Recent reviews by RBNZ and FMA into the conduct and culture of banks and life insurers in New Zealand did not find systemic issues, but identified instances of poor conduct or misconduct. The reviews also identified significant regulatory gaps in that there is no over-arching conduct regime for core banking and life insurance. In addition, the IMF’s 2017 assessment of New Zealand’s financial system identified similar gaps compared to other countries’ regimes.
The Ministry of Business, Innovation and Employment (MBIE) has released (on 27 April 2019) a discussion paper for public consultation which includes options for improving financial institutions’ conduct, to ensure good outcomes for customers.
A link to the discussion paper is available here.
Who needs to read it? Why?
The review is primarily concerned with banks and insurers (both life and general). However, the discussion paper identifies that other financial institutions more broadly may also be brought under the proposed regime. Accordingly, all involved in the financial services sector will have an interest in understanding how financial regulation may develop.
What does it cover?
The discussion paper contextualises the current situations and problems identified, before setting out the various options that may be implemented as a response.
Many potential options are proposed. They include:
- entity licensing – this option focuses on the fact that in NZ, unlike Australia or the United Kingdom, there is no general conduct licensing regime for financial institutions. Currently RBNZ undertakes prudential licencing for banks, insurers and non-bank deposit takers, and FMA licenses fund managers, derivatives issuers, DIMS providers, and platforms, and now financial advice providers;
- executive accountability – this option appears to be based on the Australian BEAR (bank executive accountability regime) which came into force last year for Australian banks, and is currently being expanded to cover insurers and superannuation trustees. It imposes clear personal accountability and rules for conduct for the individuals who lead financial institutions;
- imposing legal duties on banks and insurers, e.g. to prioritise customers’ interests;
- restrictions on certain products that lead to poor customer outcomes;
- managing remuneration models that promote good customer outcomes;
- new whistle-blowing and reporting requirements;
- duties to ensure insurance claims are handled fairly, timely and transparently; and
- giving greater power to FMA and enforcing stronger penalties to regulate and deter misconduct, including extending liability to directors and senior managers – under existing laws.
Alongside this discussion paper, MBIE has published a document summarising some of the key problems in the financial sector and its initial preferences to address the relevant conduct and culture issues. This summary is available here.
The key problems identified include:
- an imbalance of power between financial institutions and consumers;
- some products are not designed with good customer outcomes in mind;
- sales are prioritised over good customer outcomes;
- there are weak systems and controls to manage conduct risk; and
- there is a lack of accountability to ensure good conduct.
Our view
Historically, the New Zealand financial services sector was relatively lightly regulated compared to other OECD jurisdictions. Over the last decade, there has been a move closer to the centre, with expanded roles for regulators under a tsunami of legislation including the AML/CFT Act 2009, the Insurance (Prudential Supervision) Act 2010, the Non-bank Deposit Takers Act 2013, the Financial Markets Conduct Act 2013 (FMCA), and most recently the Financial Services Legislation Amendment Act 2019 (incorporated into the FMCA). In addition, changes to the Reserve Bank’s policies under the Reserve Bank of New Zealand Act 1989 have had a significant impact.
A key question going forward will be whether reforms, or what extent of reform, is actually needed for the purposes of New Zealand’s financial sector, which already manages a significant regulatory workload. There is a real risk of swamping institutions with so many compliance projects that they become distracted from effectively managing and growing the business. On the other hand, these consultations may bring an opportunity for the industry to develop new sustainable business models for the future.
There is a balance to be found and it is important that industry participants engage to ensure any reforms properly tackle the relevant issues without unnecessary restriction and burden.
This is particularly the case given:
- the significantly heavier legislation in Australia has not proven effective in preventing misconduct as was highlighted by the Australian Hayne Royal Commission.
- the reviews into New Zealand’s financial institutions found that we do not have the same level of systemic issues that exist in Australia.
It will be important that there is a careful balancing of costs and benefits in determining which path New Zealand should follow. It is natural for government and regulators to seek more regulation as the solution to issues. But behavioural economics analysis such as the work of Kahneman and Tversky suggest an unintended consequence of more rules may be worse behaviour.
For further discusses of our views in relation to the conduct and culture reviews and potential regulatory development, see our most recent issue of Cover to Cover.
What next
MBIE is now seeking written submissions on the issues raised by the discussion paper. The deadline for submissions is 7 June 2019 at 11:59pm.
Following that, submissions will be reviewed and recommendations will be made to the Minister of Commerce and Consumer Affairs with a view to introduce legislation to Parliament by the end of 2019.
In addition to the formal consultation process, MBIE is welcoming feedback at any time about its work on the conduct of financial institutions.
It will be important for all affected financial institutions to respond to this important opportunity for input into the policy formation.
If you have any questions in relation to the options paper, making a submission, or are considering how these changes affect you or your business, please contact one of our experts.
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