A few years ago, New Zealand’s banks were increasingly offering their customers a range of insurance products along with their core banking products and services.
The attractions of becoming a ‘one stop shop’ for insurance and other financial services included opportunities to offer customers a co-ordinated range of services and streamline their customer experience as well as increasing the banks’ revenues.
More recently, banks have been exiting life insurance and related businesses, such as loss of income insurance. In the past two years, three of the four major banks which previously underwrote life insurance in New Zealand have sold their life businesses. Two of those banks, BNZ and Kiwibank, now direct customers to their specialist life insurer partners, and do not manage the customer relationships themselves – as they do for their general insurance offerings. Westpac continues to sell life insurance products via its website, but no longer underwrites them. This brings Westpac’s life insurance offering in line with its general insurance business.
This change follows a significant increase in attention by the Financial Markets Authority (FMA) upon life insurance and related insurance products and services and the way in which they are marketed and sold, including high profile civil proceedings against insurers that have resulted in large financial penalties.
We attribute this shift to a range of factors, including a push by banks to simplify their businesses. However, it also seems likely that recent regulatory change and the change in the FMA’s focus will have contributed to banks’ decision-making. This movement appears to be an example of regulation resulting in financial institutions becoming more focussed upon their core offerings and less willing to offer associated products to customers. While this may mean that institutions remaining in the market will be focussed upon (and adequately resourced to) providing good customer outcomes that regulators say they expect, it may also lead to decreased competition and consumer choice. In particular, it seems likely to reduce opportunities for customers to enjoy the convenience of placing all their financial services with a single provider, should they wish.
In 2018 and 2019, the FMA and the Reserve Bank of New Zealand (RBNZ) released the outcomes of their thematic reviews into the conduct and culture of retail banks and life insurers. While the issues identified were not as serious as those identified by the comparable reviews in Australia, the reports concluded that there were extensive weaknesses in these financial institutions’ systems and controls and a lack of focus on good customer outcomes.
In response to the consumer protection issues highlighted by the reports, the Government moved to establish a new regime to regulate the conduct of banks and insurers. In late June 2022, the Financial Markets (Conduct of Institutions) Amendment Act 2022 (CoFI Act) was passed into law.
The CoFI Act adds a new Subpart 6A to Part 6 of the Financial Markets Conduct Act 2013 and provides the FMA with a legislative mandate to regulate the general conduct of Financial Institutions as defined (including banks and insurers) which provide financial products and services to consumers.
Planned to come into force in early 2025, the new regime will require financial institutions to:
- Be licensed in respect of their general conduct towards customers. The licensing regime will be monitored and enforced by the FMA.
- Establish, implement and maintain, and comply with effective fair conduct programmes that ensure consumers are treated fairly.
- Comply with regulations that regulate incentives. Pursuant to the regulations certain sales incentives based on volume or value targets may be prohibited (such as overseas trips, bonuses, or leader boards).*
*This third point also applies to intermediaries.
The FMA will now begin work with Financial Institutions to ensure that they are prepared for the new regime. An exposure draft of proposed regulations prohibiting certain volume or value-based incentives, has now been released for consultation, and licensing applications are anticipated to open in mid-2023.
The CoFI regime sits alongside other proposed regulatory change, notably the Insurance Contracts Bill, for which public submissions closed in May 2022, as well as the ongoing review of the Insurance (Prudential Supervision) Act 2010. We discuss the Insurance Contracts Bill in more detail here.
Exit by banks from insurance offerings
Amidst the increasing focus on the conduct of life insurers, a shake-up of the players in the life insurance sector has taken place.
In its 2019 thematic review of life insurers, the FMA and RBNZ focussed on 16 New Zealand insurers that provide life insurance products, including five banks. Since the review was released, three of those five – BNZ, Kiwibank and Westpac – have sold their life insurance businesses.
Banks have assured customers that their policies will be unchanged by the sales. As noted above, Kiwibank and BNZ life insurance customers have transitioned to become customers of the acquiring insurer. Westpac has continued to sell life insurance products (via its website) as normal, but those policies will be unwritten and issued in Fidelity Life’s name.
Notwithstanding the sales of their insurance offerings, registered banks will still be subject to the incoming CoFI obligations as providers of financial services, including the new licence regime. However, compliance with the CoFI regime will be simpler for banks that no longer provide insurance products. Banks acting as intermediaries for insurance services, i.e. selling insurance products but not issuing them, will also be covered by the CoFI regime in respect of these services. As we note here, the standard conditions for CoFI licences are still being developed, with industry and stakeholder consultation having recently concluded.
The introduction of the CoFI regime is an important step towards ensuring that financial institutions are adequately serving the needs and interests of consumers. While the opportunity offered by regulatory change to improve industry conduct and culture is welcomed, its full impact on competition and the structure of the insurance market remains to be seen.
This article was co-authored by Rosa Laugesen, a Solicitor in our Litigation and Dispute Resolution team.
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