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

During the Financial Advice NZ webinar, Minster Faafoi spoke about his commitment to ensuring that the conduct bill progresses while also highlighting that he is conscious of the importance of having enough lead-in time. During the webinar, the Minister spoke of how the Government understands that commissions are a legitimate way of paying advisers and as a result, the Government isn’t seeking to ban commissions, instead is looking to end target-based incentives. 

“In a webinar with Financial Advice NZ, Faafoi acknowledged that concern and said he did not want the conduct regime to add another layer of complexity of regulation on top for advisers.

The bill in its current form also allows regulations to dictate remuneration structures, which some industry participants have expressed concern about.

Faafoi said Government recognised that commissions were a legitimate way of paying advisers for their “important work” because consumers were generally unwilling to pay for financial advice. He said the Government was aware that commission structures were the way the sector had operated for decades.

“It is not the Government’s intention to ban all commission.” Click here to read more

It would be a great relief to advisers and insurers if it could be clearly discerned from the Bill that the power to ban commissions is reserved. At present the definition of incentives in the law can be read as including all normal commission payments, which is unnerving when long-term decisions need to be made. 

In other news:

Suncorp: Kate Armstrong joins Suncorp’s NZ boards

Suncorp: Suncorp earmarks further NZ$2 million for hardship fund

FMA: Transitional licensing continues at a “steady rate” despite COVID-19 delays – FMA

AIA: AIA new business value slips 27% after coronavirus disruption

Sharon Corbett, Manager Financial Markets Policy, at MBIE has made the following announcement: 

The Minister of Commerce and Consumer Affairs has agreed that the start of the new financial advice regulatory regime set out in the Financial Services Legislation Amendment Act 2019 will be delayed from 29 June 2020 to early 2021.

The new regime is important for promoting consumer confidence in financial advice and the Minister remains committed to seeing the changes through. For now, however, it’s important the financial sector focuses as much as possible on supporting its customers as well as its own staff and their families.

The exact revised date of the new regime will be communicated in due course, well in advance. We expect the new commencement date to be in March 2021 at the earliest. 

The transitional licensing application window will be extended until the same date in early 2021 and the new Code of Professional Conduct for Financial Advice Services will also come into force on that date.

The existing regime under the Financial Advisers Act 2008 will continue to apply in the meantime until the new regime commences.

We are still working through all the flow-on implications from this delay and the necessary legal mechanism to effect this change. We are aware that market participants are at varying levels of readiness for the new regime and that the delay will impact everyone differently.

The FMA has confirmed that transitional licensing will also remain open and the FMA licensing team will continue processing applications as resources are available and in time for the start date of the new regime in early 2021. Those who have already had licences approved or who have already submitted a transitional licensing application will not need to reapply – please see the FMA announcement and FAQs which will shortly be updated.

The disclosure regulations that were due to be made this month have now been delayed so that the commencement dates of those regulations can be updated. We hope to make these regulations available within the next couple of months.

We will be in touch when we have more details to share. We’d be grateful if industry associations could please pass the message onto members.

Thank you for your understanding in these challenging times and we hope that you are all staying well.

Kind regards

Sharon 

Sharon Corbett

MANAGER, FINANCIAL MARKETS POLICY

COMMERCE, CONSUMERS & COMMUNICATIONS BRANCH

You can check out the other details of their view at this link: https://www.dentons.co.nz/en/insights/alerts/2020/february/20/financial-law-insight-financial-markets-consultation-tsunami-to-herald-in-the-new-year

Parliament recommenced this week with first reading being completed on 12 Feb for three Bills relevant to the financial services sector:

• Financial Markets (Conduct of Institutions) Amendment Bill completed first reading, referred to the Finance and Expenditure Committee with report back due by 23 June 2020. (see more details in the blog post below).
• Fair Trading Amendment Bill read for the first time, referred to the Economic Development, Science and Innovation Committee with report back due by 12 August 2020.
• Financial Market Infrastructures Bill read a first time, referred to the Finance and Expenditure Committee with report back due by 12 August 2020.

Dates for closure of submissions on each are yet to be announced, but the likelihood of enactment before the election can potentially be gauged from the report back dates.

Consultation on the legislation being proposed for insurance contract changes is expected later this year.

My compliance guru, Rob Dowler, advises me that he has completed drafting his submission on the Conduct Bill some time ago while awaiting the call for submissions. He advises that his key submission points will be:

• Why is a “conduct licence” being introduced rather than simply legislating requiring compliance with the proposed conduct requirements?
• Why restrict the application of the legislation to licensed banks, insurers and non-bank finance companies? Why not capture all financial service providers? In fact, why not capture all commercial enterprises?

Good points. I know that quite a few industries share some of the information asymmetry that makes financial services a sector where the utmost good faith needs to be shown when dealing with customers: many technology companies offer similarly intangible services that have a lot of hidden complexity and are not fully understood by consumers. 

The Bill passed its first reading in the house. I am grateful to the FSC for this summary of key points from the proceedings in the house. Link to the draft law is below as well. 

Financial Markets (Conduct of Institutions) Amendment Bill Legislation

Key points in the introduction to the House:

The Bill seeks to address the regulatory gap as there is currently no explicit legislative mandate for the regulation of the general conduct of financial institutions. The Bill is intentionally fast tracked to protect consumers and to maintain confidence.

• New conduct regime requiring licensed entities and intermediaries to have policies, processes, systems, and controls in place to ensure they're considering consumers' interests and treating them fairly in all aspects of their business.
• Requires banks, insurers, and non-bank deposit takers to be licenced by the FMA in respect of their general conduct (with ongoing supervision), and licensing gives consumers confidence that licensed entities have been checked and meet the appropriate standards of conduct. Licensing will provide the FMA with a full range of tools to monitor, supervise, and enforce the new regime.
• Where more detailed obligations are required, regulations can provide more guidance. A principles approach is intended to enable institutions to determine their own policy systems and controls.
• Gives a regulation making power relating to incentives as a mechanism through which sales incentives based on volume and value targets will be prohibited. This prohibition applies not just to licensed entities but also to all intermediaries. Includes any and all incentives, whether monetary, such as commissions, bonuses, or other non-monetary rewards. This approach was taken as conflicted remuneration and incentives are seen as one of the biggest issues driving poor outcomes for consumers in the financial sector. It is intended that this prohibition on target-based incentives will address the fact that targets create an increasingly strong incentive to sell and therefore can encourage the person making the sale to prioritise their own interests over those of the customer. This prohibition still allows people to be remunerated for sales, but removes the particularly problematic target-based remuneration.

National Response: Not support the Bill (in current form).

• Duplication with FSLA.
• Note quoted Chapman Tripp.
• Expressed concerns with the blanket regulation making power in relation to incentives and who they apply to without further scrutiny by government.
• Argued that there are better and less onerous ways of ensuring an obligation to ensure a customer is not going to be harmed simply by the existence of incentives, when incentives are essentially part of a sales business.

The Government announced plans reform laws governing insurance contracts. Minister Faafoi has said that consumers will have greater certainty about their insurance cover when they need to make a claim.

Agreed changes include:

• Placing the responsibility on insurers to ask consumers the right questions when processing new insurance policies
• Requiring insurance policies to be written and presented clearly
• Ensuring insurers respond proportionately when consumers don’t disclose something they should have, or misrepresent themselves
• Strengthening protections for consumers against unfair terms in insurance contracts
• Allowing the FMA to monitor and enforce compliance with new requirements

Click here to read more

From MBIE:

The Fair Trading Amendment Bill was introduced to Parliament today.

This Bill is a result of the Government’s work on unfair commercial practices and the review of consumer credit law. The Bill:

• introduces a prohibition against unconscionable conduct in trade;
• extends the current protections against unfair contract terms in standard form consumer contracts to also apply to business-to-business contracts that form part of trading relationships with a value below $250,000 per year;
• strengthens the ability of consumers to require uninvited sellers to leave or not enter their premises, including through the use of ‘Do Not Knock’ stickers; and
• makes a number of minor, technical changes to the Fair Trading Act.

You can follow the progress of the Bill here.

The Bill will likely be considered by Select Committee in early 2020. There will be an opportunity to submit on the Bill at that point.

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/ 

Following a recent speech by Kris Faafoi, Minister of Commerce and Consumer Affairs, my compliance consultant and I exchanged views on the interactions between the proposed conduct law and the other parts of the financial services legal and regulatory regime.

It is hard to envisage circumstances where the conduct requirements under the regime proposed for banks, insurers and NBDT entities will not be introduced into the new Licensed FAP regime. It is clear that FAPs will need to meet at least broadly equivalent conduct requirements. A product provider bound by a conduct law would have to require a FAP, perhaps an agent of the product provider, to meet standards if the standards were not going to be extended to the FAP.

Then consider this situation: There is the issue of those FAPs that provide advice on the products of licensed conduct entities where there is no commercial relationship between the FAP and the conduct licensed product provider. Take ABC Advice Ltd charging client fees direct and receiving no remuneration from XYZ Insurer Ltd with ABC Advice Ltd providing advice on XYZ Insurer Ltd products, with or without the knowledge of XYZ Insurer Ltd that ABC Advice Ltd is doing so. XYZ Insurer Ltd will still have conduct obligations to a consumer who is also a client of XYZ Insurer Ltd and ABC Advice Ltd, even in the absence of any contractual relationship between XYZ Insurer Ltd and ABC Advice Ltd. 

Separately to that issue, as the conduct licence is separate from the other licences required by banks, insurers and NBDTs, what does it mean if a conduct licence is withdrawn? It would seem likely that the loss of a conduct licence will be sufficient to put the total entity out of business. That raises so many questions about sanctions short of withdrawal of the licence, and also the need for a process to manage the extreme circumstance of licence removal and how to protect the interests of clients during that period of time.