Budget 2026: New Prudential Levy explained for New Zealand’s finance sector
Budget 2026: New Prudential Levy explained for New Zealand’s finance sector
The policy reflects a simple proposition: those who benefit from a stable and well regulated financial system should bear the cost of maintaining it. Matt McQueen, BDO's Audit and Assurance Partner, Financial Services explains more.
What you need to know about the Prudential Levy
The prudential levy is intended to recover the costs incurred by the RBNZ in licensing, supervising and, where necessary, intervening in regulated financial institutions. While consultation will determine the final design, the levy is expected to raise around $209 million over four years, rising to roughly $70 million per annum once fully implemented. The Government has emphasised that this represents less than 1% of the profits of the major banks. The move also comes against the backdrop of tighter five year funding agreements for the RBNZ, reinforcing a broader theme of cost discipline, transparency and sustainability in how the RBNZ is funded.
How does this compare with other jurisdictions overseas?
“The new approach outlined in Budget 2026, is best understood as a catch up rather than an outlier, as it will bring New Zealand into alignment with other jurisdictions overseas.”
Australia
In Australia, the Reserve Bank of Australia (RBA) funds its core monetary policy and operational functions largely through its own earnings, preserving independence from the annual budget cycle. Prudential supervision, however, sits with a separate regulator, Australian Prudential Regulation Authority (APRA) which is almost entirely industry funded. Banks, insurers and superannuation funds pay levies designed to recover the full cost of APRA’s supervisory activities.
United Kingdom
The UK has gone even further down the industry funding path. Both the Prudential Regulation Authority (PRA) and, more recently, the Bank of England are funded predominantly through levies on financial institutions. Since 2024, the Bank of England’s monetary policy and financial stability functions have been funded through a formal levy on banks’ balance sheets, replacing earlier indirect funding mechanisms.
Canada
The Bank of Canada funds itself through its own earnings and remits any surplus to the federal government. Prudential oversight is handled by the Office of the Superintendent of Financial Institutions (OSFI), which is mostly funded through annual fees charged to regulated financial institutions.
What does this mean for New Zealand businesses in this space?
International experience shows that industry funding works best when it complements strong cost discipline.“The new prudential levy brings New Zealand into line with Australia, the UK and Canada, but those systems also demonstrate an important point: user pays funding is about cost recovery, not cost expansion. Levies fund clearly defined regulatory functions within agreed budgets; they are not a licence for unchecked growth.”
In New Zealand, the RBNZ already operates under tight five year funding agreements and heightened scrutiny of expenditure. Matt continues:
“The RBNZ currently has a relatively lean and cost-efficient operation, and the new levy should be seen as a way of changing who pays, not as a signal that more spending is either needed or expected. If anything, industry funding tends to sharpen focus.”
Regulated entities are typically more engaged with how levies are set, how costs are allocated, and whether supervisory effort is aligned with risk. That dynamic can reinforce the discipline already embedded in the RBNZ’s operating model.
“Handled well, the prudential levy should support the RBNZ’s independence without diluting its cost discipline. The test will not be whether the RBNZ has access to more stable funding, but whether the framework continues to encourage a lean, focused and credible supervisor. In short, the levy should change the funding mechanics, not the mindset.”
What happens next?
At this stage, the prudential levy is a decision in principle rather than a finished design. The RBNZ will consult with affected sectors through 2026 on the scope of costs to be recovered, how the levy should be allocated across different types of institutions, and the most appropriate calculation methodology. Cabinet decisions are expected in early 2027, with the levy likely to be introduced part way through that year.
