Fairness in action – a new financial conduct regime

Commerce and Consumer Affairs Minister, Kris Faafoi has today announced a new regime to regulate conduct for banks and insurers.

Details of the proposals are available here, including a link to the Cabinet paper here and minute here. The regulatory impact statement is here.

The FMA’s press release is available here.

Who needs to read it? Why?

Although more detail is needed on the extent of the proposals, banks, insurers and non-bank deposit takers (NBDTs) (and in some cases intermediaries they deal through) are the primary targets. All financial markets participants, however, should be attentive in case the proposed regime is ultimately applied more widely.

What is proposed?

The Minister noted the latest comments from the Reserve Bank and Financial Markets Authority’s (FMA) review of banks and life insurers and has stated:

“Those reviews by the Reserve Bank of New Zealand and the FMA have also highlighted other problems in the banking and insurance sectors, which include weak systems for managing conduct risks and ensuring good conduct is a priority in their business … We will soon introduce new legislation to Parliament which will require banks, insurers and other financial service providers to put systems in place to make sure they treat their customers fairly.”

The Government proposes introducing the following measures:

  • Create a conduct licensing regime for registered banks, licensed insurers and licensed NBDTs regarding their general conduct. These institutions will be licensed by the FMA.
  • Require licensed institutions to meet a fair treatment standard (for example, to pay due regard to the needs and interests of customers and treat them fairly).
  • Require licensed institutions to implement effective policies, processes, systems and controls to meet the fair treatment standard.
  • Create obligations for financial institutions in relation to how they design their remuneration and any other sales incentives, and how they must manage the risks those incentives create.
  • Prohibit sales incentives based on volume or value targets (e.g. soft commissions such as overseas trips, bonuses for selling a certain number of financial products, leader boards, and performance management based on the volume of sales). This prohibition will apply to banks, insurers, NBDTs and their intermediaries.
  • Make licensed entities accountable for sales to consumers by the entities’ contracted intermediaries who are not financial advice providers (non-adviser intermediaries include car dealers, retailers selling add-on finance and insurance, and travel agents or airlines selling travel insurance).

According to the Minister:

“New Zealanders need to be confident that the financial advice, products and services they are buying will be appropriate to their circumstances and meet their needs … The regime will come with strong enforcement tools, including giving the FMA the ability to direct licensed institutions to change behaviour, improve their systems and processes and suspend or vary the conditions of a licence. By taking action to improve conduct, we’re putting the consumer at the centre and helping banks and insurers to restore confidence in their industry. We all benefit from a well-functioning financial sector that’s focussed on the interests and needs of customers.”

The FMA’s view

The FMA has welcomed the Government’s announcement. According to FMA chief executive Rob Everett, the FMA and Reserve Bank had highlighted gaps in the regulation of banks and insurance in their joint thematic reports on conduct and culture in both sectors. According to Mr Everett:

“The Government has said today it intends to close these gaps and give us the mandate to implement and enforce conduct obligations across both sectors … We look forward to working with industry to implement any changes passed by Parliament to ensure banks and insurance companies serve the needs of their customers.”

Our view

The proposed changes are not a surprise to us. They reflect a strong desire by the Government to move the dial on conduct and culture in the financial sector. It follows several reviews, including the 2018, FMA and RBNZ reviews of banks and life insurers, the 2018 MBIE issues paper and insurance contract law and conduct of insurers, the 2017 IMF review of New Zealand’s financial sector (FSAP) and the 2018 Australian Royal Commission into misconduct in banking superannuation and financial services.

They partially address the allocation of roles in New Zealand’s regulatory model for banks, insurers and non-bank deposit takers where the Reserve Bank is the primary prudential regulator (through the bank registration and licensing for insurers/NBDTs regimes) and the FMA is the primary conduct regulator. However, as the Cabinet paper recognises there is still substantial overlap with the Commerce Commission and others, and in our view, New Zealand is far from having a true “twin peaks” model.

There is also a major gap in that while the activities of registered banks and licensed NBDTs are covered – including in relation to lending, the activities of other lenders are not addressed, that means that a finance company will be responsible for car dealers selling its loans if it takes deposits, but not if the finance company is funded in the wholesale market.

We look forward to more detail about the regime, including answers to questions around (for example) the role of the Commerce Commission versus that of the FMA, and the capacity of the FMA to implement another new licensing regime.

Although the changes make sense at a structural level for the regulatory system, it is also, however, another set of distractions for institutions which are already deep in existing regulatory change projects.

What next?

If you have any questions in relation to the proposed changes, please contact one of our experts.

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