Yesterday, the Ministry of Business, Innovation and Employment (MBIE) released two discussion documents for public consultation relating to the Financial Markets (Conduct of Institutions) Amendment Bill (Bill). The Bill contains a new conduct regime for banks, licensed insurers and licensed non-bank deposit takers (together, "financial institutions") and is currently at second reading stage before the House (see our earlier updates on the bill here and here).
The first discussion document addresses proposed regulations to support the operation of the regime, including in respect of prohibitions on particular types of sales incentives.
The second paper relates to a proposed change to the treatment of intermediaries of financial institutions within the Bill. Potential amendments are proposed to both the current definition of “intermediary” and to narrow the obligations that apply to financial institutions in respect of “intermediaries”. These amendments would be made via Supplementary Order Paper when the Bill is at Committee of the Whole House stage later this year.
While focused on aspects of the Bill and regulations, MBIE recognises in the discussion documents that the Financial Markets Authority (FMA) will likely develop guidance over time to communicate expectations and highlight best practice in respect of the new regime. It is also expected that there will be frequent dialogue between regulated parties and the FMA as the regime embeds.
Submissions on both papers close at 5pm on Friday 4 June. Please contact one of our experts if you would like to discuss any aspect of these discussion papers or the Bill and see below for further detail.
Discussion Document: Regulations to support the new regime for the conduct of financial institutions
The first discussion document, Regulations to support the new regime for the conduct of financial institutions, seeks feedback on areas where MBIE considers additional regulations are and are not required to support the new regime.
The key areas where regulations are proposed are:
Requirements for fair conduct programmes: The Bill includes a new overarching fair conduct principle which is that financial institutions must treat consumers fairly. This principle is not an enforceable duty itself, but rather informs other fundamental duties of the regime, including a duty for financial institutions to establish, implement and maintain a fair conduct programme. The discussion document queries what further detail is required to support the development of fair conduct programmes. The suggested areas for further regulations relate to:
- the requirement to "manage the provision of financial products and services";
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issue identification and subsequent remediation of conduct issues;
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consumer complaints handling;
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claims handling and settlement (with an insurance focus); and
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whether vulnerable customers should be a factor to consider in developing fair conduct programmes.
Sales incentives: This is an aspect of the paper that all financial institutions and intermediaries should consider carefully against their business models. The discussion paper reiterates that the intention of the Bill is not to ban all sales incentives. Instead, there is an obligation around design and management of incentives contained within the Bill. The Bill provides a regulation-making power which allows for the prohibition or regulation of any practice, activity, or other conduct in connection with offering or giving incentives.
In relation to the latter, the discussion document's current preferred option is for regulations that prohibit sales incentives based on volume or value targets.The paper describes that:
- "This option would prohibit banks, insurers, and non-bank deposit takers, and their intermediaries, from offering incentives which are linked to sales volume or value targets."
- "This option would cover any incentive (whether monetary or non-monetary and whether direct or indirect) that is determined or calculated in any way by reference to the volume or value of relevant services or associated products, and which has any target component to it (broadly defined)."
The alternative option described is that a more principles-based approach should be adopted, rather than a blanket ban of targets.
Requirement to publish information about fair conduct programmes: The Bill requires financial institutions to make certain information about their fair conduct programmes publicly available on their websites and upon request. This aspect of the Bill was amended at select committee stage and, consistent with the amendments made, MBIE has reiterated that the objective is not to require financial institutions to publish extensive detail about their fair conduct programmes. The discussion document, nevertheless, seeks feedback on whether further detail is required in regulations relating to this obligation.
Status of insurance contracts under the Financial Markets Conduct Act 2013 (FMCA): While insurance is already covered as a “financial service” under the fair dealing provisions in Part 2 of the FMCA, MBIE considers that it would also be useful for clarification and consistency to expressly declare contracts of insurance to be "financial products" for the purposes of Part 2. MBIE states that such regulations would:
- be consistent with the extension of the FMCA in relation to insurance-related conduct through the current Bill; and
- have the additional benefit of making it clearer that misleading conduct in relation to insurance products is prima facie a FMA / FMCA matter rather than a Commerce Commission / Fair Trading Act matter.
In addition to its content on potential regulations, the discussion paper notes that MBIE is carrying out a targeted consultation with Lloyd’s insurance market in order to establish an effective way to apply the Bill’s requirements to its market. This may involve tailoring some of the Bill’s requirements.
The treatment of intermediaries
The second discussion paper, Treatment of intermediaries under the new regime for the conduct of financial institutions, seeks feedback on a range of issues about the Bill’s obligations on financial institutions in relation to their intermediaries. Intermediaries apply to the Bill as presently drafted in the following respects:
- financial institutions themselves are required to include in their conduct programmes' provisions relating to training, supervision and oversight of intermediaries; and
- the incentives regulation provisions continue to apply to some categories of intermediaries.
MBIE noted that stakeholders had raised concerns about:
- the oversight and training requirements contemplated under the new regime;
- the overlap with the obligations that apply to some intermediaries under the new financial advice regime – the Financial Services Legislation Amendment Act (FSLAA);
- the breadth and scope of the definitions and obligations; and
- the potential cost and burden of compliance.
This discussion document seeks feedback on a range of options for possible amendments to the Bill which financial institutions and potential intermediaries should consider in detail. For example:
- amending the definition of an intermediary to either:
- focus on sales and distribution; or
- refine scope as to who is covered as an agent;
- narrowing the obligations that apply in respect of intermediaries; and
- distinguishing between FSLAA and non-FSLAA intermediaries.
MBIE also notes the option to amend the obligations that apply in respect of employees and agents. However, beyond seeking comment on the option, it does not consider any amendments are required.
The discussion document recognises that the final content of the Bill relating to intermediaries will impact on the regulations required (and so the content of the first discussion document as it relates to intermediaries). It, therefore, invites any relevant feedback on regulations relating to intermediaries in respect of either discussion document.
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.