The FMA released today an insights paper which shares its observations on the approach insurers are taking to ensure consumers are treated fairly in relation to incentives, specifically non-monetary benefits and short-duration sales campaigns, and includes questions for insurers to consider. This is a clear regulatory signal: incentives remain an active area of supervision and potential enforcement. Insurers should expect questions and be ready with contemporaneous records.
While directed at insurers, the insights paper warrants reflection from bank and non-bank deposit-takers too on incentives and record-keeping obligations under the Conduct of Financial Institutions (CoFI) regime in the Financial Markets Conduct Act 2013 (FMCA).
The FMA's full insights paper is available here and our summary and takeaways are below.
What’s in scope?
The focus spans monetary and non-monetary benefits and short duration sales campaigns tied to products within the CoFI regime's scope. The prohibited incentives regulations now in force capture incentives determined by targets or thresholds linked to the volume or value of services/products (with limited exceptions, e.g. strictly linear commissions). Both insurers and intermediaries have obligations here.
Dual compliance lens: incentives and FCP
Compliance is not just about avoiding ‘prohibited incentives’. Under the CoFI regime, every licensed insurer must establish, implement and maintain an effective fair conduct programme (FCP) that meets minimum requirements and drives fair consumer outcomes. FCPs must include effective policies, processes, systems and controls (PPSCs) for ensuring incentives are designed and managed to mitigate or avoid adverse effects on consumers’ interests, so far as reasonably practicable. As the FMA notes, some benefits and campaigns may be inconsistent with this requirement even where they do not amount to a prohibited incentive.
FMA expectations: manage it or don’t do it
Where benefits and campaigns create, or risk creating, adverse effects on consumers’ interests, and those risks cannot be effectively managed through the PPSCs in an FCP, insurers should consider whether it is appropriate to offer that benefit or campaign at all. The FMA is explicit: if the effect of any incentive is that one product is disproportionately promoted and it results in customers’ objectives not being met, the insurer should not offer the benefit or campaign if its PPSCs can’t effectively address that risk. The FMA emphasises that it considers insurers’ boards are ultimately accountable for ensuring the insurer's FCP and PPSCs are effective.
Records will make (or break) a licensee's position
Under the FMA’s standard licence conditions for financial institution licences, financial institutions must have systems and processes to maintain relevant records in relation to their financial institution service. The standard licence conditions explain that records will be relevant if they demonstrate how a licensee has:
- established, implemented and maintained an effective FCP; and
- taken all reasonable steps to comply with it and with their broader market‑services licensee obligations.
Records must be created in a timely manner and be readily available for FMA inspection, including remotely. In practice, that means keeping clear files on incentives governance decisions, risk assessments, approvals, controls, monitoring, testing and remediation. Records may be kept by another person (including any outsource provider), providing the licensee can retrieve the records if required. Absence of adequate records can impede the FMA’s monitoring and itself amount to a breach of licence conditions and undermine a licensee's ability to evidence compliance with ss 446G or 446I of the FMCA.
The FMA has previously issued separate guidance for financial advice providers on their record-keeping obligations which may be of interest here. We also note that in the AML/CFT context, the FMA, together with other supervisors, has taken action in relation to record-keeping failures. For example, in FMA v CLSA [2021] NZHC 2325, the High Court confirmed that record keeping is central to the AML/CFT regime and that not keeping records in a readily accessible way would severely hamper supervisors’ ability to monitor compliance. CLSA could provide some, but not all, required records, partly because an overseas third-party provider refused access; however, the Court noted that AML/CFT reporting entities must ensure that third-party arrangements allow compliance.
The takeaway for CoFI licensees is straightforward: contemporaneous, well‑organised records are not administrative hygiene, they are a licensee's primary evidence of compliance and a regulatory expectation in their own right.
FMA’s monitoring approach and enforcement
The FMA states it will actively test insurers’ arrangements through its supervisory and monitoring activities under the CoFI regime. Where it identifies weaknesses, it will expect insurers to address them promptly, including by changing or stopping benefits and campaigns that are inconsistent with the fair conduct principle or that expose consumers to unfair outcomes. Insurers should not assume that monitoring, governance processes or planned remediation will be sufficient where the arrangement itself would not satisfy the FCP minimum requirements.
Where an insurer does not comply with its obligations under the CoFI regime, the FMA may take regulatory action. Depending on the nature and seriousness of the breach, the FMA’s response may include direction orders (such as requiring remedial actions or improvements to governance or conduct controls), adding or varying licence conditions, or pursuing civil action.
Get in touch
If you would like to discuss your incentives framework or any aspect of your FCP, please get in touch.