Conduct of Financial Institutions Bill introduced
Today, the Financial Markets (Conduct of Institutions) Amendment Bill was introduced to Parliament by Minister Kris Faafoi. The Bill introduces a licensing regime regulated by the Financial Markets Authority (FMA) for conduct by registered banks, licensed insurers and licensed non-bank deposit takers (the specified financial institutions).
Who needs to read it? Why?
At this stage, the scope of the new regime is intended to cover registered banks, licensed insurers, and licensed non-bank deposit takers, and to apply broadly to all services and associated products provided by those specified financial institutions. It will, however, also be relevant for other financial businesses and intermediaries who deal with them.
What does it cover?
The purpose of the Bill is to improve the conduct of the specified financial institutions in respect of services and products provided to consumers, thereby reducing the risk of harm to those consumers. To achieve this, the Bill makes amendments to the Financial Markets Conduct Act 2013 (the FMC Act), amongst other enactments, to ensure that the specified financial institutions and their intermediaries comply with a principle of fair conduct and associated duties and regulations.
To address these issues, the Bill:
- requires specified financial institutions, that are in the business of providing relevant services, to obtain a licence from the FMA (in addition any other licence or registration from the RBNZ or the FMA) under Part 6 of the FMC Act – ‘relevant services' are defined as acting as an insurer (in relation to a consumer insurance contract, or other life or health insurance), being a creditor under a consumer credit contract, providing other retail financial services (of the kind that require registration as a financial services provider), or acting as a paid intermediary to a consumer for any of those activities (all of the italicised terms being further defined in the Bill)
- requires specified financial institutions and intermediaries to comply with a fair conduct principle to treat consumers fairly, including by paying due regard to their interests – this will require institutions and intermediaries to turn their minds to the fair treatment of consumers in a broad range of circumstances, from early design of products and services to post-sale dealings
- requires specified financial institutions to establish, implement, and maintain an effective fair conduct programme – to operationalise the fair conduct principle through policies, processes, systems, and controls throughout every relevant part of their business, from the governance level to day-to-day interactions with consumers, whether those interactions are made directly or indirectly through intermediaries
- requires specified financial institutions and intermediaries to comply with the fair conduct programme. This is aimed at ensuring that the chain of distribution of services and products is captured. That requirement is aimed at ensuring that institutions take responsibility from the top down
- requires specified financial institutions to ensure that intermediaries comply with the conduct programme – this aims at ensuring that institutions take care that any intermediaries distributing their products or services are doing so responsibly (but does not apply to intermediaries that are specified financial institutions or financial advice providers)
- requires specified financial institutions and intermediaries to comply with regulations that regulate incentives based on volume or value sales targets
- provides that specified financial institutions and intermediaries will be subject to the FMC Act’s compliance and enforcement tools such as civil pecuniary penalties for contraventions of various obligations, and licensed financial institutions will be subject to licensing actions such as censure and the imposition of action plans
- provides protection to employees and agents of specified financial institutions and intermediaries who report a contravention of a provision of the FMC Act or of the fair conduct principle to the FMA
- provides for interactions between different regulatory regimes and regulators that arise as a result of the new conduct regime, including multiple pecuniary penalties for the same conduct, proceedings under different enactments, and licensing for conduct and prudential activity.
What is the timing for the changes?
The exact timing for implementation is not yet clear. By its terms, most of the Bill will come into force on a date or dates specified by Order(s) in Council, but no later than two years after the date of Royal assent. The deferred commencement allows regulations to be made to implement the Bill.
The Bill allows regulations to be made to apply the licensing requirements to different classes of entities at different times (up to four years after the date on which the Bill receives the Royal assent). Licence applications will be able to be made before the regime is brought into effect.
The Bill also contains a regulation-making power to prohibit or regulate certain activities related to the offering or giving of sales incentives in connection with a relevant service or associated product. These regulations may apply to existing incentive arrangements and those entered into before the commencement of the regulations, but cannot apply to any incentive that is paid, is payable, or to which a person has become entitled before the commencement of the regulations.
The Bill is an important step towards enshrining in legislation a deep commitment to good customer outcomes for customers of banks, insurers and non-bank deposit takers, through a new licensing regime.
There is much work to be done, however, to assess how the Bill and the regime will operate in practice and it may require some refining. For example, the Bill should be carefully considered to determine whether there may be unintended consequences where the specified financial institutions compete in some markets with other financial businesses. Licensed non-bank deposit takers and registered banks may, for instance, compete with non-deposit taking lenders (such as finance companies who raise their capital in the wholesale markets, or peer-to-peer lenders).
The complexity and interaction of the consumer/retail threshold will also need careful review, especially for those specified financial institutions that offer a range of products and services across different market segments.
If you have any questions about the Bill or how it will relate to your business, please contact one of our experts.
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