Consultations released on regulations and fees for Conduct of Financial Institutions regime

Earlier this week, MBIE released two consultations on proposed regulations and licensing fees under the Conduct of Financial Institutions (COFI) Regime:

• The first consultation seeks feedback on an exposure draft of regulations under the Financial Markets (Conduct of Institutions) Amendment Act 2022 (COFI Act) relating to the prohibition of sales incentives based on volume and value targets. A link to the consultation paper can be found here, and a link to the exposure draft is here. Submissions close on 9 November 2022.
• The second consultation seeks feedback on a discussion paper on proposed licensing fees to apply to licence applications made under the COFI Regime. A link to the discussion paper can be found here. Submissions close on 26 October 2022.

As expected, the draft regulations will prohibit sales incentives based on volume or value targets, while permitting 'linear' sales incentives (incentives calculated on a per product or per service basis only). Product issuers and intermediaries should carefully test their existing incentive structures against the definition of 'prohibited incentive' in the regulations to ensure they will fall within the permitted category of linear incentives.

A notable feature of the draft regulations is that they do not expressly exempt senior managers from the incentives prohibition. Instead, the regulations rely on the definition of 'incentive' in the COFI Act, which is designed to capture a person who is directly or indirectly 'involved' in the provision of the service or product (and will therefore not apply to senior managers who are not directly or indirectly involved). This approach will provide significantly less certainty about the boundaries of the prohibition, and will require an analysis of which senior managers meet the "involved" standard in relation to relevant products and services. Financial institutions should consider carefully if this current drafting will cause any unintended consequences and/or gives rise to any uncertainty in relation to current or planned incentive structures.

While the licensing fees discussion paper is, as we would expect, focussed on fees, it does provide helpful insights on the intended licensing process. In particular, that standard licensing applications should require minimal manual intervention by the FMA, that the licence application process will involve applicants responding to 'binary questions', and that limited documentary evidence is likely to be requested in these circumstances. This is consistent with recent updates from the FMA in relation to licensing, which have been that the application process will involve a single online form for all applicants, aimed at understanding the applicant's business. The FMA has also said that applicants will need to have an established fair conduct programme (FCP) before applying. While the FMA has advised that it does not expect an applicant's FCP to be fully implemented at the time of applying, it does expect the FCP to have been approved by the applicant's board of directors.

The latest information released by the FMA regarding timing for licensing applications is set out below:

• Late-2022/early-2023: the FMA will release a licence application guide, with information about how to make an application and interpret the questions in the application form.
• Late-2022/early-2023: the FMA will release a FCP information sheet to help applicants prepare for licensing by establishing their FCP.
• Mid-2023: financial institution licence applications expected to begin, around 18 months prior to commencement of the COFI Regime.
• Early-2025: the COFI Regime comes into effect.

See below for a more detailed update regarding each of the consultations. Please let us know if you would like to discuss these consultations or your approach to the new COFI Regime generally.

Consultation paper: Exposure draft regulations on sales incentives under new conduct regime

The COFI Regime requires registered banks, licensed insurers and licensed non-bank deposit takers, along with intermediaries involved in distributing their products, to comply with regulations regarding incentives. Following consultation by MBIE in 2021, Cabinet decided that financial institutions and intermediaries would be prohibited from offering sales incentives based on volume or value targets to their employees, on the basis that these types of incentives lead to a strong conflict between the interests of consumers and the interest of the person eligible to receive the incentive.

The draft regulations define 'prohibited incentive', and provide examples of prohibited and non-prohibited incentives under the COFI Regime:

• An incentive is a prohibited incentive, in relation to relevant services or associated products, if a person's entitlement to the incentive, or the nature or value of the incentive, is determined or calculated in any way by reference (directly or indirectly) to a target or other threshold that relates to the volume or value of the services or products. An example of a prohibited incentive is where an employee of a life insurer is offered a $1,000 bonus for selling 100 life policies in a 3-month period.
• Incentives that are calculated on a 'linear' (ie, a per service or per product) basis are not prohibited. For example, an employee (A) is paid a 5% commission for each life policy that A arranges. The percentage does not depend on any target or threshold (that is, the percentage does not change based on the volume or value of life policies), and so this type of incentive is not prohibited under the proposed regulations.

The draft regulations also provide that the incentive prohibition applies to financial institutions and intermediaries who offer or give incentives to a 'relevant person'. The regulations define a relevant person as including a financial institution's or an intermediary's employees, agents and intermediaries.

A notable feature of the draft regulations is the treatment of senior managers and executives in relation to the incentive prohibition. Cabinet previously decided to exempt senior managers and executives from the incentive prohibition, recognising that while it is less common for senior managers to receive sales incentives based on volume or value targets, they will often receive incentives that are aimed at growing the business and increasing market share.

However, the draft regulations do not expressly exempt senior managers and executives from the incentive prohibition. This is because the definition of 'incentive' in the COFI Act is designed to capture a person who is directly or indirectly 'involved' in the provision of the service or product. 'Involved' is defined by the Financial Markets Conduct Act 2013 as either arranging the contract or giving regulated financial advice. The upshot is that if a senior manager or executive is 'involved' in the provision of the service or product, then they will also be subject to the incentive prohibition.

Discussion paper: Financial institution licensing fees under new conduct regime

The discussion paper seeks feedback on the proposed financial institution licensing fees for licence applications made under the COFI Regime.

MBIE's preferred option is to apply a flat licensing fee to all standard licensing applications, with additional fees applicable to applications that are more complex and exceed an assessment timeframe of 6.75 hours, seek to include authorised bodies in a licence, or involve subsequent applications to vary a licence. The discussion paper observes that standard licensing applications should require minimal manual intervention by the FMA, noting that the licence application process will involve applicants responding to 'binary questions', and limited documentary evidence is likely to be requested in these circumstances. The proposed fees are intended to incentivise the FMA to deliver licensing services efficiently, as in more complex cases the FMA will be required to notify applicants and explain the reason for charging an additional hourly rate.

The proposed licensing fees are summarised in the table below: