The regulation of financial markets is constantly evolving to respond to a changing environment. Recently, we have seen heightened geopolitical uncertainty, market volatility, and unpredictability in the global economy. Financial markets are also becoming increasingly fragmented and digitised.

Change has been the only constant over the last few years, with the roll-out of regulatory reforms following the Conduct and Culture reviews of banks and life insurers in 2018 and 2019. While some of these reforms are at the implementation stage, others are yet to come into force. For example, the new regulatory regime for financial advice came into effect in March 2023, capping off a transition that began in 2019. In the last year, the Financial Markets Authority (FMA) engaged on and published guidance on the Climate-related Disclosures regime to help entities get ready for the first year of reporting in 2024, as well as the Conduct of Financial Institutions (CoFI) regime, currently due to come into force in March 2025. However, the formation of the new Coalition Government in New Zealand has thrown uncertainty on the future of some of these regulatory reforms. We summarise the changes at the end of this article. 

Against this backdrop of change and uncertainty, we examine the current regulatory trends and priorities of the FMA.

FMA’s strategic priorities

Outcomes-focused regulation

Clare Bolingford, Executive Director of Regulatory Delivery at the FMA, indicated in August 2023 that the FMA’s first key priority is to develop a more outcomes-focused approach to supervision and monitoring [1]. A few months later, in November 2023, the FMA released a draft guide on its approach to outcomes-focused regulation for consultation, with a specific focus on fair outcomes for consumers and markets financial service providers. 

Earlier this year, Minister of Commerce and Consumer Affairs Andrew Bayly affirmed the importance of fair conduct and stated that businesses that have begun preparing fair conduct programmes (FCP) in anticipation of CoFI’s implementation should continue to do so. The confirmation provided by Minister Bayly means that this consultation is key for the future delivery of financial services and for enforcement. The consultation guide (which can be found here) reflects the FMA’s expectation that firms will focus on results and move away from compliance as a matter of form and prescription. It sets out seven “fair outcomes” that the FMA considers firms should be working towards:

1. Consumers have access to appropriate products and services that meet their needs;
2. Consumers receive useful information that aids good decisions;
3. Consumers receive fair value for money;
4. Consumers can trust providers to act in their interests;
5. Consumers receive quality ongoing care;
6. Markets are trusted based on their integrity and transparency; and
7. Markets enable sustainable innovation and growth. 

Consultation closes on 1 March 2024, after which the FMA will review submissions and finalise the fair outcomes and guide.

In her 2024 FSC speech, Samantha Barrass, the FMA Chief Executive, emphasised that using the core principles at the heart of CoFI can result in a simple and streamlined approach for conduct regulation. Further to the Minister’s indication that the Government wished to transfer responsibility for monitoring CCCFA conduct from the Commerce Commission to the FMA, Barrass noted that aligning credit regulation with an outcomes-based approach and fair conduct rules would provide regulatory certainty and efficiency. For example, the FMA may turn to the Financial Markets Conduct Act to support appropriate regulation of registered banks, non-bank deposit takers and high-interest rate lending, particularly those targeted at vulnerable communities. 

Improving understanding of the drivers of market, provider, and consumer behaviour 

The FMA’s second strategic priority is to improve its understanding of the drivers of market, provider, and consumer behaviour by gathering evidence, insights and data from firms and other regulators [2].

Bolingford has said that this will help to establish “an evidence base to decide where to focus [the FMA’s] discretionary effort; a feedback loop to evaluate the impact of those actions; and core intelligence data to improve [its] practice”[3]. Also relevant is that the FMA has appointed a Chief Economist for the first time. Barrass said that the role would assist in focusing “our regulatory lens on the right priorities and outcomes” and that it would make a “significant difference to the way we best target our resources”[4].

Taking a proactive approach to minimising harmful conduct on the perimeter

The Financial Markets Conduct Act 2013(FMCA) established what the FMA calls its perimeter – the borderline of its formal powers. The FMA has indicated that its third strategic priority is to focus on activity on the perimeter that causes harm to the public and erodes confidence in the system [5].  In recent years, following the Conduct and Culture reviews of banks and life insurers, the FMA has focused on customers being overcharged or otherwise disadvantaged as a result of poor practices and inadequate systems and processes. This has resulted in seven civil proceedings of this nature against banks or insurers, including the largest penalty to date of $3.9 million. These cases provide lessons in how the courts view the application of the fair dealing provisions, and important guidance for firms on conduct and the need to invest inappropriate systems and controls. 

Further, in May 2023, the FMA issued a permanent stop order to Validus and Associates, which is registered in the United States, for making misleading offers of financial products that did not exist. This shows that the FMA will take steps to challenge unregulated harmful activity even when it originates overseas.

Criminal activity that causes harm to the public, such as scams and frauds, also sit on the perimeter. In recent years, there has been a global surge in scams and crimes targeting the financial sector. As with the International Organisation of Securities Commissions, the FMA has raised this issue to the top of its agenda. The New Zealand Banking Association also announced in September 2023 that it was going to investigate improving the industry scam response, including introducing name and account number checking. 

Deterring misleading value propositions 

The FMA’s fourth strategic priority is deterring misleading value propositions of financial products and services [6]. This includes a focus on inappropriate advertising, issues with multi-policy discounts, value for money, poor disclosure, and increasingly under CoFI, the design and distribution of everyday financial products. Over the last few years, the FMA has brought penalty proceedings against five entities for insurance relying on the fair dealing provisions. Penalties of up to $3.9m were paid. We can expect this trend to continue. Similarly, in recent years, Australian Securities & Investments Commission (ASIC)has focused on failures by insurers to deliver on their pricing promises, resulting in the Federal Court of Australia imposing the highest penalty of $40 million in June 2023.In 2024, ASIC has indicated that it is turning its attention to failures in insurance claims handling, with a focus on claims handling, poor communication and record keeping, and inappropriate use of exclusions [7].

ASIC has noted that for consumers in the unfortunate situation of needing to claim on their insurance policy, timely and fair claims handling is crucial [8]. We expect this to be a key theme in New Zealand in the years to come. In the 2022/2023 FMA annual report, Samantha Barrass reiterated the FMA’s continual expectations for insurers to resolve claims in a manner that is fair and timely, putting the interests of each customer at the centre of their response [9]. 

Financial Services Council (FSC)Outlook 2024: Changes to financial regulation

At the FSC Outlook 2024, the new Minister of Commerce and Consumer Affairs, Andrew Bayly, stated that the complex legislative and regulatory framework currently governing the financial services sector has led to lack of clarity and increased operational costs. He signalled an intention to simplify this framework to reduce compliance burden without comprising the protection of consumers ’interests. Samantha Barrass also spoke at the FSC 2024 Outlook event and indicated her alignment with the Minister’s key messages. The Minister and Ms Barrass’ speeches can be found here and here respectively.

CoFI regime

Minster Bayly signalled that a targeted reform of CoFI, rather than a repeal, was appropriate, to ensure that good conduct obligations are proportionate and fit-for purpose. The reform includes two aspects:

• it will reinforce the principle that the responsibility for determining what is an appropriate fair conduct programme for their specific business lies with the applicant. This means that liability lies with the directors and management and the board to identify key risks in areas of concern and develop their fair conduct programmes accordingly.
• the FMA is expected to issue clear guidance for smaller institutions to meet minimum requirements of conduct.

At the same time, Minister Bayly affirmed the importance of fair conduct and stated that businesses that have begun preparing fair conduct programmes (FCP)in anticipation of the regime’s introduction should continue to do so. In terms of the FMA’s expectations of FCPs, Samantha Barrass has emphasised that it is not the FMA’s intention to scrutinise FCPs line by line during the licensing process, and that FCPs should be right-sized for the businesses they serve. Ms Barrass indicated that the FMA will be flexible and respond to different business models in their licensing, supervision and monitoring approach, rather than using a ‘tick box’ approach.

Credit Contracts and Consumer Finance Act 2003 (CCCFA)

Minister Bayly stated that a priority was to reform the CCCFA to protect vulnerable consumers without unnecessarily limiting access to credit. In his view, the current detailed regulations and strong liability regime have led to overly risk-averse lending decisions, created unnecessary compliance costs, and reduced access to credit for consumers. As a starting point, he proposed removing the prescriptive affordability requirements for lower-risk lending. From there, he proposed undertaking a more substantive review of the CCCFA, including reviewing its penalty and disclosure regime, and its relationship with the CoFI regime.

Twin peaks regulatory model

The Minister also spoke to the significance of the twin peaks regulatory model. He supported maintaining a clear distinction between the purview of the Reserve Bank of New Zealand as prudential regulator and the FMA as conduct regulator. To that end, he proposed the following changes:

• transferring responsibility for monitoring conduct in respect of the CCCFA from the Commerce Commission to the FMA;
• consolidating and simplifying existing conduct licensing requirements (for example, the FMA could issue a single licence covering conduct issues for financial institutions); and
• removing duplication in areas of initial fit-and-proper person assessments and cyber resilience reporting.

Final remarks

As ASIC Chair Joe Longo indicated, the need for change is constant, and to remain effective, regulators must be open to change themselves [10]. The FMA is adjusting their regulatory and enforcement approach to respond to changes in the financial, economic and political environment. It is important for firms to keep up with regulatory trends and priorities to ensure they are meeting changing regulatory expectations.

References and footnotes

1. Clare Bolingford, FMA Executive Director of Regulatory Delivery (speech at 2023 Financial Services Council Conference – 16 August 2023): See also the FMA Outlook 2023/2024
2. Clare Bolingford, above n 1
3. Clare Bolingford, above n 1
4. FMA appoints Stuart Johnson to new Chief Economist role
5. Clare Bolingford, above n 1
6. Clare Bolingford, above n 1
7. Sarah Court, ASIC Deputy Chair (speech at ASIC Annual Forum 2023 – Enforcement session opening remarks, 21 November 2023)
8. Sarah Court, ASIC Deputy Chair (speech at ASICAnnual Forum 2023 – Enforcement session opening remarks, 21 November 2023)
9. FMA 2022/2023 Annual Report, at 9
10. FMA 2022/2023 Annual Report, above n 9