John Botica and Liam Mason of the FMA presented on the licensing of Financial Service Providers and the conduct review of banks and insurers at Chapman Tripp on 25 July 2019. Three key areas warrant comment.
Licensing of FAPS
The presentation highlighted the announcement on the same day of the date when transitional licensing will open to applications, being 4 November 2019, with applications able to be submitted to a yet to be finalised date in June 2020.The release of a tool to assist with business decisions and a transitional licensing guide was also highlighted. Decisions on transitional licensing were stated as expected to generally be available within 5 days of completed application.
During the commentary, significant emphasis was placed on the decisions that will need to be made by businesses and advisers as to whether to apply for their own transitional and eventually final FAP license, or whether to rely upon someone else’s licence.
There was some comment on the limitations applying to certain choices during the transitional period, depending upon whether or not agreements were in place prior to 8 April 2019. It was stated that there would be flexibility within the system if entities and individuals decide to change their decisions as they move to full licensing.
However, what seemed to be missing was an appreciation of the difficulty for a business or adviser in determining how best to proceed (obtain their own licence or rely on someone else’s license) in the absence of information on the final licensing conditions or criteria. This was also reflected in the answer to the question asked as to when such information would become available, which indicated that consultation on proposed final licensing conditions would take place “late this year or early next year.”
In this environment, there is clearly a high risk that entities and individuals will make decisions that are then found to be inappropriate and either the costs incurred will have been wasted, or additional costs will then be incurred that might otherwise have been avoided. As it appears that all of the information that the FMA needs to finalise final standard licensing conditions must now be available, it is disappointing that the FMA does not recognise the risks and costs for both financial services providers and advisers as they try to make decisions with incomplete information. That has to have an effect on advice provision. The costs are always borne by consumers in some way, too. Quickly delivering licence standards would avoid many of those costs and provide adequate time for businesses to complete the resulting changes to business structures, policies and processes that will be necessary in many cases.
Conduct Review – Responsibility of product providers for third parties
Recognising that the purchase of a product creates a direct relationship between a product provider and the end consumer, even when completed via a third party, the presentation emphasised the need for each product provider to take on greater responsibility and to accept greater accountability for the conduct and actions of external or third parties selling or advising upon that provider’s products.
In response to questioning, the FMA representative acknowledged the difficulty that will then arise in getting an appropriate balance between maintaining consumer access to advice across a range of market products or services and what will likely be a natural desire of each product provider to limit liability by trying to restrict third parties to only selling or advising on the provider’s own products.
The presenters also suggested that product providers, in another attempt to limit liability, may move towards only being prepared to engage with or allow sales of or advice upon their respective products to be given by those third parties that are licensed Financial Advice Providers.
The risks are clear that none of this bodes well for the maintenance of consumer access to advice across a broad range of market products. In order for this balance to be struck appropriately there must be good delineation between what is meant by 'oversight' and what is left firmly in the realm of the Financial Advice Provider. If there is much overlap in responsibility there will be a corresponding duplication of cost. There could also be an increase in the incentives for product providers to deal with fewer, more aligned or even tied, FAPs - due to the risks involved.
Conduct Review – Internal and external incentives
The presenters noted the decision by the banks to cease to offer internal incentives to employees linked, for example, to product sales volumes, and stated that the response from insurers is still being assessed or is awaited.
Interestingly, the FMA presenter stated that the decision by the banks to withdraw all such incentives was not a surprise, as the FMA had already determined that there were no suitable controls that could be put in place to reduce or remove the potential harm to consumers that the internal incentives introduced.
No response was forthcoming when it was suggested that perhaps the presenters might therefore also wish to comment as to whether they also held the view that there are no suitable controls able to be put in place in relation to incentives provided to external third parties.
Watch this space but measure the risk that the regulator already thinks that all incentives, whether internal or external, cannot be adequately managed to reduce or remove consumer harm. The doubt about that means that it is hard for financial service providers to plan remuneration strategy effectively while there is uncertainty on this point.
Rob Dowler and Russell Hutchinson