For the first time in New Zealand, legislation has been passed that will bring registered banks, licensed insurers and non-bank deposit takers under a statutory conduct regulation regime.
The Financial Markets (Conduct of Institutions) Amendment Act – commonly known as COFI – will bring these entities into a principles-based fair conduct regime, designed to manage and monitor the risk of poor conduct and deliver good outcomes to customers.
The genesis of the legislation was in the outcomes of two reviews, done by the Financial Markets Authority (FMA) and Reserve Bank of insurers and registered banks in 2018-19. These, in turn, were promoted by the findings of the Australian Haynes Royal Commission into misconduct in banking, superannuation and others in the financial services market which uncovered headline-grabbing instances of egregious misconduct and greed, including the charging of bank fees to dead customers.
Here in New Zealand the findings of the two reviews were nowhere near as colourful. But they did uncover a poor understanding of good conduct within the banking and insurance sector and a culture where insurers did not consider themselves responsible for bad customer outcomes. Nonetheless, many told the regulators they were confident there were no significant conduct and culture issues within their businesses.
The COFI legislation was the result. The bill received the royal assent late last month and is expected to come into full effect in early 2025. But it did not enjoy unanimous support as it passed through the House, with both National and Act saying it would simply add to the “avalanche” of legislation and compliance that is confronting the financial services sector.
Along with COFI, the sector also must comply with FSLAA (the Financial Services Legislation Amendment Act) which also imposes conduct and client-care obligations on financial services providers and requires them to be licensed by the FMA.
Insurers are facing compliance with a new Insurance Contracts Bill which, among other things, introduces far-reaching changes around disclosure and risk. And the Reserve Bank is midway through a review of the Insurers (Prudential Supervision) Act 2010.
Alongside these legislative changes, the FMA is seeking compliance with its cybersecurity regime and has a consultation document in the market about a plan to require investment advisers to be able to demonstrate the advice they give on IPOs (initial public offerings) and listed equities is reasonable. The FMA is also targeting “greenwashing” (the making of false or misleading claims about the ethical standards applied to investments) and the wholesale investment market.
So, is there an element of overkill?
Bell Gully says an estimated 90% of businesses registered on the Financial Services Providers Register (FSPR) will not be expressly subject to the COFI regime.
And it says there is a risk that COFI may create an uneven regulatory playing field where “some institutions will be subject to a wide-ranging conduct and licensing regime while others providing the same service will not.”
Bell Gully says there is considerable overlap of COFI’s fair conduct principles and duties with existing conduct requirements in the Credit Contracts and Consumer Finance Act (CCCFA), FSLAA and the Financial Markets Conduct Act (FMCA).
Nevertheless, other commentators say New Zealand has been an outlier when it comes to imposing a conduct regime upon the financial services sector. COFI introduces a conduct licensing regime by the FMA for retail banks and insurers. Financial institutions will be required to set up, maintain and monitor effective fair conduct programs that put customers at the centre of their businesses and treat them fairly.
But during consultation on the bill, the financial services sector had one important win. In the first draft, the government charged insurers with the responsibility of training, managing and monitoring the intermediaries, such as brokers, who sell their products.
There was significant push-back from the industry which argued that insurers could not be held responsible for the conduct and culture of intermediaries which were third-party, independent businesses. Such a move could have unintended consequences, the government was told, as it would encourage intermediaries to restrict the number of insurers they dealt with to limit the number of conduct regimes with which they had to comply.
The requirement was dropped in the final version of the bill but the government will still have the last word. Intermediaries and brokers will be subject to regulation, yet to be drafted by MBIE, requiring them to support an insurer’s compliance with the fair conduct regime.
Commerce and Consumer Affairs Minister David Clark says he is also determined to use regulation to tackle the vexed issue of commissions and other incentives, saying the new rules will probably relate to commissions based on value and volume. However, in this area the industry has largely cleaned up its act. Gone are the days of conferences at five-star hotels in exotic locations, with a holiday tacked on at the end.
As one adviser puts it, “Insurers now treat everybody the same, regardless of whether they’re super-stars or not.”
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