Yesterday MBIE released detail of Cabinet decisions that have been made affecting the future of the Financial Markets (Conduct of Financial Institutions) Amendment Bill (COFI) and related regulations. The amendments to the Bill will be incorporated via a supplementary order paper, with the aim to pass the Bill by mid-2022.
Against the background of recent issues arising in relation to CCCFA reforms, the willingness to revisit the Bill post select committee stage is positive. Although, it may cause some to query again the wisdom of the pace at which the Bill was first introduced into the House, which may be a different lesson to be drawn for future law reform processes. MBIE officials' Regulatory Impact Statement from the time the Bill was introduced (December 2019) having said:
Consultation and testing
This analysis has been prepared under significant time constraints, which did not allow time for more extensive consultation with stakeholders on the development and refinement of options. The broader framework for the conduct regime has been developed in a short timeframe and we expect that there may need to be further refinements through consultation during the legislative process.
The key amendments to the Bill at this stage are to:
- narrow the scope of the obligations on financial institutions in relation to intermediaries, including to provide for better interaction between COFI and the Financial Services Legislation Amendment Act 2019 (FSLAA));
- add a requirement for financial institutions to take into account the potential for customers to be in vulnerable circumstances when designing their fair conduct programmes; and
- change the Bill to appropriately capture the Lloyd’s insurance market.
In relation to regulations, the Minister has determined that only minimal new regulations are, at this stage, required to support the operation of the Bill. The main regulations will, therefore, be those relating to a decision to prohibit the offering of sales incentives based on volume or value targets to employees and intermediaries.
The absence of extensive regulations means that FMA guidance will likely be important to those wanting to better understand how to approach their obligations. Of potential relevance to this, the FMA's CEO noted in a
speech this week that the FMA will shortly publish an updated draft Conduct Guide for consultation. While that Guide will be targeted at all financial sector participants, it is likely to provide insight into the tenor of FMA guidance on COFI.
The FMA has given limited detail on the nature of the changes to the Guide. However, it appears its principles may be structured in a way that is similar to how the FMA and RBNZ categorised their feedback in the Conduct and Culture reviews. The "four principles" of the revised Guide having been said to be:
- Treating customers fairly
- Governance and accountability
- Effective systems, controls and reporting; and
- Identifying and remediating issues.
More details in relation to the amendments to the Bill follow. Please contact one of our experts if you wish to further discuss any conduct regulation developments.
The position of intermediaries
Initial versions of the Bill ensured intermediaries complied with the principle of fair conduct by imposing obligations on financial institutions (FIs) to train, manage and supervise the conduct of those intermediaries. However following feedback from public consultation, there was a concern that those requirements were too broad and would overlap with obligations already faced by those intermediaries under FSLAA and may place unnecessary burdens on intermediaries themselves. In response, Cabinet has decided to narrow the obligations related to intermediaries by:
(a) Removing obligations on FIs to train, manage and supervise intermediaries. Instead FIs are required to introduce policies, processes and systems that ensure their distribution systems comply with the fair conduct principle.
(b) Limiting the scope of intermediaries covered under the Bill to only those who sell or distribute financial products and/or services to customers, and excluding intermediaries involve in administration or preparatory work.
Introduction of a minimum requirement to consider vulnerable customers in fair conduct programme
The Bill requires FIs to introduce a fair conduct programme to ensure compliance with the fair conduct principle. The Bill contains minimum requirements for such programmes, including processes for risk management, ongoing training for employees and systems for process and policy review. Cabinet have decided to include a specific minimum requirement that FIs consider the position of vulnerable customers when developing their fair conduct programmes.
Insurance related amendments
Consultation revealed a concern that the Bill did not adequately cover the Lloyd's insurance market, owing to the unique structure of that market. In response, the supplementary order paper will impose minimum obligations for fair conduct on Lloyd's managing agents, but not underwriting members. Underwriting members are now not required to be licensed under the Bill.
Cabinet also decided to expressly provide that insurance contracts are covered by the fair dealing provisions of the Act. As a consequence, breaches of fair dealing provisions for insurance contracts will be regulated by the FMA under theFinancial Markets Conduct Act 2013, rather than by the Commerce Commission under the Fair Trading Act 1986. See our recent update on other insurance regulation law reform here.
Supporting regulations
The Minister has determined only minimal new regulations will be required to support the Bill. He agreed to introduce regulations to expressly prohibit LFIs from offering sales incentives based on volume or value targets to both employees, agents and intermediaries. These regulations will specify the consequences of breaching this obligation, including imposing civil liability directly on managing agents.
The Minister has said that he intends to exclude senior managers and executives from the scope of those regulations. The prospect of some form of executive accountability regime in New Zealand, which may include provisions relating to executive remuneration structures, nevertheless remains on the horizon. Albeit, the latest Council of Financial Regulators update continues to put the development of such a regime in the "timing to be confirmed" category.
This article is intended only to provide a summary of the subject covered. It does not purport to be comprehensive or to provide legal advice. No person should act in reliance on any statement contained in this publication without first obtaining specific professional advice. If you require any advice or further information on the subject matter of this newsletter, please contact the partner/solicitor in the firm who normally advises you, or alternatively contact one of the partners listed below.