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Conduct & Culture Update: New conduct licensing regime, Senior Managers regime in the wings, and keep your eyes on the horizon

Home Insights Conduct & Culture Update: New conduct licensing regime, Senior Managers regime in the wings, and keep your eyes on the horizon

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Contributed by: Emmeline Rushbrook and Guy Lethbridge

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Published on: September 27, 2019


As has been widely publicised, the Minister of Commerce this week announced a proposal to introduce a conduct licensing regime for banks, insurers and non-bank deposit takers (NBDTs) in respect of their conduct in relation to retail customers. The Minister also announced a proposed prohibition on sales incentives (including commissions) based on volume or value targets that will bite on banks, insurers, NBDTs and their intermediaries. It is proposed that these changes are made by way of an amendment to the Financial Markets Conduct Act 2013 (FMC Act).

In addition, a Cabinet Paper released by the Ministry of Business Innovation and Employment (MBIE) this week confirmed that "in the short term" a regime to increase accountability for senior executives in financial institutions may also be introduced. The Cabinet Paper notes that officials are to work together on a proposal for such a regime co-ordinated across the conduct and prudential spaces. 

This update includes further detail on this week's conduct regulation announcement, a summary of the first formal feedback on the effectiveness of the UK's senior management regime, and provides links to a selection of other conduct and culture related publications that have recently caught our eye.

New Conduct Licensing Regime

Our summary of what we know so far about the proposed conduct licensing regime is available here. Note that this contains additional detail to that included in the Minister's initial announcement.

The parliamentary law reform process is intended to be swift. The Minister's intention is to introduce a bill into the House and have it referred to select committee by the end of this year. Based on that timeline, and assuming the continued support of all government coalition parties, we anticipate that legislation could be passed by the end of the parliamentary term in 2020. 

While neither the Minister or MBIE has yet indicated when the conduct licensing regime itself might come into effect, we consider it unlikely that this would occur before 2021. This is particularly given the regulations and licensing framework that need to be designed and drafted to support the regime. The proposed prohibition of sales incentives may, however, be able to come into force earlier.  

Given the anticipated pace of the legislative reform, stakeholders should immediately consider the available detail of the regime and prohibition, and be ready to engage on both the substance and practical aspects of the proposals. This should include considering the most realistic timing for the new regime coming into effect. The Cabinet Paper acknowledges the need for consideration of transition periods and the potential sequencing of the regime to different types of entities (ie, it may be that there is a staggered entry of banks, insurers and NBDTs into the regime). 

In addition, and over the period prior to implementation of the new regime, we encourage potential licensees to keep working to:

  • refine remuneration and incentives arrangements for staff and intermediaries in line with both the proposed prohibition and the proposed licensing obligation concerning the design and oversight of staff and third party sales incentives; and
  • embed customer-centric strategies, policies, processes, systems and controls into their businesses. 

In relation to the latter, the Financial Markets Authority (FMA) has made its conduct expectations clear in its 2017 Conduct Guide, its feedback from the retail and life insurer Conduct and Culture review work and recent Strategic Risk Outlook. It is highly unlikely that those base expectations will need to alter in response to the exact wording of the legislation ultimately drafted. In a recent speech at the Financial Services Council conference, Rob Everett, CEO of the FMA, summarised the FMA's expectations as follows:

When we talked in our reports about good customer outcomes, some of you came forward and asked for more clarity – what does it mean? We have put that phrase into the context of how you serve the needs of customers.

It's about treating your customers fairly, recognising and prioritising the interests of your customers, giving your customers clear and honest information. Designing products that are suitable, targeted at and sold to appropriate groups. Ensuring your after-sales care is good, and effectively monitoring your own conduct and that of suppliers and distributors, to ensure you can identify, rectify and learn from mistakes.

Banks and insurers should, therefore, keep focussed on developing and implementing action plans in response to the FMA and Reserve Bank's recent Conduct and Culture review work and, once set, continue to monitor the impact and effectiveness of those plans. To the extent they have not done so already, NBDTs should also now consider undertaking gap analysis work against the FMA's Conduct Guide, the FMA and Reserve Bank Conduct and Culture reports for the retail banks and life insurance sectors and the FMA's report on retail bank incentives in order to develop their own action plans. 

First reports released on effectiveness of the UK Senior Managers Regime

Given that an executive accountability regime remains an option in New Zealand, two reports assessing the impact of the UK Senior Managers and Certification Regime (SMCR) for the banking sector may be of interest for those looking to the horizon. The reports may also provide useful context for those organisations who have or are proactively adopting aspects of the SMCR or the equivalent Australian executive accountability regimes into their conduct and culture action plans.

The reports, one released by the Financial Conduct Authority (FCA) here and one released by UK Finance (the UK banking industry body) here have been commissioned against the background of the SMCR having now been in force for over three years. Notably, the report released by UK Finance found strong agreement that the new SMCR rules had brought about a meaningful change in behaviours in the industry. Themes from respondents included that:

  • there had been benefit in clarifying roles and responsibilities of senior managers;
  • there have been significant changes in the approach taken to decision-making within most organisations, including in respect of considering relative risks and involving relevant control functions in decisions; and
  • there was evidence of governance improvements more broadly as a result of the regime, including the tightening of committee structures, terms of reference and membership.

The reports also contain survey responses on the actual impact to date in relation to some of the key concerns frequently raised about executive accountability regimes. For example, concerns that such regimes result in: increased decision-making times; a culture of fear; an increase in risk aversion; recruitment challenges; and administrative overload. Insights from these survey responses may be relevant to the design of any New Zealand executive accountability regime and related supervisory approach.

Conduct and Culture collation

A steady stream of reports and guidance continues to be released in other jurisdictions relevant to conduct and culture issues. Three disparate publications that have interested us in the past few months are:

  1. An Australian Institute of Company Directors paper on governing organisational culture here. This may be of interest to those considering the strong organisational culture theme that has emerged lately, particularly from the Australian Prudential Regulation Authority governance accountability and culture self-assessment process.
  2. A paper released by the FCA here with feedback on its proposed fair pricing framework. This may be of interest to those considering broader concepts of fairness in relation to pricing.
  3. On a lighter note, particularly for those working hard on remediation projects, a Guardian article "From a wrongful arrest to a life-saving romance: the typos that have changed people's lives" puts a spotlight on both the pain and pleasure that can arise from manual processes. A refreshing reminder that it is not just in the financial services industry where, in our part manual and part digital world (the "almost digital age"), a simple keyboard error can trigger huge unintended consequences. That article is 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.

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