12/03/2011 Providence Savings & Loan

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Description of the legal framework governing Offshore Finance Companies (OFC)
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A bout Us Definition of terms:

Fees
Bank -- means anyone that carries on the business of banking (Bills of Exchange Act 1908,
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Banking Act Repeal Act 1995 etc.)

Business of banking -- means conducting current accounts for customers, where the
amounts are repayable to the customer's order, and the person also either collects cheques
payable to the customer or receives funds from third parties to the customer's current account
(no statutory definition, common law definition, see Tyree's Banking Law in New Zealand,
Second Edition, pages 69-72).

Financial institution -- means someone who carries on the business of borrowing and lending
money, providing financial services, or both (Reserve Bank of New Zealand Act, section 2, see
also Financial Transactions Reporting Act 1996 (a more broad definition).

Security -- means an equity security, a debt security, a unit in a unit trust, an interest in a
superannuation scheme, a life insurance policy or a participatory security. (Securities Act 1978)

Issuer -- general definition is a person who issues securities, however for the purposes of the
Securities Act 1978 a special more complex definition applies, resulting in the OFC being an
issuer in the general sense and and Approved Issuer under the Approved Issuer levy (AIL)
scheme but not an issuer for the purposes of the Act.

Approved Issuer -- means an issuer of debt securities that is approved by the IRD for the
purposes of the AIL scheme.

Registered bank -- means a financial institution registered by the Reserve Bank of New
Zealand (may or may not be a bank under the common law definition).

The OFC is a financial institution (if it borrows and lends money or provides financial services or
both), a bank (if it conducts current accounts for its customers and makes and receives
payments from such accounts), and an issuer of securities (but not an issuer for the purposes
of the Securities Act 1978), an Approved Issuer (for the purposes of the Approved Issuer Levy
scheme), but not a registered bank.

The OFC may carry on the business of banking and provide financial services and may issue
securities to the public outside New Zealand. The OFC may not use the restricted words 'bank,
banker, or banking' in its name or title, and may only use them in its advertising if it also
includes a disclaiming statment that the OFC is not a registered bank. The OFC may not issue
debt securities to the public in New Zealand without a registered prospectus, a supervisory
trustee and the use of investment statements as per the requirements of Part II of the
Securities Act 1978. The OFC may not carry on the business of insurance without placing a
deposit with the Public Trust in New Zealand as required by the Insurance Companies
(Deposits) Act. The OFC may not carry on business as a futures dealer unless authorised by the
Securities Commission. Share brokerage requires a sharebroker licence under the
Sharebrokers Act 1908, however this does not apply if the sharebroker is also a bank.

OFC Entitlement to Carry on Business of Banking

Documented sources showing that unregistered banks are free to carry on the business of
banking include:

1. Legislation

Most English common law jurisdictions regulate entry into the business of banking through a
Banking Act, e.g. the Banking Act 1987 in the UK and the Banking Act 1959 in Australia.
However in New Zealand the Banking Act 1982 was repealed by the Banking Act Repeal Act
1995.

2. Regulatory authorities and official sources

Reserve Bank of New Zealand, in an article summarising the regulatory framework for
the New Zealand financial sector, prepared in consultation also with the Securities
Commission and the Ministry of Economic Development: 'Unlike in many countries,
where the licencing of a bank determines what the bank can do, bank registration in
New Zealand does not determine the permissible activities of a bank. In most respects a
non-[registered]bank financial institution can conduct banking business (including
deposit-taking and lending on current account) without being a registered bank.
Registration as a bank merely enables the entity to include "bank" or a derivative of that
word in its name.' (Bulletin Volume 66, number 4, page 26 of the attached, or accessible
at http://www.rbnz.govt.nz/research/bulletin/2002_2006/2003dec66_4mortlock.pdf ).
Reserve Bank of New Zealand: 'We do not license the business of banking per se.
Financial institutions do not have to be registered banks in order to take deposits and
make loans. A financial institution can conduct the business of banking without being
subject to the Reserve Bank's prudential requirements for registered banks, so long as it
does not use the word "bank" in its name.' (Alan Bollard, RBNZ Governor, Financial
System Regulation in New Zealand, Financial Sector Ombudsman Conference, 25 July
2003, page 5, http://www.rbnz.govt.nz/finstab/banking/supervision/0137359.pdf
Reserve Bank of New Zealand: 'Bank registration does not involve the licencing of the
business of banking or deposit taking. It is only if an institution wishes to call itself a
bank that there is a requirement for it to be registered by the RBNZ. Hence non-licenced
institutions are able to take deposits and conduct other aspects of the banking business
in New Zealand.' (The Role of the Reserve Bank of New Zealand in Supervising the
Financial System, RBNZ, March 2001,
http://www.rbnz.govt.nz/finstab/banking/supervision/role_financialsys.pdf -- Note: 'this
paper is no longer current as some aspects of our banking supervision policy have
changed.'

3. Commentaries:

'Banking business is not, however, restricted to registered banks. While registered

banks' business must comprise of borrowing and lending money and/or the provision of
financial services, any non-[registered]bank institution may conduct business that is
traditionally regarded as banking business -- such as deposit taking, the provision of
credit and the offer of cheque accounts and may be regarded as a "banker" for the
purposes of mutual common law rights and duties of the banker-customer relationship.'
Tyree's Banking Law in New Zealand, Second Edition, pages 8-9.

OFC Entitlement to Borrow and Lend Money and Provide Financial Services

Documents showing that most types of financial institutions need not be registered, licenced,
approved or authorised:

1. Legislation

Various entity related legislation exists for different types of financial entities, including:

Reserve Bank of New Zealand Act 1989 -- for registered banks and their prudential
supervision by the Reserve Bank of New Zealand
Unit Trusts Act 1960 -- for Unit Trusts for the regulation of Unit Trusts and requires
registration of the trust deed with the District Registrar [of Companies]
Life Insurance Act 1908 -- for life insurance companies, includes requirements to make
deposits with Public Trust
Building Societies Act 1965 -- requires the registration of Building Societies
Insurance Companies' Deposits Act 1953 -- requires insurance companies to make
deposits with the Public Trust
Friendly Societies and Credit Unions Act 1982 -- requires the registration of Credit
Unions and similar entities
Securities Markets Act 1988 -- requires the registration of stock exchanges and the
authorisation of futures dealers.
Superannuation Schemes Act 1989 -- requires registration of superannuation schemes.
Secondhand Dealers and Prawnbrokers Act 2004 -- requires pawnbrokers to be licenced
(other types of lenders need not have a licence, and the licencing only relates to non-
objection by the Police).

There is no requirement for companies that carry on the business of borrowing and lending
money and/or providing financial services to register or obtain approval or licence if they do not
want to use the word Bank in their name and do not carry on the business of insurance or
pawnbrokerage.

Some roles in registered or authorised entities are restricted, e.g. managers and custodians of
unit trusts must be approved by the Securities Commission.

Activity related legislation includes the Securities Act 1978 in relation to issue of securities to
the public in New Zealand, the Credit Contracts and Consumer Finance Act 2003 in relation to
consumer credit.

2. Regulatory authorities and official sources

See Table 3 of
http://www.rbnz.govt.nz/research/bulletin/2002_2006/2003dec66_4mortlock.pdf as showing
that 'finance companies' are not subject to 'registration by RBNZ' 'supervision by RBNZ' or 'other
registration requirement.' This table also shows that there is no 'deposit or other insurance'
and no 'required actuarial assessment' 'special insolvency arrangements' or 'mandatory credit
rating requirement.' For the Securities Act 1978 requirements shown in the table see below for
how they do not apply to the OFC either.

OFC Entitlement to Issue Securities to the Public Outside New Zealand

Documents showing that securities can be offered to the public outside New Zealand by issuers
incorporated, resident or carrying on business in New Zealand without Part 2 of the Securities
Act, concerning requirements for registered prospectus, statutory trustee, investment
statement etc. applying.

1. Legislation

'7 Territorial Scope of Part 2

(1) Part 2 applies to securities offered to the public in New Zealand, regardless of—

(a) where any resulting allotment occurs:

(b) where the issuer is resident, incorporated, or carries on business.

(2) For the purposes of this Act, a security is offered to a person in New Zealand if an offer of
that security for subscription is received by a person in New Zealand, unless the issuer
demonstrates that it took all reasonable steps to ensure that members of the public in New
Zealand may not accept the offer.

(3) Sections 38B and 58 (except section 58(3) and (4)) also apply to any advertisement that
contains or refers to an offer of securities to the public outside New Zealand and that is
distributed or to be distributed to a person outside New Zealand by,—

(a) in the case of section 38B, a person resident or having a place of business in New Zealand:

(b) in the case of section 58, a person resident or having a principal place of business in New
Zealand.

(4) For the purpose of subsection (3), the definitions of advertisement and offer extend to
communications or offers received by persons outside New Zealand.

(5) The territorial scope of Part 2 may be further extended under Part 5

(6) For the avoidance of doubt, nothing in Part 2 applies to a security or an advertisement
unless it applies under subsections (1) to (5).' (Securities Act 1978, Section 7)

This section shows that securities offered by New Zealand issuers to the public outside New
Zealand are outside the scope of the Act, and that the requirements of the Act do not apply in
such cases. However criminal liability for untrue statements in prospectuses or offers of
securities remains.

2. Commentaries:

'Securities offered overseas: Nothing in Part II of the Act applies in respect of any security that
is offered for subscription only to persons outside New Zealand and persons in New Zealand
who can properly be regarded as having been selected otherwise than as members of the
public.' Guidebook to New Zealand companies and securities law, 7th Edition, CCH, Andrew
Beck and Andrew Borrowdale, page 211.

OFC as A pproved Issuer

The OFC's status as an approved issuer will be obtained and documented in each instance, as
in the example company documents above. The Approved Issuer levy (AIL) scheme enables the
issuer to pay interest on registered debt securities to non-associated non-residents of New
Zealand for tax purposes without disclosure to the IRD and without deduction of Non-Resident
Withholding Tax (NRWT). We register Savings Account and Term Deposit as classes of
securities for the purpose of the scheme for each OFC, as in the above example. Note: this
scheme only applies to debt securities, equity securities are subject to NRWT and the company
itself is subject to Income Tax. The issuer must pay a 2% AIL on the interest on such securities
in lieu of NRWT. See http://www.ird.govt.nz/resources/file/ebc1eb4f43d41f3/ir395.pdf for the
official guide from the IRD about this scheme.

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