takers Bill

4 July 2011 ATTORNEY-GENERAL

LEGAL ADVICE

CONSISTENCY WITH THE NEW ZEALAND BILL OF RIGHTS ACT 1990:

NON-BANK DEPOSIT TAKERS BILL

1. We have considered whether the Non-Bank Deposit Takers Bill (PCO 14891/11.0) is consistent with the New Zealand Bill of Rights Act 1990 (the Bill of Rights Act). We understand that the Bill is likely to be considered by the Cabinet Legislation Committee at its meeting on Thursday, 7 July 2011.
2. We considered potential issues of inconsistency with ss 14, 21 and 25(c) of the Bill of Rights Act and assessed whether or not any apparent inconsistencies are justifiable under s 5 of that Act. To that end we examined whether the relevant clauses serve an important and significant objective, and whether there is a rational and proportionate connection between these clauses and that objective. [1]
3. We have reached the conclusion that the Bill appears to be consistent with the rights and freedoms affirmed in the Bill of Rights Act.
   

PURPOSE OF THE BILL

4. The objectives of the Bill are to promote the maintenance of a sound and efficient financial system and to avoid the significant damage that could result from the failure of a non-bank deposit taker (NBDT).
5. The Bill implements the final components of the new regime for the prudential regulation of NBDT’s which arose out of the Government’s Review of Financial Products and Providers. The Bill incorporates existing prudential requirements from Part 5D of the Reserve Bank of New Zealand Act 2008, gives the Reserve Bank increased powers to detect and manage NBDT distress and failure, and imposes additional requirements on NBDTs including:
   

• licensing
• suitability assessments of directors and senior officers, and
• restrictions on changes in ownership.
  

POSSIBLE INCONSISTENCIES WITH THE BILL OF RIGHTS ACT 1990

Section 14 – Freedom of Expression

Section 14 of the Bill of Rights Act affirms the right to freedom of expression, which includes the freedom to seek, receive, and impart information and opinions of any kind and in any form. The right has been interpreted as including the right not to be compelled to say certain things or to provide certain information. [2]

We note, taking into account the various domestic and overseas judicial pronouncements on the issue, a two-step inquiry has been adopted to determine whether an individual’s freedom of expression has been infringed. The first step involves a determination of whether a particular

activity falls within the ambit of freedom of expression. The second step is to determine whether the purpose or effect of the proposed government action is to restrict that freedom. [3]

The Bill contains several provisions relevant to s 14 of the Bill of Rights Act:

• cl 11 prohibits a person who is not a NBDT or licensed as a NBDT from holding themselves out as such
• cls 12 and 14 require certain personnel to supply the Reserve Bank (the Bank) with suitability notices that certify whether or not there are suitability concerns with a named director or senior officer, or a proposed director or senior officer of an NBDT
• cl 41 requires a director of a licensed NBDT to notify a bank as to suitability concerns as soon they become aware – or ought to be aware – of them. After inquiries, the Bank may either issue a notice of non-objection or must advise that it does not intend to issue a notice of non-objection for a person
• cl 43 allows the Bank to require a trustee to attest to the lawful compliance of a licensed NBDT. Cl 44 requires a trustee to report licensed NBDT non-compliance with the legislation. Cl 45 requires a trustee to disclose certain information to the Bank connected to the performance of a NBDT, and
• cl 65 provides that it is an offence to disclose that the Bank has given a direction on certain matters or has issued a notice removing or appointing a director.
  

The provisions above affect the transmission of information in different ways. Clauses 11 and 65 preclude the expression of certain information as to the status of a NBDT. Clauses 12 and 14 relate to background information that is needed for the Bank’s determination of an application for a NBDT licence. Clauses 41 and 43 require key personnel to provide assessments as to the ongoing suitability of directors and senior officers of a NBDT and the lawful compliance of a NBDT.

An important component in determining whether the freedom of expression has been infringed is that the communication in question must attempt to express an idea or meaning. [4]

It is arguable whether this component is satisfied in relation to the information that has to be provided/withheld under the above provisions because the information is either factual or otherwise opinions based on the assessment of factual material. [5] It is questionable whether this information is sufficiently expressive in nature to engage s 14.

With respect to the second step, the above requirements plainly compel/prevent the provision of information and make it an offence not to comply with each requirement.

For completeness, we also consider whether, if the provisions place a limit on the freedom of expression, they are justifiable in terms of s 5 of the Bill of Rights Act. The requirements in the above clauses support the Bank in its role as the prudential regulator and licensing authority for NBDTs.

Clauses 11 and 65 seek to maintain trust and confidence in the integrity of licensed NBDTs. Clause 11 mirrors other existing financial licensing provisions [6] and seeks to ensure that the public can trust individuals who claim to represent licensed entities. Clause 65 prevents the financial damage that would result from public knowledge of a direction. The requirements in cls 12, 14, regarding information about suitability, help to ensure that only appropriate people are in positions of trust from the outset. The requirements of cls 41 and 43 also help to ensure the ongoing viability of a NBDT. The Reserve Bank would be unable to carry out its role effectively if it was unable to compel the disclosure of relevant information.

We consider the above provisions are proportionate in the circumstances. The participants in this sector are voluntary and the financial consequences for the failure of an NBDT would be significant. The provisions make sure the participants are accountable to the regulator and aim to ensure a sound and effective financial system.

The disclosed/prohibited information is limited to facts or opinions based on assessments of factual material that are necessary to carry out the purposes of the Bill.

We therefore consider that even if the disclosure/non-disclosure requirements amount to a prima facie infringement of s 14 of the Bill of Rights Act they appear to be justifiable under s 5 of that Act.

Section 21 – Unreasonable search and seizure

Section 21 of the Bill of Rights Act provides for the right to be secure against unreasonable search or seizure, whether of the person, property, correspondence or otherwise. There are two limbs to the s 21 right. First, s 21 is applicable only in respect of those activities that constitute a "search or seizure". Second, where certain actions do constitute a search or seizure, s 21 protects only against those searches or seizures that are "unreasonable" in the circumstances. The Bill contains several

clauses relevant to “a search or seizure”:

• cls 46 and 47 allow the Bank to require information from NBDTs and associated persons about relevant matters
• cl 48 allows the Bank to require information from NBDTs and associated persons on relevant matters for investigation purposes
• cl 49 permits the Bank to require a trustee to obtain information from a NBDT
• cl 50 enables the Bank with reasonable cause and by notice to either require the supply of information and/or appoint a suitably qualified person to enter and search a place under warrant issued under cl 51
• cl 51 of the Bill enables a suitably qualified person to, either with the consent of the occupier or with a warrant, enter and search any place. A warrant may only be issued by a Court on reasonable grounds and must comply with the procedure set out in Schedule 2 of the Insurance (Prudential Supervision) Act 2010. That procedure sets out safeguards such as:
  • the form and content of a search warrant
  • the extent of search powers and powers of people called to assist in a search
  • identification and notice requirements for those conducting a search, and
  • privileges and immunities.
    

The financial sector is heavily regulated and the above search powers are necessary to monitor compliance with the regime set up by the Bill. Clause 52 protects existing privileges under ss 54 to 57 of the Evidence Act with respect of any communication or information obtained under cls 48, 50 or 51. Clause 52 (8) also provides that the privilege against self incrimination in s 60 of the Evidence Act is not affected. We also note that cl 53 protects the confidentiality of information where there is no lawful or proper interest in publication or disclosure.

We consider that the search and seizure powers in the Bill appear to be consistent with its purposes and reasonable in the circumstances. The search and seizure provisions of the Bill therefore appear consistent with s 21 of the Bill of Rights Act.

Section 25(c) – Right to be presumed innocent until proved guilty

Section 25(c) affirms the right to be presumed innocent until proved guilty. This means that an individual must not be convicted where reasonable doubt as to his or her guilt exists. The prosecution in criminal proceedings must therefore prove, beyond reasonable doubt, that the accused is guilty.

Several clauses create offences that on their face appear to be strict liability offences. A strict liability offence is one where the prosecution is only required to prove whether something has or has not occurred regardless of the accused’s state of mind.

Examples include:

• it is an offence if a person is a NBDT and not licensed (cl 10)
• it is an offence for a licensed NBDT not to have a current credit rating (cl 22)
• it is an offence for a trustee to not provide an attestation as to the lawful compliance of a licensed NBDT (cl 43), and
• it is an offence for a licensed NBDT or an associated person to not comply with a notice from the Reserve Bank directing information to be provided or a search to be carried out (cl 50)
  

Clause 66 provides a general defence for offences under the Bill if a defendant can prove that:

• the contravention was due to an act or omission of another person, or some other cause

beyond the defendant’s control, and

• the defendant took reasonable precautions and exercised due diligence to avoid the contravention.
  

Do the offences/defence impose a limit on section 25(c) of the Bill of Rights Act?

The positive defence in cl 66 of the Bill gives rise to a limit on s 25(c) of the Bill of Rights Act because the accused is required to prove, on the balance of probabilities, a defence to escape liability. In other proceedings an accused must merely raise a defence in an effort to create reasonable doubt. Where an accused is unable to prove the defence, he or she could be convicted even though reasonable doubt exists as to his or her guilt.

We consider that the clauses cited above, in combination with the general defence provision in cl 66, are prima facie inconsistent with s 25(c) of the Bill of Rights Act. It is therefore necessary to consider whether that inconsistency is justifiable under s 5 of the Bill of Rights Act.

Is this a justified limitation under s 5 of the Bill of Rights Act

Where a provision poses a limit on a particular right or freedom, it may nevertheless be consistent with the Bill of Rights Act if it can be considered a "reasonable limit" that is justifiable in terms of s 5 of that Act. Following the guidance of the New Zealand Supreme Court decision of Hansen v R, the s 5 inquiry may be summarised as: [7]

(a) does the objective serve a purpose sufficiently important to justify some limitation of the right or freedom?
(b) if so, then:

1. is the limit rationally connected with the objective?
2. does the limit impair the right or freedom no more than is reasonably necessary for sufficient achievement of the objective?
3. is the limit in due proportion to the importance of the objective?
   

In addition to the factors listed above, we consider the following factors are relevant in assessing whether the strict liability offences can be justified under s 5 of the Bill of Rights Act:

(a) the nature and context of the conduct to be regulated

• (b) the ability of the defendant to exonerate themselves and the risk of conviction of an innocent person, and
• (c) the penalty level.
  

Clause 3 provides that the purpose of this Act is to promote the maintenance of a sound and efficient financial system and to avoid significant damage to the financial system that could result from the failure of a NBDT. The failure of a NBDT would have significant and detrimental financial effects.

The offences are designed to encourage prudent conduct by parties and compliance with these requirements. Compliance is important because it both makes the failure of a NBDT less likely and minimises the associated systemic effects of a failure such as runs on money and loss of confidence in the financial sector. Accordingly, the objective of the strict liability offences is to increase the likelihood of successful enforcement action to promote the objectives of the Act. The type of offences above are common among other commercial law statutes, such as the Securities Act, the Fair Trading Act, the Companies Act, the Insurance (Prudential Supervision) Act and the Reserve Bank of New Zealand Act.

The strict liability offences also aid the achievement of the objectives of the Act because the relevant directors, trustees and associated persons of NBDTs are best placed to ensure the financial health of their NBDTs. The offences apply to specific conduct by specific people. Accordingly, accused people are in a good position to give evidence that they complied with the Act and will therefore be able to exonerate themselves where this is the case. The defence in cl 66 relies on information likely to be peculiarly within the knowledge of the accused.

We have also considered the penalty levels for the offences. The Bill introduces Tiers corresponding to the gravity of an offence and the relationship of the offender to the NBDT:

$500 000

Tier

4

33 (for trustee), 36 (for trustee),

39 (for trustee), 43-45 and 50

A fine not exceeding $200 000

These penalties generally correspond in level to those available in Part 5D of the Reserve Bank of New Zealand Act 1989 and contained in other financial management legislation. We conclude that the penalty levels are proportionate to the significant potential harm caused for failing to meet the requirements of the Act. While the penalty levels are high, this must be weighed against the catastrophic effects of a NBDT failure.

We therefore consider that the limits the strict liability offences/positive defence place on s 25(c) of the Bill of Rights Act are justifiable in terms of s 5 of that Act.

CONCLUSION

We have concluded that the Bill appears to be consistent with the rights and freedoms affirmed in the Bill of Rights Act. This advice has been prepared by the Public Law Group and the Office of Legal Counsel.

Jeff Orr

Chief Legal Counsel Office of Legal Counsel

Footnotes:

1. In assessing the Bill under section 5 of the Bill of Rights Act, we have considered the guidelines provided in Ministry of Transport (MOT) v Noort [1992] NZCA 51; [1992] 3 NZLR 260 and R v Hansen [2007] 3 NZLR 1 (SC).
2. RJR-MacDonald Inc v Canada (Attorney-General) [1995] 3 SCR 199. Also see, “The New

Zealand Bill of Rights Act- a commentary” Butler & Butler, Wellington 2005 pp 389-390

3. Ross v New Brunswick School District No 15 [1996] 1 SCR 825. 4. R v Keegstra [1990] INSC 224; [1990] 3 SCR 697, 729, 826.
5. Clause 41 requires a Director of a NBDT to raise ‘suitability concerns’ with the Reserve bank. ‘Suitability concerns’ will not be matters of pure opinion but as per the definition in Clause 4 will be set out in Regulations. There will include matters such as criminal convictions, previous bankruptcy et cetera
6. For example, section 16 of the Insurance (Prudential Supervision) Act 2010 makes it an offence for a person who is not a licensed insurer to represent or imply that they are a licensed insurer.
7. The proportionality test under s 5 of the Bill of Rights Act, as applied in Hansen v R [2007] NZSC 7 [123], draws on the test articulated by the Canadian Supreme Court in R v Oakes [1986] 1 SCR 103, R v Edwards Books and Art Ltd [1986] 2 SCR 713 and R v Chaulk [1990] 3 SCR 1303. See for example, Hansen, at [42] per Elias CJ; [64] and [79] per Blanchard J; [103],

[104] and [120]-[138] per Tipping J; [185] and [217] per McGrath J; and [272] per Anderson J.

In addition to the general disclaimer for all documents on this website, please note the following: This advice was prepared to assist the Attorney-General to determine whether a report should be made to Parliament under s 7 of the New Zealand Bill of Rights Act 1990 in relation to the Non-Bank Deposit Takers Bill. It should not be used or acted upon for any other purpose. The advice does no more than assess whether the Bill complies with the minimum guarantees contained in the New Zealand Bill of Rights Act. The release of this advice should not be taken to indicate that the Attorney-General agrees with all aspects of it, nor does its release constitute a general waiver of legal professional privilege in respect of this or any other matter. Whilst care has been taken to ensure that this document is an accurate reproduction of the advice provided to the Attorney- General, neither the Ministry of Justice nor the Crown Law Office accepts any liability for any errors or omissions.