Daily news update: overview of main points from CoFI select committee hearing, and more stories

Insurance and industry associations representatives shared their views on CoFI during the select committee hearing held on 10 June 2020. Participants included, Cigna head of legal Michael Burrowes, AIA general counsel Kristy Redfern, Financial Advice New Zealand CEO Katrina Shanks, Partners Life chief legal, risk and conduct officer Rebecca Sellers, industry expert David Whyte and Anna Black Fidelity Life chief risk officer.

Michael Burrowes head of legal said that the bill was a good idea but was rushed and complex. Michael and AIA general counsel Kristy Redfern both suggested that the bill be delayed. Kristy highlighted that unlike Australia, New Zealand had time to get the bill right. She also warned that the reform was affecting the mental wellbeing of advisers, which could lead to New Zealanders becoming even more underinsured.

“Michael Burrowes, head of legal at Cigna, said the bill was a good idea but there had been a lack of consultation with the industry for what would be a substantial and important regime. The result was rushed, complex and lacked the appropriate clarity and detail.

He and AIA general counsel Kristy Redfern called for the bill to be delayed until FSLAA had bedded in.”

“Redfern said changes to commission rules in Australia had affected the availability of advice and given that New Zealand was underinsured already, that outcome should be avoided. She said the threat of significant reform was affecting advisers’ mental wellbeing. “It’s more important than ever that any additional regulation is fit for purpose and doesn’t create unintended consequences and anxiety.”

She said, because there was no evidence of widespread misbehaviour New Zealand had time to get the bill right.”

Katrina Shanks shared Financial Advice’s concerns as well as saying that it was hard to understand the implications of CoFI as a lot was left to regulations. Katrina also highlighted that that unlike other sectors, the power to prohibit incentives was very strong. Similarly, David Whyte said that it was unclear if advisers were caught by providers’ fair conduct programmes.

“Shanks said Financial Advice NZ had six main concerns: the bill’s power to regulate sales incentives, no definition of “fair”, confusion over whether financial advisers are included in fair conduct programmes, the definition of intermediary, the claims process, and the timing of the bill’s enactment.”

“David Whyte, speaking on behalf of a group of sector participants including Financial Advice New Zealand, the TripleA Advisers Association and Wealthpoint, said the drafting was confusing because it was not clear whether financial advisers were caught by providers’ fair conduct programmes.”

Rebecca Sellers, chief legal, risk and conduct officer at Partners Life highlighted that incentives played an important part in the livelihoods of many advisers. While Anna Black Fidelity Life chief risk officer said that the outcome of CoFI needs to increase customer trust and ensure sustainability

“Partners Life chief legal, risk and conduct officer Rebecca Sellers said incentives played an important part in the livelihoods of many businesses and were a matter of substantive policy that should not be delegated to regulation – though committee member and Labour MP Duncan Webb asked AIA how the rules could be kept up-to-date with a changing industry if they were not in the regulations.”

“Anna Black, chief risk officer at Fidelity Life, said the outcome of the bill needed to increase customer trust and ensure sustainability of the industry over the long term. “Pausing is appropriate.”” Click here to read more

In other news:

Commerce Commission: The Commerce Commission:  announced that it has finalised the criteria it will use to assess whether a lender is “fit and proper” under the Credit Contracts and Consumer Finance Act

Partners Life: Partners Life sponsored the filming for Fight For Time, a story of the Pink Dragons

FSC: FSC 2020 Awards will be held at the FSC Generations Conference Gala Dinner

FSC: Generations Conference earlybird tickets now available

FSC webinar: Introduction to Generations webinar

FSC: FSC’s partner Voices of Hope will be the charity partner for the 2020 Conference


Daily news update: CoFI submitters areas of concern, and more stories

There have been many submissions on the topic of CoFI. AIA, Cigna, Fidelity Life, Partners Life and AMP have shared their views in regard to the implications CoFI will have on advisers, commission as well as the scope of COFI and the time needed.

Fidelity has stated their concern for potential adviser issues and customer confusion relating to advisers having to comply with different fair conduct programmes. Gail Costa, CEO of Cigna, has said that because of CoFI, advisers could end up preferring one provider's conduct programmes to simplify their compliance obligations, causing a conflict of interest. Partners Life have said that advisers should not be caught by the bill at all. While AIA have said that advisers that were not licensed under FSLAA should be the only ones affected by CoFI.

“While submitters voiced support for the overall intention of the bill, all raised concerns about how it has been drafted.

Significant concern related to how advisers will be dealt with under the bill. There is a carve-out for financial advice providers, but not necessarily for individual advisers, in its current form.

That could mean all advisers had to show compliance with the financial advice providers’ conduct programme, as well as meeting their own obligations under FSLAA.”

When discussing commission, Fidelity said that CoFI could create uncertainty and affect participants’ ability to plan for the future. Nick Stanhope has said that change in commission, will create very high levels of regulatory risk.

“Submitters were concerned that the bill left open the option of regulators introducing new rules for commission structures, without any legislation change being required.”

Another area or concern was the scope of CoFI. AMP stated that they were concerned that being considered a financial institution would increase costs. And Partners Life has said that there is a risk that CoFI is going to create an uneven playing field. KiwiSaver customers would have protection through the bill if they were with a bank but not through a fund manager.

“Many submitters were worried about the scope of the new bill. Some said it was too broad – AMP Wealth Management New Zealand said it was concerned about being included as a financial institution – the cost of licensing would affect its ability to keep costs down. The Securities Industry Association said it seemed that NZX trading, and advising market participants, had been inadvertently captured as intermediaries.

But Partners Life said there was a risk it would create an uneven playing field – a customer would have protection through the bill if they were in KiwiSaver through a bank but not through a fund manager.”

The last area that has created mass concern is time. Nick Stanhope has said that FSLAA should be given enough time to be implemented before more regulations are introduced. David Ireland, partner at Dentons Kensington Swan has also expressed his concern saying that CoFI hasn’t gone through the same level of consultation as other significant regulatory changes.

““No consultation draft was released for public feedback, with no opportunity to debate the outcome of the one round of consultation on the issues paper released last year. The outcome is a bill that provides a framework for a new regime, but with many of the details not fully formed and with many uncertainties as to scope and practical application.

“Conduct licensing is complex. A new regime as significant as this one ought not to be rushed through.”” Click here to read more

In other news:

FSC set to host Reserve Bank on CEO Roundtable 11 June 2020

FSC to make oral submission to the Finance and Expenditure CoFI 10 June 2020

FSC: Big Trends in Tech, Innovations and Investing Webinar to be held 9 June 2020

FSC: Get In Shape Advice Session 2 webinar with Karty Mayne and David Greenslade to be held 12 June 2020

BNZ: OMNIMax and BNZ work together to help BNZ customers get the most out of KiwiSaver


How to participate in the select committee proceedings on COFI

There have been a number of changes made to the way select committees are conducted. The changes are as follows. To comply with Alert Level 2 restrictions, public attendance of committee hearings will not be permitted. Those that wish to make submissions will need to do so via video or telephone. This applies to witnesses as well. If a member of the public wishes to be physically present, they must first seek approval from the Speaker of the House. Hearings that would have been normally been opened to the public can be views on the Parliament website and committee Facebook pages. Those that attend the select committees will need to practice social distancing. Some committees meetings can be held remotely.

Select committees Open to the public:

10 June 2020

9:00am - 11:00am: Inquiry into the operation of the COVID-19 Public Health Response Act 2020

11:20am - 11:50am: 2020/21 Estimates for Vote Pike River Re-entry

1:00pm - 5:00pm: Financial Markets (Conduct of Institutions) Amendment Bill

9:00am -TBC: Local Government (Rating Whenua Māori) Bill

Click here to find out more

Watching committee meetings: 

Open for submission:

Inquiry into the operation of the COVID-19 Public Health Response Act 2020

Overseas Investment Amendment Bill (No 3)

Select-committee-c19.E0SPFA


From 1 February, OnePath becomes Cigna

Cigna formally absorbs OnePath from 1 February. Quoting from an email sent to advisers recently they announced: 

"We’re pleased to let you know that we have received approval from the Reserve Bank of New Zealand, and on 31 January 2020 the OnePath business will be transferred to Cigna. This means the two businesses will begin operating as one – Cigna"

Congratulations to Cigna on the successful completion of the merger. Adviser familiar with other mergers will be able to appreciate how quickly, and in many respects smoothly, this has gone. Also announced under the same email are changes to the agency agreements. These, like AIA's recent changes, introduce new obligations for both advisers and Cigna. These relate to the expected requirements under the Conduct of Financial Institutions Bill. Although these requirements will probably undergo some change, the transfer of all OnePath business to Cigna means that a new agreement was required.


UPDATED - CoFI introduced to Parliament

The daily progress report for parliament yesterday shows the introduction into Parliament today of the Financial Markets (Conduct of Institutions) Amendment Bill.

https://www.parliament.nz/en/pb/daily-progress-in-the-house/daily-progress-for-wednesday-11-december-2019/

The draft bill can be found on the legislation.govt.nz site - or you can just download your copy at this link. Download Financial Markets Conduct of Institutions Amendment Bill

David Chaplin has his brief take on it all at this link: https://investmentnews.co.nz/investment-news/fair-cop-government-sneaks-in-conduct-bill-before-year-end/ 


New exclusions: cancellation due to sanctions

A new type of exclusion has appeared. The average policyholder has nothing to worry about. Perhaps it would be more accurate to say - only the most extraordinary policyholders have any concerns, and if they did, we should probably have concerns about them.  That's because the new exclusion is to remind people that if they - or a related party - are subject to sanctions from a range of western economies or the United Nations, then the policy may be cancelled. Here is the section from AIA's policy document: 

Cancellation due to Sanctions
We shall not provide cover for any risk and/or activity and shall not be liable to pay any claim or pay any benefit hereunder to the extent that the provision of such cover, payment of such claim or provision of such benefit would be in respect of a person who is the subject of any sanction, prohibition or restriction under United Nations resolutions or trade or economic sanctions, laws or regulations of New Zealand, the European Union, United Kingdom or United States of America, or any of its states and/or any other applicable economic or trade sanction laws or regulations.
This provision applies without limitation not only to the policy owner or holder, but to the life assured and any assignee, other third party, related party or beneficiary of the policy.
Should we determine that the above is applicable, we may at our sole discretion terminate the policy with immediate effect.

This should probably be seen in the context of the conduct conversation. If you have been following the concerns about Westpac Bank in Australia raised by the AUSTRAC, the regulator responsible for enforcement of the equivalent of our AML-CFT laws you will see that context is no longer purely local. Regulators expect companies to have oversight mechanisms in place, and tools to manage actions that the regulator may require. That's what AIA's new cancellation mechanism is about. Hopefully it may never get used, but a prudent approach is to have the tools available just in case. 


Australia: NAB to pay $49.5m in compensation related to credit insurance sales

Elouise Fowler writes in the AFR that NAB will have to pay compensation of $49.5 million to clients sold unsuitable credit insurance contracts.Link

Credit insurance as a brand has been devastated by conduct issues in Australia and New Zealand. Here new sales are virtually nil and the in-force book is shrinking fast. 


The challenges of agreements as you look towards CoFI

Even a cursory glance at an agency agreement shows a number of problems against expected oversight requirements under proposed new Conduct of Financial Institutions law. In fact, most agency agreements, with a few notable exceptions, lack the tools to be really effective today, let alone in the new environment. Common problems include: 

  • Insufficient detail on what exactly is expected of the agency-holder
  • Vague and indistinct ideas about the role of 'advice' in the relationship, usually agency holders are required to be advisers, but they are not required to give advice, and most other performance obligations don't appear to relate to that service
  • Speaking of service: it is sometime a vague requirement, but it is rarely defined, and frankly cannot be defined really well without cutting across the variation in business models that is a vital part of the adviser ecosystem
  • A mixture of tightly defined things - such as a requirement to meet certain legal standards - which often do not need to be in the contract with a complete absence of some other rules, such as brand use and privacy provisions which are common agency relationship issues suited to being dealt with in the agency contract
  • Inadequate dispute mechanisms coupled with the sanction for any breach usually being termination of the agreement. That sanction is rarely used, so the agreement rarely mirrors how the agency relationship actually works

In the new environment there is more complexity, not less. The starting point should be clarity on who the parties are likely to be and what you expect of each other. Defining that in business relationship terms first may give you a smoother path to producing the new document. Chatswood has an agency terms comparison checklist for those of you that might want to have a discussion about this. 


Advisers minimise chances of poor claim outcomes

Tower CEO Richard Harding detailed that research showed confidence in the industry is at an all-time low. Harding revealed that although general insurers often claim 99.9 per cent of claims are paid, instead approximately one in five claims were withdrawn by policyholders. Although there are many reasons a policyholder could withdraw a claim, including pressure from the insurer, fear, dishonesty and non-disclosure, having an adviser reduces chances of withdrawals. Clients with advisers are better informed and make fewer pointless claims. In effect, his comments were a big endorsement of having an adviser involved. By implication, however, they raise questions about direct insurance. Click here to read more


RBNZ: Insurance sector must evolve in line with increased public expectations and changing risks

Adrian Orr, Governor from RBNZ delivered a speech at the Insurance Council of New Zealand Conference today about building confidence and reducing risks in the insurance sector. You can read his full speech here.

Here are some key points that I really enjoyed:

  • There are significant information-asymmetries between an insurance provider and their customer, and the risks of providing poor or outdated information run in both directions. ‘Who is good for what, and when?’.
  • ...often there is a long period of time after a customer-relationship has been established. In very difficult circumstances, a customer may find that they do not have the coverage they believed would be available to them. And, on the other side of the ledger, insurers rely on accurate information from customers about their own circumstances.
  • Orderly and well-articulated changes in insurance and pricing strategies are needed, so that all participants in the financial sector – and wider economy - can adapt their behaviour without creating unintended outcomes.
  • How a firm monitors and addresses conduct and culture issues will be a part of our ongoing ‘business as usual’ supervision with all insurers. We will also monitor insurers to make sure their planned actions are implemented effectively.
  • The public is demanding that both insurers and regulators play a part in providing greater confidence in the health and conduct of the sector. The Reserve Bank’s insurance agenda for the coming year (or years) is thus very full.

The section on three disciplines, which is too big to quote, is also well worth a look.

I liked the comment about changes in insurance and pricing strategies. I think that this is probably about the more visible marketplace - general insurance - and the role it has in affecting decisions that people make about where they live and the buildings in which they live, and also what buildings get built and where. But it could equally well apply to the marketplace for income protection too, which is in a product design and pricing crisis that has some similar features to insuring buildings in earthquake and flood prone areas. Both life and property insurers have efficiency challenges. The point about information asymmetries cannot be made strongly enough and needs to be remembered in the insurance contract law review process. It is a comfort to insurers (and should be to consumers as well, although they don't tend to be) that officials are signalling that they understand these fundamental concepts.