ANZ NZ CEO says NZ's biggest bank to be ready for new RBNZ outsourcing requirements ahead of schedule, but would've liked to spend the money on customer services

ANZ and BNZ both say they'll meet the deadline to transition to the Reserve Bank's revised outsourcing policy, albeit at a combined cost of hundreds of millions of dollars.

The country's big banks are required to comply with the Reserve Bank's revised outsourcing policy, or BS11, by October 1 next year. That's after the deadline was pushed back 12 months in March 2020 at the onset of the Covid-19 pandemic.

For New Zealand's four Australian-owned banks, the outsourcing policy requires them to have the legal and practical ability to control and execute outsourced functions, such as IT processing, accounting and call centres, independent of their parent banks.

The Reserve Bank announced the revised outsourcing policy in 2017 after two years of consultation, after determining in a 2014 review that the policy was being inconsistently applied, compromising the stability of the financial system in stress situations, and potentially undermining the viability of the central bank's Open Bank Resolution (OBR) policy.

In 2019 it emerged the directors of NZ's big banks had told the Reserve Bank quarterly for years that their banks were fully compliant with their regulator's outsourcing policy when they may not have been, albeit the banks individually played this down.

In the ANZ Banking Group's interim results briefing last week, CEO Shayne Elliott highlighted the preparation for the revised Reserve Bank outsourcing policy as one of the group's key costs.

"BS11 is a significant piece of work. In its entirety it will cost half a billion kiwi dollars. We're at the end of that sometime this year," Elliott said.

"This has been a major initiative that will result in a significantly stronger New Zealand franchise."

'A very, very large project'

ANZ NZ CEO Antonia Watson told interest.co.nz the bank hopes to have the required compliance work largely done for the revised policy this year.

"It has been a very, very large project...we're nearly five years into it already," Watson said.

She says ANZ NZ will continue to utilise ANZ Group resources as and where it can.

"We have a very regional footprint and we see huge advantage in that, and we see huge advantage in sharing technology. A really good example of that is having the group's resources brought to bear on our cybersecurity plans, So in some cases we are separate now, but in some cases what we've built is the ability to separate much more quickly."

"And in some cases we've been able to make some great strategic change by getting things into the cloud through a third party provider. And therefore we're able to have our own contract with a third party provider. [It's] the same technology but we're not sharing it with our parent. So it just depends on the part of business that your talking about, how we've approached it," Watson said.

She noted that under Reserve Bank requirements in some cases ANZ NZ needs to be able to stand up services in NZ with no reliance whatsoever on the ANZ Group within six hours. Watson said such a scenario would have to be a pretty dire one.

"it's hard to think of what that scenario might mean when our parent would want to jettison 25% of the group. So it would be pretty dire," Watson said.

"I'd love to have spent that money on customer propositions, but it will protect the New Zealand banking system in some kind of crisis."

BNZ confident of meeting deadline

Speaking after BNZ posted its interim financial results, CEO Dan Huggins told interest.co.nz the bank has a lot of work going on as it prepares for the revised outsourcing policy.

"We're going to spend around about $145 million on that programme of work. It's progressing well, [but there's] lots more work to do. There's a lot going on, but we are confident we'll get to that 2023 target date," Huggins said.

Meanwhile, he said major BNZ outages at Easter had nothing to do with parent National Australia Bank (NAB).

"It's the first significant outage we've had in nearly two years. We know that customers expect more from us than that," Huggins said.

"In terms of what happened, we had a regular upgrade to our underlying systems several months before that. [And] that upgrade caused some slowness in an unrelated system to the transaction processing system. Then when we got the load coming in over Easter, which is our second highest load month of the year, that slowness caused the outage," said Huggins.

"[It] was nothing to do with NAB. It was in our systems."

In May 2018 BNZ customers suffered a weekend service loss with most banking, online banking, EFTPOS and ATM services, hit after power was lost by NAB in Melbourne. At the time the Reserve Bank told interest.co.nz NZ's major banks should have systems in place to prevent such a scenario reoccurring, once they've implemented their regulator's revised outsourcing policy.

ASB & Westpac mum on costs

Westpac NZ CEO Catherine McGrath says the revised outsourcing policy is "understandably a really important strategic priority."

"There's significant resource going into that project as we work towards the deadline next year," McGrath says, adding the cost is commercially sensitive.

The Westpac Banking Corporation, Westpac NZ's Australian parent, last year considered demerging the NZ business, ultimately deciding not to. One of the reasons it gave for considering its ongoing ownership of the NZ unit was the Reserve Bank's outsourcing policy, which it described as "the RBNZ requirement to structurally separate Westpac’s NZ business operations from its operations in Australia." This meant there was "limited opportunity for [Westpac] Australia and [Westpac] New Zealand to share capability and scale." 

A spokeswoman for ASB says the bank has implemented a substantial multi-year programme to enable compliance with the revised outsourcing policy.

"This has involved setting an internal date for compliance that is in advance of the Reserve Bank’s 1 October 2023 deadline, to ensure we’re well prepared. Costs associated with the programme are commercially sensitive," the ASB spokeswoman says.

'Every effort' made to keep compliance costs as low as possible

The main aim of the Reserve Bank's revised outsourcing policy is to ensure NZ banks are able to continue operating in the event of the failure of a key service provider, especially when the service provider is a related party.

“The outsourcing policy enhances the viability of OBR as a means to resolve a bank failure, therefore reducing the risk of taxpayer funds being required to resolve a failed bank. The policy ensures that a failed bank will be able to continue to provide liquidity and a basic level of banking services to customers. This means that wider systemic effects from a bank failure can be kept to a minimum,” the then-Reserve Bank Deputy Governor Grant Spencer said in 2017.

.Key features of the revised policy include:

• a formal definition of outsourcing;
• a formal engagement process with the Reserve Bank on new proposed outsourcing arrangements with related parties;
• robust-back up arrangements for key functions outsourced to a parent or other related party;
• strengthened contractual provisions for outsourcing arrangements;
• foreign-owned locally incorporated banks to produce separation plans;
• clarity on the level of service a bank must be able to continue providing in the event of a failure and possible separation from its parent.

Spencer said "every effort" was made to keep compliance costs as low as possible without compromising the outsourcing policy’s key objectives.

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