NZ Herald 10 May 2025

AWoohoo! We’ve found the pot of gold at the end of the rainbow: higher returns with no added risk!

But hang on a minute. Didn’t Nobel Prize winning economist Milton Friedman say, “There’s no such thing as a free lunch”? When you gain something in investing, you lose something else. (There’s one notable exception — if you diversify, you reduce risk without reducing average returns. But that’s another story.)

So why shouldn’t we all invest in non-bank deposits after July 1 — up to $100,000 per provider — given that if the finance company goes broke, we will be compensated under the DCS?

To use another common saying — which apparently dates way back to one of Aesop’s Fables — look before you leap!

The Reserve Bank has published a list of deposit takers that will offer protected deposits at tinyurl.com/NZDepositCompensation. But, it points out, “Deposit takers can offer a mixture of protected and unprotected deposits.”

From 1 July, deposit takers will have to keep a list of protected deposits on their website, “and we recommend that people speak with their deposit taker if they are unsure whether their deposits will be covered by the DCS,” says the Reserve Bank.

There also are a couple of other issues:

• Will it be a hassle to get your money back if a deposit taker fails — which is probably more likely for a non-bank than a bank?

  “If a deposit taker fails, depositors will be contacted by either the RBNZ or a third party (such as a receiver or liquidator on behalf of RBNZ) with the steps they need to take to receive their DCS payment,” says the Reserve Bank.

  “Depositors will need to set up a bank account at another deposit taker if they don’t have one already. They will be provided with instructions on how to submit these account details to the RBNZ so their DCS payment can be made.

  “RBNZ will need time to process data that is received from the failed deposit taker, to make sure all eligible depositors receive the correct amount they are entitled to, and to ensure compensation is being paid into the correct account.”

  How long might it take before you got your money back? “The RBNZ will work to process DCS payments as quickly as possible, but it could take some time especially for more complex cases,” says the Reserve Bank. It adds that it will advise on likely timeframes in its communication on a payout.

• Will the difference in bank and non-bank interest rates continue?

  When you emailed me, a week or so ago, you mentioned a finance company that was offering 5.8% on a 9-month TD. But when I checked that was still accurate, their rate had dropped to 5.1%.

  Logic tells us that non-bank deposit takers won’t have to offer such a big premium in their interest rates, for deposits of up to $100,000, once their customers are guaranteed to get their money back. The rates will probably still tend to be higher than banks offer, because people are less familiar with the companies, and there’s the hassle factor mentioned above if they fail. But I predict the gap will lessen.

  Mind you, banks may also pay somewhat lower interest. Their term deposits will be more attractive — relative to other investments — because of the DCS, so there will be less need to entice people with high rates.

AThe DCS protects “debt securities of eligible depositors,” says the Reserve Bank. These include everyday bank accounts and savings accounts, term deposits and the like.

It adds, “Some banks offer cash and term PIEs that invest only in debt of that bank, and many depositors will view this interchangeably with regular call or term deposit products,” and they may also be covered. “Deposits takers will be required to have a list of protected products, which may include cash and term PIEs, from 1 July 2025,” says the Reserve Bank. As mentioned above, if in doubt, ask your bank or other deposit taker.

What about a banks’ KiwiSaver fund that invests only in that bank’s securities? I don’t think there is such a creature, but what if one was created?

“No KiwiSaver funds are intended to be a captive cash PIE or protected by the DCS,” says the Reserve Bank.

On the failure of a KiwiSaver provider, every provider has a supervisor, a separate company, that monitors what it does. I asked the Financial Markets Authority several questions about this:

• What would happen if a KiwiSaver fund got into financial trouble?

  “Under the law, fund managers are required to notify the supervisor if they are, or are likely to become, insolvent,” says the FMA. “The supervisor is responsible for monitoring the manager’s performance of its functions and obligations, as well as its financial position.

  “In the event that the licensed fund manager becomes insolvent or is otherwise unable to continue operations, the supervisor has the power to appoint a temporary manager to ensure the continued management and operation of the fund until a permanent replacement is appointed.

  “Importantly, investor assets are held separately in trust by an independent custodian (either the supervisor or a third-party custodian appointed by the supervisor, distinct from the manager) which provides an additional layer of protection.”

• Okay, but what might happen to KiwiSaver members’ accounts if fraud or criminal activity was found?

  “The licensed fund manager has a general duty to act in the best interests of investors, along with a specific fiduciary duty to exercise care, diligence, and skill in carrying out its responsibilities,” says the FMA.

  “Managers are expected to maintain appropriate systems and controls to manage operational risks, including those arising from fraud and criminal activity. The supervisor oversees the design and effectiveness of these controls to help safeguard investor assets from such risks.

  “So where a loss arises due to fraud linked to a failure by the manager to exercise reasonable care and diligence, the manager may be held liable and required to compensate affected members.”

  There’s an exception to this, though. “If a loss results from a member’s own actions — such as sharing login credentials or falling victim to a scam — the manager cannot generally be held responsible, and the outcome will depend on a case-by-case basis.”

• Is it possible the manager could go bankrupt in the process, so that KiwiSaver members lose some of their money?

  “It is possible, but in our view unlikely,” says the FMA. “KiwiSaver providers are obliged to act with care, diligence and skill and this includes managing known risks. Typically this will involve professional indemnity insurance, strong capital positions, a parent company guarantee or other similar arrangements. Supervisors are responsible for monitoring these arrangements.”

AKiwiSaver money is not insured. Still, while it’s possible you could lose your money this way, it’s unlikely, says the FMA.

“KiwiSaver providers are required to maintain robust business continuity planning and technology systems to mitigate risks such as cyberattacks. This has been a standard license condition since 1 July 2024. Regulatory settings, supervision arrangements and insurance reduce risks to investors.”

So there we have it. In all these scenarios KiwiSaver members could lose money, although it’s unlikely. How does the FMA advise people to reduce this risk?

“The FMA encourages all members of KiwiSaver to remain engaged with their provider and financial adviser (if any) and to stay informed and exercise caution to protect themselves against scams and fraudulent activity.

“Many KiwiSaver providers provide useful information to raise investor awareness on safeguarding personal information and detecting fraud/scams. Good personal cyber security practices and vigilance are important complements to the broader regulatory protections in place.”

Footnote: I hope you and other readers are comforted — rather than alarmed — by all this. I would hate to see people staying out of KiwiSaver for fear of something highly unlikely happening. If you’re that much of a worrier, you probably shouldn’t be in a car, train or bus either. The risk of harm while commuting or travelling is almost certainly higher.

AThanks for your concern about my welfare! I do try to be positive about most things. But I’m not keen on someone saying how well they have done with their investments if it might lead to others copying their tactics but not their success.

If positivity means encouraging people to take unnecessary risks they don’t really understand — such as trying to time markets — count me out.

As for the Aussies, I spent two years in Sydney a long time ago, and enjoyed it. But they have their fair share of whingers. I’m happy to be back here.

P.S. This column has turned out to be rather gloomy. Will try for brightness next week!

ABy the time you read this — a couple of weeks after you wrote to me — your balance may have recovered. More importantly, over the years you’ve probably done pretty well. Most KiwiSaver members have.

That aside, I agree that it’s better to keep your account open. KiwiSaver is a good place for retirement money. And even if you leave just a few dollars in there in the meantime, your balance shouldn’t go to zero unless all the fund’s investments fail, which is hard to imagine. So yes, the account should stay active.