The Ministry of Business, Innovation and Employment (MBIE) has released two consultations on the Conduct of Financial Institutions regime (CoFI regime). These consultations seek feedback on supporting regulations to the regime relating to the prohibition of sales incentives based on volume and value targets, and the proposed licensing fees for financial institutions.
Who needs to read it? Why?
The CoFI regime covers registered banks, licensed insurers, and licensed non-bank deposit takers, and applies broadly to relevant services and associated products provided by those specified financial institutions (including financial businesses and intermediaries who deal with them). These regulations are part of the Government’s work in establishing and implementing a fair conduct programme that complies with the fair conduct principle introduced by the CoFI regime. These consultations are an opportunity to engage with MBIE and influence regulatory development with industry insight
What does it cover?
Prohibition of sales incentives based on volume and value targets
MBIE is seeking feedback on an exposure draft on regulations that will prohibit financial institutions from offering sales incentives that are based on value or volume to their employees (except senior managers and executives), agents and intermediaries.
Incentives that are likely to be caught within this regulation include bonuses and soft commissions such as overseas trips for selling a particular amount of financial products. This broad view of what qualifies as an incentive is in line with the current definition in the Financial Markets Conduct Act 2013 (FMC Act). Currently, incentives on a linear basis (per product or per service) are not prohibited since they are not determined or calculated in reference to a target or threshold.
Volume or value based incentives are being targeted as they create a strong conflict between the interests of consumers and the person who is potentially eligible to receive an incentive. Senior managers and executives are excluded from the prohibition because “the greatest conflict of interest is likely to occur at the mid-to-lower levels of an organisation where individuals are more directly involved in the chain of distribution,” while it is less common for senior managers and executives to receive incentives based on volume or value.
Feedback has informed the development of this regulation so far, and in this round of feedback MBIE is looking to ensure it has not “overlooked any technical points in how the policy decisions have been drafted” so that the regulation achieves the policy objects and does not give rise to unintended consequences.
Proposed licensing fees for financial institutions
It is estimated that around 100 entities will need to obtain a financial institution licence under the new CoFI regime. Obtaining a licence will be a one-off process and such licences will not expire. Feedback from this consultation will help determine what licensing fees for financial institutions will be set. The purpose of these fees is to cover the costs that the FMA, as the body assessing and approving licences, will incur.
The FMA has stated that it considers it appropriate to charge the cost of staff time spent considering a licence application as the institution receives a private benefit from holding a licence and being able to operate within the regulatory environment established by the CoFI regime. The FMA already licenses other financial market services, the fees for which are set out in the Financial Markets Conduct (Fees) Regulations 2014 (Fees Regulations). The proposed fees for financial institution licences will be incorporated into the Fees Regulations.
Currently, the FMA is proposing a flat licensing application fee for standard applications, with an additional hourly rate applying for more time-consuming applications. The proposed flat fee is $1,024.93 for all applications, which has been calculated on the basis that each application will take an average 5.75 hours to assess. This fee is lower than the fees charged for most other licensed services applications. Where the assessment of an application takes more than 6.75 hours to process, the FMA is proposing a rate of $178.25 for each additional processing hour. This 1-hour margin is in line with other FMA licensing fees.
A further proposal is that separate fees will be payable for applications by authorised bodies and subsequent applications to vary licences. The FMA estimates that an authorised body application assessment will take approximately 3.45 hours because some of the information will have already been considered by the FMA, bringing the standard fee down to $614.95. Subsequent applications to vary licence conditions is proposed to be $115.00 plus $178.25 for every hour, which is the same as the existing variation fee.
Alternative options open to feedback are a flat application fee for all financial institutions with no additional hourly rate, setting different licence classes, and Crown funding for the cost of assessing applications.
The proposed regulations on sales incentives are in line with the current legislation and have taken on board the feedback received by MBIE so far. Similarly, the licensing fees are consistent with existing fees and calculated on the same basis. We do not anticipate significant changes to be made following this round of consultation, but it is an important opportunity for those with industry insight to provide MBIE with views on the possible effects of the proposed regulations.
Submissions on prohibiting volume and value based sales incentives close on 9 November 2022, and submissions on the proposed licensing fees close on 26 October 2022. Once the consultation period for each one closes, MBIE will analyse the feedback and consider any changes. The draft regulations are anticipated to be made in quarter 1 of 2023, and come into force in early 2025 along with the rest of the new financial conduct regime.
If you have any questions in relation to these proposed regulations, providing MBIE with feedback, or the CoFI regime generally, please contact one of our experts.
This article was co-authored by Elise Plunket, a Law Clerk in our Financial Services team.
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