Westpac continues to find itself frustrated with the operating conditions for its banking businesses in New Zealand, and the insistence of the local regulator on compliance with controversial conditions imposed on the bank over recent years.One previously unpublicised detail in the annual report of Westpac's two NZ banking entities and published in late 2009 shows that a review of Westpac's operating model uncovered issues about Westpac compliance with the Reserve Bank of New Zealand's outsourcing policy.The RBNZ had asked for the review when it became apparent in 2008 that both Westpac NZ and the NZ branch of Westpac were non-compliant with certain conditions of registration.  The independent review was completed in September 2009.Westpac has a dual operating model in New Zealand, where the locally incorporated Westpac NZ conducts retail and banking business activities and the Westpac Banking Corp NZ branch runs the institutional and financial markets activities.Under the RBNZ's outsourcing policy, banks are subject to conditions of registration related to outsourcing agreements.  The policy requires that a bank must show that, in the event of stress or failure, it has "legal and practical ability to control and execute" any outsourced function such that among other things, a bank's existing customers can be given access to payments facilities following any failure and on subsequent days.In short, this means that outsourcing arrangements for bank functions must not create risk to the bank's ability to continue to provide and circulate liquidity in the economy.The provider of the outsourced services is believed to be Westpac in Australia.Other banks, and notably ANZ, have in the past lobbied for equal treatment of the Australian operations of banks in New Zealand on the grounds that the tight conditions around ANZ National's business need to apply to rivals.This, however, does not mean that a bank is not allowed to pursue outsourcing strategies to meet its needs. They have the flexibility to do so provided the bank is able to satisfy the RBNZ that the required outcomes are met.Westpac is currently addressing the issue and will be in discussion with the Reserve Bank regarding operating model and governance changes that may likely result from this. It is also understood that the independent review made various other observations, but those were not disclosed.Westpac has in the past been found to be in breach of liability limits that apply to its branch in New Zealand, though this was rectified in early 2009.