New Zealand life insurers to provide overview of programme of work to the FMA

Yesterday the Financial Markets Authority (FMA) published a letter, which was sent to each of New Zealand’s licensed life insurers earlier this week. The letter is similar to the one sent to New Zealand’s registered banks and the New Zealand Bankers Association on 3 May 2018.

In its letter, the FMA and the Reserve Bank of New Zealand (RBNZ) require life insurers to provide information to the FMA explaining how they have ensured that the misconduct alleged in Australia is not taking place in New Zealand. The letter is, in part, a response to issues raised in relation to Australia’s life insurance providers at the Australian Royal Commission into Misconduct in Banking, Superannuation and Financial Services Industry (Royal Commission).

The full text of the letter is available here.

Who needs to read it? Why?

All licensed life insurers in New Zealand will need to read and respond to this letter. It will also be of great interest, as was the letter to registered banks, to all other financial service providers including financial advisers, issuers of financial products, and others because, as well as setting out specific information to be provided by life insurers, the letter highlights the regulators’ expectations in relation to conduct more generally and their priorities for the future.

What does it cover?

The letter includes:

  • the FMA and RBNZ’s expectations: the FMA and RBNZ wish to understand what steps life insurers have taken to review their operations to identify and address conduct and culture issues. The FMA and RBNZ say life insurers are expected to be familiar with the FMA’s conduct guide published in February 2017 (Conduct Guide). The FMA and RBNZ anticipate that life insurers will reflect on the issues raised at the Royal Commission when considering the expectations set out in the Conduct Guide;
  • the information requested: all life insurance providers are requested to provide a response to the letter outlining how they have obtained assurance that the issues highlighted in Australia are not taking place here including:
    • the actions the life insurer, its board and senior teams have taken to identify and address conduct risk arising from the firm’s actions. This includes product design, distribution, incentives setting, claims performance and any “gap analysis” work undertaken against the expectations set out in the Conduct Guide;
    • any specific plans and actions the life insurer has taken or has underway to respond to the issues and themes arising from the Royal Commission;
    • any other work the life insurer has underway, or that is planned, to proactively identify and address potential conduct and culture risk; and
    • any remediation work the life insurer has underway in relation to identified issues where conduct by the life insurer has resulted in detrimental outcomes for customers;
  • additional requirements: the response should provide an overview of the life insurer’s programme of work including:
    • the key objectives of the life insurer’s work;
    • the structure, approach and level of resourcing in respect of the work;
    • the level of board and senior management oversight and reporting;
    • the key personnel involved;
    • a summary of any early findings or insights to date;
    • details of any remediation programmes the life insurer has underway; and
    • any other summary information that will help the FMA and RBNZ understand the level and depth of the life insurer’s inquiries and its focus areas; and
  • the due date and process thereafter: the requested information must be provided to the FMA by Friday 22 June 2018. After the FMA has had the opportunity to assess the summary information, it will meet with the life insurer’s core team to discuss its response, agree next steps, further information requests and ongoing reporting. All responses will be shared with the Commerce Commission and the RBNZ.

Our view

We expect life insurers will embrace the opportunity to consult with the FMA, especially in light of recent reports issued by the FMA about insurance and insurance advice including its soft commissions report published earlier this month. Like the banks, life insurers will likely appreciate the opportunity to explain why a Royal Commission is not required in New Zealand.

We believe both letters have wide implications for all financial institutions as:

  • it is clear the FMA expects all financial institutions to comply with the Conduct Guide on the basis that it reflects good business practice. The Conduct Guide states that it gives guidance on what the FMA would focus on when examining how “licensed financial services providers” demonstrate good conduct and meet governance and management responsibilities. Strictly speaking, the Conduct Guide is not explicitly addressed to licensed life insurers and registered banks as they are not necessarily “providers licensed or authorised by [the FMA] under the FMC Act or any other financial markets legislation (including the Financial Advisers Act).” Rather, they are licensed by the RBNZ, which is primarily focussed on prudential supervision rather than conduct regulation. However, it is clear that the FMA expects to apply the same principles to all life insurance and banking activities; and
  • it is also likely that the FMA and RBNZ expect all financial institutions (not just life insurers and banks) to carefully consider the issues raised at the Royal Commission and for their boards and senior managers to consider how they can be certain that misconduct of the type highlighted in Australia is not taking place here in New Zealand. In that regard, the Governor of the RBNZ has this morning published an article on his view on conduct, which we will comment on in a later Financial Services Update.

Accordingly we recommend all other financial service providers take the step, without waiting for a letter from the FMA, of considering how they apply the principles in the Conduct Guide to their business, and what lessons can be drawn from Australia. We encourage all, not just life insurers and banks, to take up the FMA’s invitation to consult with them early in relation to any areas where remediation work is anticipated to be appropriate.

We also anticipate the Royal Commission will potentially impact the current law changes proposed under the Financial Services Legislation Amendment Bill (FSLAB). The FSLAB reforms will, amongst other things, impose stronger duties on financial advisers to prioritise clients’ interests and to prohibit inappropriate incentives. In this regard, we note the reporting back date of the Finance and Expenditure Select Committee on the FSLAB has been put back to 31 July 2018, which allows additional time for officials and Members of Parliament to consider these matters.

That said, one of the lessons we think can be taken from Australia is that having complex and detailed laws does not necessarily prevent misconduct.  Generally, our more principles-based approach to regulation has been at least as effective (if not more) than the Australian black-letter approach. This aligns with behavioural economics which indicates that having more rules often correlates with more transgressions, as people cease to self-monitor and the choice of misconduct becomes a commercial, rather than an ethical, question. Instead, our view is culture is more important than rules, and the steps the FMA and RBNZ are now taking to invite institutions to consider how they are working to improve their cultures and outcomes for their customers, is the most effective approach.

What’s next

The FMA’s future focus includes the following areas, previously identified by the FMA as priorities:

  • the FMA’s thematic review on soft commissions in the life and health insurance sector – as mentioned, the FMA has recently published a report on soft commissions. A link to our news alert on this report is available here;
  • the Financial Adviser Act reforms;
  • the FMA’s work on incentives in vertically integrated institutions;
  • GFE insurance provider replacement business; and
  • the FMA’s stakeholder relationship management programme.

If you have any questions in relation to the FMA and RBNZ’s letter or need assistance with your response please contact one of our experts.

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