In this article, we examine the progress of key regulatory changes for insurers and other financial institutions, and the further delays resulting from COVID-19.
When New Zealand finished the first lockdown in May, regulators indicated that proposed law changes would be delayed due to COVID-19 but remained optimistic that progress could be made towards the end of this year. However, with the second lockdown for Auckland in August, further delays are expected. In the current climate, financial institutions are still expected to support their customers during the continuing COVID-19 pandemic.
Financial advice regime starts 15 March 2021
In June, the Ministry of Business, Innovation and Employment (MBIE) set the commencement date for the new financial advice regime to be 15 March 2021. With six months until the new regime, insurers should start actively preparing for the new regime, if they haven’t done so already.
Key elements of the proposed regime
The Financial Services Legislation Amendment Act 2019 (FSLAA) will repeal the Financial Advisers Act and insert a new financial advice regime into the Financial Markets Conduct Act 2013 (FMCA). Anyone providing financial advice to retail clients from 15 March 2021 onwards will need to hold a transitional licence and comply with the obligations under the new provisions in the FMCA.
In brief, FSLAA will impose a licensing requirement on those persons that provide a financial advice service to retail clients, and new duties on persons (the financial advice provider, financial advisers and nominated representatives) which provide regulated financial advice. While most obligations only apply to those giving financial advice to retail clients, certain obligations will apply to financial advice given to both retail and wholesale clients.
The new duties include:
- prioritising clients’ interests where there is a conflict of interest by taking all reasonable steps to ensure financial advice is not materially influenced;
- exercising the care, diligence and skill that a prudent financial adviser would exercise when giving financial advice;
- taking reasonable steps to ensure that clients understand the nature and scope of the advice, including any limitations;
- meeting competence, knowledge and skill requirements under the new Code of Professional Conduct for Financial Advice Services; and
- complying with new disclosure requirements defined in the regulations, including ensuring that those disclosures are not misleading, deceptive or incomplete.
Disclosure obligations released
In June, MBIE released the disclosure regulations that prescribe the information that financial advice providers (and their financial advisers and/or nominated representatives) must make available and the manner in which this information must be prescribed.
Different sets of information must be provided:
- publicly on a website or (if the provider doesn’t have a website) on request;
- to the client when the nature and scope of advice to be given becomes known;
- to the client when the advice is given; and
- if a complaint is received.
The most welcome change to the regulations is the streamlining of the disclosure so that:
- advisers will not be required to provide the nature and scope or advice disclosure information if the client has previously been given the information and there has been no material change to that information since the client was given it; and
- the nature and scope disclosure and advice disclosure can be combined (as long as the timing requirements under each of these obligations, when read together, is met).
Changes to FMA levies
The Financial Markets Authority (Levies) Amendment Regulations 2019 (2019 Amendment Regulations), which set new levies for financial advice providers (FAPs), financial advisers and authorised bodies for the purposes of the new regime, have now been revoked by the new Financial Markets Authority (Levies) Amendment Regulations 2020. The Minister of Commerce and Consumer Affairs (the Hon Kris Faafoi) provided that the proposed changes under the 2019 Amendment Regulations needed to be revoked to reflect the recent delay in commencement of the new financial advice regime. Instead, new levies are expected to be announced later this year with agreement to be sought from Cabinet in late 2020.
Proposed standard conditions for financial advice provider full licences
FSLAA enables a transition to the new financial advice regime. There are two phases to FAP licensing – transitional and full.
In June, the FMA released a consultation paper on the standard conditions it proposes to impose on full licences for FAPs. Consultation on the conditions closed in August.
All financial advice provider full licence holders and each of their authorised bodies will need to comply with the standard conditions.
The proposed standard conditions cover:
- creating and maintaining records;
- having an internal complaints process;
- providing the FMA with regulatory returns;
- having appropriate arrangements for any outsourcing;
- having and maintaining adequate and appropriate professional indemnity insurance;
- having and maintaining appropriate business continuity and technology systems;
- meeting ongoing eligibility and other requirements; and
- notifying the FMA of material changes.
Full licence applications will open when FSLAA comes into force on the 15 March 2021. Currently, the application form and accompanying guide have not been finalised.
FEC reports on CoFI Bill
The Finance and Expenditure Committee (FEC) has reported its findings on the Financial Markets (Conduct of Financial Institutions) Amendment Bill (CoFI Bill). The report suggests a number of amendments to the CoFI Bill, including:
- clarifying the fair conduct principle by inserting a number of factors relevant to the requirement to treat consumers fairly;
- inserting sections that require certain content to be included in fair conduct programmes, which was previously to be prescribed through regulation;
- requiring that financial institutions provide their fair conduct programme to the FMA, and publicly disclose only a high-level summary of their programme (as opposed to the previous requirement to disclose the entire fair conduct programme publicly);
- clarifying the threshold for non-compliance with the fair conduct programme: financial institutions must take all reasonable steps to comply with their fair conduct programme;
- including a list of matters for the Minister to have regard to before recommending regulation or prohibition of incentives;
- narrowing the range of intermediaries that the power to regulate or prohibit incentives can apply. Intermediaries under such regulation are only those involved in the chain of distribution; and
- reducing the extent obligations apply to intermediaries. Financial institutions must manage and supervise intermediaries, as well as provide ongoing conduct training.
Importantly for insurers, the FEC inserted a regulation-making power to exempt specified types of financial institutions from the requirement to hold a licence. This was to alleviate the onerous burden placed on a broad range of participants with varying market structures in the previous definition of ‘licensed insurers’.
The CoFI Bill still awaits its second reading. After the general election (19 September 2020), the third reading will be confirmed. Based on the first reading debate, indications are that the current Coalition Government support the CoFI Bill, however it may be opposed by the opposition.
Insurance contract law review continues
Progress is slow on MBIE’s review of New Zealand’s insurance contract law. As mentioned in our June issue of Cover to Cover, MBIE has not announced any delays to the review. However, submissions from the consultation on the options paper are not yet available despite consultation closing in June of 2019, and Cabinet announcing their decision in December last year. It is currently unclear when further consultation will be made available or a draft Bill released.
IPSA Review to recommence
The Reserve Bank of New Zealand has recently announced its intention to recommence the review of the Insurance (Prudential Supervision) Act 2010 (IPSA), issuing a relaunch paper in respect of the same. The review will commence in parallel to the review of insurer solvency standards.
IPSA Review relaunch paper
The relaunch paper sets the focus and timeframe for the IPSA review, highlighting the Reserve Bank’s progress to date and issues that have arisen since the review was deferred in 2017. It will consider recent reviews of the sector, namely the International Monetary Fund’s review of the financial sector, the insurance contract law review and the Trowbridge/Scholtens review of the Reserve Bank’s supervision of CBL Corporation.
The main focus points will be:
- The scope of legislation and which organisations should be captured: this involves a possible amendment to the definition of “insurance” under IPSA and the “carrying on business” test.
- Overseas insurers: how overseas insurers operating in New Zealand should be treated under IPSA and what kind of supervision they require.
- Statutory funds: to what extent statutory funds should feature in New Zealand regulation and an assessment of whether the current regulation for statutory funds is effective and efficient.
- Solvency: whether the enabling provisions for solvency standards are supportive of good regulations and whether the definitions in IPSA require amendment.
Insurance solvency standards review
The Reserve Bank is reviewing the solvency standards issued under section 55 of IPSA. This review will span the next three years, with standards to be finalised in Q3 2023. The review follows other various reviews in recent years containing recommendations for the administration of insurer solvency in New Zealand, such as the IMF review, the CBL review, and the thematic review of appointed actuaries. The review aims to change the structure and level of registered capital requirements which will bring the solvency standards in line with international standards.
This review will bring New Zealand into line with international standards. As indicated by the many reviews pointing out pitfalls in the current solvency standards, the Reserve Bank’s review of these standards is long overdue and should be strengthened to ensure effective prudential supervision across the insurance industry.
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