On 25 September 2019, the Minister of Commerce 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 for banks, insurers and NBDTs and their intermediaries. It is proposed that these changes be made by way of an amendment to the Financial Markets Conduct Act 2013 (FMC Act).
See below for what we know about the proposed changes to date based on the Minister's announcement and a Cabinet Paper that has been released by the Ministry of Business Innovation and Enterprise (MBIE).
- The proposed conduct licensing regime is to apply to banks, insurers and NBDTs. The Cabinet Paper recognises that the proposal will create a dual-licensing regime, with banks and insurers required to obtain a prudential registration or licence from the RBNZ and a conduct licence from the FMA.
- The intention is that the conduct licences would apply in respect of all aspects of business relating to retail customers, including all products and services offered by banks, insurers and NBDTs to retail customers, at all points of the life-cycle of the products and services. The Cabinet Paper indicates that:
- "retail customer" will be consistent with similar concepts in the FMC Act. That is, broadly, general consumers and small businesses with assets or turnover of up to $5 million in a financial year; and
- the products and services in scope will include (but not be limited to) credit, insurance, KiwiSaver, and associated services (e.g. complaints and claims handling, information provision).
- In respect of intermediary relationships, the proposal is that licensed entities:
- will be made accountable for sales made by their intermediaries who are not financial advice providers (for example, car dealers and retailers selling add-on finance and insurance, and travel agents or airlines selling travel insurance). In this regard, the Cabinet Paper suggests that this will require licensees to manage responsibility through some form of agency agreement.
- will not be directly accountable for the advice provided by intermediaries that are subject to a financial advice regime. We note that this carve out may be intended to cover both advised and non-advised sales by intermediaries that are subject to a financial advice regime (eg. of general insurance) but that this is not yet clear.
Material released to date highlights two key obligations within the proposed licensing regime:
1. An obligation to treat customers fairly
- The licensing regime will include a high-level fair treatment standard which will be set out in the FMC Act and, in order to hold a licence, banks, insurers and NBDTs will have to have policies, processes, systems and controls outlining what they are doing to meet that standard.
- The precise boundaries of that high-level standard are to be developed through the drafting process. In the meantime, the Cabinet Paper articulates that "fair treatment" means that:
- Customers have confidence that they are dealing with institutions that place the fair treatment of customers at the heart of their business.
- Customers receive clear, fair and not misleading information and are kept appropriately informed at every point they interact with the institution, including during any claim or complaint.
- Institutions design and sell, and customers ultimately receive, products and services that meet the customers' needs.
- Customers do not face unreasonable pressure to retain or change products, switch provider, submit a claim, make a complaint, or make other product or service decisions or changes – but neither are they unreasonably prevented from doing so if they wish to.
- Customers are provided with products and associated services of an acceptable standard and which perform or operate as institutions have led them to expect.
- Institutions establish, implement and maintain effective and transparent complaint-handling systems and customers are treated fairly in interactions with such systems.
- It is proposed that the high-level standard provided in the FMC Act will be supplemented by regulations and licence conditions. The conditions will, for example, set out what policies, processes, systems or controls have to contain and could include additional obligations regarding communications with customers, claims handling etc.
2. Obligations in respect of remuneration and incentives
- As part of the licensing regime, banks, insurers and NBDTs would be subject to an obligation regarding how they design their remuneration and any other sales incentives, and how they must manage the risks those incentives create.
- It is planned that this will encapsulate remuneration and incentives in the broadest sense (eg -commissions, soft commissions, bonuses, leaders boards, performance management etc). The Cabinet Paper specifically calls out that in practice this obligation would, for example, require a life insurer to review commission structures provided to life insurance brokers and reduce levels of commissions if there was found to be a risk that these are leading to consumers being switched between products unnecessarily.
- The Cabinet Paper expressly states that the intention is not to ban commissions and there is also no cap on commissions proposed.
- Licensed entities will be required to have in place effective methods for monitoring compliance with their licence obligations, including the proposed systems and control requirements, and to report any material contraventions of licence conditions or changes in circumstances to the FMA.
- The licensing regime is also proposed to give the FMA a full range of monitoring, supervision and enforcement tools to ensure entities' compliance with their obligations. This will include the FMA being able to review licensed entities systems and controls at any point and to require amendments to those systems and controls; the ability for the FMA to give a censure or require an action plan; and the FMA being able to give a direction, and to suspend, vary or cancel a licence.
- Potential enforcement options and penalties flagged in the Cabinet Paper include:
- civil liability for serious or material breaches of systems and controls requirements with related pecuniary penalties for and the potential need to pay compensation to customers. The indicative pecuniary penalties being not to exceed the greatest of: (i) the consideration for any relevant transaction; (ii) three times the amount of the gain made or (iii) the loss avoided; and $1 million for an individual and $5 million for a body corporate; and
- civil liability for contravening monitoring and reporting obligations with related pecuniary penalties of up to $600,000.
We assume that the reference to individuals within the indicative pecuniary penalties above suggests the potential for accessory liability but this is not yet clear.
- The Cabinet Paper recognises that the implementation of the regime will likely require additional funding for the FMA. We note that it is likely that the industry will be asked to meet at least some of this cost through licensing fees or levies.
Prohibition of sales incentives based on volume or value targets
The Minister has also announced a prohibition on sales incentives based on volume or value targets. This would apply to banks, insurers, NBDTs and the intermediaries of these institutions creating these types of incentives. It is proposed that a contravention of this prohibition may give rise to civil liability, including pecuniary penalties for licensed entities, up to $1,000,000 for an individual and $5,000,000 for bodies corporate; and for all other entities, up to $200,000 for an individual and $600,000 for bodies corporate.
The intention is to introduce legislation into the House and have it referred to select committee by the end of the year. No indication has yet been given as to when it is planned for the regime to come into effect, albeit the Cabinet Paper recognises the need for transition periods and the potential sequencing of the regime to different types of entities (eg, it may be that there may be a staggered entry of banks, insurers and NBDT into the regime).