2019 is shaping up as the year that "culture and conduct" and regulatory change collide. The regulators have, or are expected to, set an aggressive timeframe for retail banks and life insurers to improve how they manage conduct and culture risks. At the same time, changes are being made or proposed to much of New Zealand's financial regulation. This includes a new financial advice regime, expansion of the AML/CFT regime and RBNZ's review of the Reserve Bank Act, capital framework and Banking Supervision Handbook. There are also KiwiSaver reforms, review of the CCCFA, review of the law in relation to insurance contracts, changes to the law in relation to unfair commercial practices, the Trusts Bill and the Privacy Bill.
To assist you with keeping on top of all of these developments, we have created a timeline of the key financial regulation developments that are currently expected. Please click here to download a copy.
In this update, we look ahead to what 2019 has in store in more detail.
Continued focus on conduct and culture
The FMA and RBNZ will be expecting retail banks to promptly demonstrate a proactive response to their joint report, Bank Conduct and Culture, which was released in November 2018. Each of New Zealand's 11 largest retail banks is required to develop a plan to address the regulators' individual feedback, and to report on progress by the end of March 2019.
If the regulators identify further remediation issues following review of the banks' progress reports, we may see further investigation and, in some cases, enforcement action.
The FMA and RBNZ are expected to publish their joint conduct and culture report on life insurers in late January 2019. Individual feedback letters will also be provided to each life insurer reviewed. Similar to the retail banks, we anticipate that life insurers will then be given a relatively short timeframe in which to demonstrate that they are addressing the regulators' findings and recommendations.
The RBNZ has also noted that there will be more supervisory focus on solvency in 2019, as capital strength in the insurance sector has declined and a number of insurers are operating with small buffers.
Australian Royal Commission: final report
All eyes will be on Australia in early February 2019, when we are expecting the release of the final report on the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry. The final report will make recommendations to the legal and regulatory framework in Australia with a view to preventing the conduct identified by the Royal Commission from happening again.
New financial advice regime
The Financial Services Legislation Amendment Bill (FSLAB) is currently before Parliament following its second reading.
At this stage, the FSLAB is expected to be passed by the end of the first quarter of 2019. Any related regulations, as well as a Code of Conduct for financial advice, will likely be finalised by the middle of the year. Applications for transitional licensing will then open during the fourth quarter of 2019, to allow previous industry participants to (for example) benefit from competency safe harbour provisions until the end of the transitional period in 2022.
MBIE has indicated that, in early 2019, it will be in touch with financial advisers regarding information about upcoming new disclosure requirements, and how to prepare for the transitional licensing regime. The Act, Regulations, and Code of Conduct are not expected to come into force until around the middle of 2020.
In the second half of 2019, the FMA will release its anti-money laundering and countering financing of terrorism (AML/CFT) Monitoring Report. The report will cover FMA monitoring activities and findings for 2017 to 2018, including both positive and negative examples of common themes identified among reporting entities.
After lawyers and accountants became subject to the AML/CFT regime in 2018, the following groups are set to come under Phase 2 of the AML/CFT regime during 2019:
- real estate agents became subject to the regime on 1 January; and
- businesses trading in high value goods, such as jewellery, precious metals, precious stones, watches, motor vehicles, boats, art or antiquities, and the New Zealand Racing Board, will become subject to the regime on 1 August.
We also anticipate ongoing AML/CFT enforcement action this year, in advance of the next Financial Action Task Force (FATF) evaluation of New Zealand's compliance with global standards for AML/CFT measures, which is set to take place in around February 2020.
Review of the Reserve Bank Act
The Government is currently undertaking a review of the Reserve Bank Act – the first major overhaul of the Act since its enactment in 1989. Phase 1 of this review, concerning the RBNZ's monetary policy role, is substantially complete. Legislation arising from Phase 1 is currently before Parliament, and is expected to be passed in 2019.
Phase 2 of the review is currently underway. This phase focusses on the RBNZ's financial policy and prudential regulation mandates. The first consultation on these issues closes on 25 January, with two more consultations to come later in 2019. Legislative change arising from Phase 2 is expected in 2020.
Capital framework and Banking Handbook updates
The RBNZ is currently undertaking a review of its capital adequacy requirements for registered banks. This review has been underway since 2017, and consultation on the method of calculation of bank capital and risk weighted assets has already been completed. The current phase of consultation concerns what percentage of a bank's funding should be from capital, with a substantial increase on current minimum levels proposed by the RBNZ. Consultation on this question will close on 29 March 2019.
Also currently underway is a redesign of the RBNZ's Banking Supervision Handbook. This redesign, with a particular focus on the documents that make up the capital adequacy framework, is expected to be opened to public consultation before its completion in 2019.
The Taxation (Annual Rates for 2018-19, Modernising Tax Administration, and Remedial Matters) Bill proposes to make significant changes to KiwiSaver. These changes include (for example):
- allowing individuals over the age of 65 to join KiwiSaver. Employers would not be required to make compulsory employer contributions for these individuals; and
- providing a broader choice of salary contribution rates by adding 6 and 10 per cent to the pre-existing options of 3, 4 or 8 per cent.
The Select Committee released its report on 16 January 2019, recommending that the Bill be passed. We anticipate that it will shortly progress to its second reading, although Parliament has not yet provided a timeframe.
Review of CCCFA
The Government has decided to make changes to the Credit Contracts and Consumer Finance Act following its 2018 review of consumer credit law. New legislation will be drafted, introducing (for example):
- an interest rate cap on high-cost loans, to stop debit spirals;
- clearer responsible lending requirements, to increase compliance; and
- tougher penalties for breaking the law, such as increased financial penalties, statutory damages, and banning orders.
Although the Government has not yet indicated a proposed timeline, it has confirmed that new consumer credit legislation will be drafted. There will be an opportunity to make submissions on the proposed laws once the draft Bill is in Parliament.
Regulatory Systems Bill
The Regulatory Systems (Economic Development) Amendment Bill (No 2) was introduced on 12 December 2018 and will have its first reading this year. The policy objective of this Bill is to improve regulatory systems by ensuring that they are effective, efficient, and accord with best regulatory practice. It includes amendments to (for example) the lender responsibility principles under the Credit Contracts and Consumer Finance Act (CCCFA), and section 30 of the Fair Trading Act, which relates to compliance with product safety standards.
Insurance Contract Law Review
MBIE is carrying out a review of New Zealand's insurance contract laws for the purposes of ensuring that current legislation is:
- facilitating well-functioning insurance markets; and
- enabling individuals and businesses to effectively protect themselves against risk.
We expect an options paper to be released shortly following a public consultation last year.
Unfair commercial practices
On 10 December 2018, MBIE published a discussion paper entitled Protecting businesses and consumers from unfair commercial practices. Although existing legislation protects consumers and businesses against a range of unfair commercial practices, the Government is seeking to ensure there are no gaps in the current protections.
MBIE is seeking feedback on these proposals by 25 February 2019.
The Trusts Bill will replace the Trustee Act 1956 and the Perpetuities Act 1964. The purposes of the Bill include making trust law more accessible and clarifying and simplifying core trust principles and essential obligations for trustees. The Trusts Bill will affect all new and existing express trusts, including trusts used to facilitate commercial transactions such as securitisation trusts, managed investment scheme trusts, custodial or broking trusts, wholesale financing trusts and employee share scheme trusts.
The Select Committee published its report on the Bill on 31 October 2018 (read more here). While Parliament has yet to release an indicative timeline, we anticipate that the Bill will soon progress to the second reading stage as the Committee recommended that it be passed.
The Privacy Bill is currently before the Justice Committee. The Bill will repeal and replace the Privacy Act 1993, as recommended by the Law Commission's 2011 review of the Act. The key purpose of the Bill is to promote public confidence that individuals' personal information is secure and will be treated properly by agencies. The Justice Committee's report is due to be published on 13 March 2019.
Read more about the Bill here.
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.