At the Financial Services Council (FSC) Outlook 2024, Hon. Andrew Bayly, Minister of Commerce and Consumer Affairs, announced changes to financial regulation that the Government intends to implement. Samantha Barrass, Financial Markets Authority (FMA) Chief Executive spoke to the FMA’s priorities for the coming year.
Easing regulatory burden on businesses while maintaining protection for vulnerable customers
Since the election in October 2023, the coalition Government has been forthcoming about its intention to improve the regulatory environment to make things easier for businesses in New Zealand. More detail on the reforms indicated in the various Coalition agreements, National’s 100-day plan and 100-point economic plan, can be found in our article here.
In his speech at the FSC Outlook 2024, the Minister discussed his concern with the series of legislative and regulatory changes made over successive governments, which has led to the architecture of the financial services sector losing some of its coherence and clarity. Minister Bayly reflected that while many of the changes were well intentioned, it has led to increased complexity for market participants and a corresponding lack of optimal outcomes for New Zealanders and businesses.
This is an issue we explored in our article Financial services – the case for reform (see here), where we discussed how the financial services sector is increasingly straying away from its intended ‘twin peaks’ model due to the increased crossover of mandates between the three regulators – the Reserve Bank, FMA, and Commerce Commission (ComCom). The upshot of this is a confusing regulatory landscape, overlapping guidance, and a multiple-licence system for financial institutions.
As the Minister identified, this creates significant operational burdens which are counterproductive to Kiwis and their businesses.
The proposed resolutions
To address the above concerns, Minister Bayly announced the following measures.
CoFI
The Minister’s concern with CoFI in its current form is that it introduces another licence requirement and imposes substantial compliance costs which are not proportionate to the issues the legislation intends to address.
The Minister announced plans to reform CoFI with a focus on:
- reinforcing that the responsibility for determining what is an appropriate fair conduct programme (FCP) lies with the board of the relevant business; and
- requiring the FMA to issue clear guidance for smaller institutions to meet minimum requirements of conduct.
The intention is that this guidance will make clear to regulated entities how to:
- appropriately engage with clients and customers;
- develop new policies and products that are fit for purpose and meet regulatory requirements;
- establish transparent fee structures; and
- develop an adequate complaints process.
The Minister made clear that the aim of this review is not to lessen requirements for appropriate conduct, but instead to ensure that financial institutions have clear guidance and can effectively meet their obligations, without compromising on conduct standards.
Despite these intended changes, the Minister strongly encouraged financial institutions to continue the work they will likely have already begun on their FCPs in preparation for the introduction of the regime by 31 March 2025. That said, the Minister also indicated that transitional arrangements and an appropriate timeline would be introduced to avoid any issues of uncertainty.
CCCFA
Minister Bayly also signalled that reform of the CCCFA was a priority. In his view, the prescriptive regulations and strong liability regime of the CCCFA has contributed to adverse outcomes for consumers, including:
- overly risk-averse lending decisions;
- unnecessary compliance costs; and
- reduced access to credit for consumers.
The Minister reiterated that the aim of reform will not be to undermine good conduct requirements but to address unintended consequences. The Minister stated that vulnerable borrowers have been unable to source traditional lending, and have instead turned to alternative unregulated high-cost sources of finance – which is contrary to the purpose of the regime.
The CCCFA will be reformed under a two stage approach:
- firstly, removing prescriptive affordability requirements for lower-risk lending as a matter of priority; and
- secondly, undertaking a more substantive review of the CCCFA, including reviewing its penalty and disclosure regime, and its relationship with CoFI.
Companies Act
The Minister also stated that he intends to simplify, modernise and digitise the Companies Act, as aspects of it are thirty years out of date and could be improved.
Structure of financial services regulators
The Ministers view (and ours) is that the twin peaks model needs to be reinforced in order to achieve improved coordination and cooperation between the financial regulators.
Specifically, the Minister aims to achieve this through the following changes:
- Ensuring the roles of the Reserve Bank and FMA are clearly delineated, with the Reserve Bank being the prudential regulator and the FMA being the sole conduct regulator. This means the responsibility of the CCCFA will be transferred from the ComCom to the FMA.
- Consolidating and simplifying existing conduct licensing requirements, whereby the FMA will issue a single licence covering conduct issues for financial institutions.
- Removing duplication in areas of initial fit-and-proper person assessments.
This revised regulatory landscape would mean that financial institutions would have one conduct licence overseen by the FMA, and one prudential licence overseen by the Reserve Bank.
Other reforms
Minister Bayly also signalled that he is interested in exploring changes to capital markets, KiwiSaver (in particular, impediments to KiwiSaver investment in private assets), and insurance contract law. We can expect to see further changes to financial services laws as the Government seeks to make good on its election promises to “help New Zealand businesses and investors thrive”. These reforms are likely to be addressed in the second half of the year.
The FMA’s view
Ms Barrass spoke to the FSC 2024 Outlook event to set out the FMA’s priorities for 2024 and indicated her alignment with the Minister’s key messages.
She focussed on how the core principles of CoFI support an outcomes-based regime that “can provide flexibility, support innovation and avoid box ticking”, as well as minimising the regulatory burden. Ms Barrass emphasised that it is not the FMA’s intention to scrutinise FCPs at the time of granting licences, and that the board of the relevant institution should right-size their FCP for the business. She referred to the introduction of the financial advice providers licence regime as a good example of how the FMA handles the introduction of new regimes smoothly.
In much of her address, Ms Barrass spoke to the Fair Outcomes consultation which is currently underway. She emphasised that the fair conduct principle that sits at the heart of CoFI, that a ‘financial institution must treat consumers fairly’, sets out that the fundamental components of fair conduct are:
- paying due regard to a consumers interests;
- acting ethically, transparently and in good faith;
- assisting customers to make informed decisions;
- ensuring relevant services and associated products meet the requirements and objectives of likely consumers; and
- not subjecting consumers to unfair pressure or tactics or undue influence.
Taking this approach to the conduct of all financial services means that an outcomes-based regime can provide flexibility, support innovation and avoid box ticking. It promotes a supervisory relationship that facilitates proactive and proportionate engagement. It also enables the FMA to minimise regulatory burden.
We were encouraged to hear Ms Barrass make clear that the Fair Outcomes approach is intended to be a work in progress between FMA and industry through continued engagement. Ms Barrass stated that the focus will be on the FMA’s approach to monitoring and supervision, as it does not wish to be an enforcement led regulator. We encourage industry members to read the consultation (see here) and engage with the FMA, which wants a “a shared focus on the ‘so-what’” of regulation.
Regarding the CCCFA being brought under the FMA’s purview, Ms Barrass said “we can see the sense in having a single over-arching conduct regulator”, and that getting credit regulation in line with an outcomes-based approach and fair conduct rules would be conducive to regulatory efficiency and certainty.
To prepare for regulatory changes, Ms Barrass stated that the FMA will be looking into pilot approaches in the coming year with a small number of firms, and invited industry members to help inform the FMA’s approach. She emphasised that industry engagement with the FMA’s monitoring teams will facilitate “a palpable shift to outcomes rather than rules and compliance with rules.”
Our view
The financial services sector represents a significant part of the New Zealand economy, and should be a large contributor to economic growth. However, achieving such growth is dependent upon a regulatory structure which promotes innovation and flexibility in financial markets, avoids unnecessary compliance costs, and facilitates the development of fair, efficient and transparent financial markets. As the regulatory environment has evolved in New Zealand, these objectives have not always been achieved, which the Minister acknowledged in his speech today.
The prize to be achieved from simplifying and standardising the regulation of the New Zealand financial services sector is significant. New Zealand’s financial services sector should be a key contributor to the development of a “weightless” economy, diversifying our foreign earnings away from the traditional sectors upon which the economy is overly reliant. The Minister’s proposed changes work towards this outcome, and deal with the incremental confusion and inefficiency that has developed within the financial services regulation.
We look forward to seeing what comes next and working with industry and government with a view to achieving change which is meaningful and comprehensive.
What next?
If you have any questions in relation to financial services regulation, and how it applies to your business, please contact one of our experts.
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