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Reflections on the interactions between likely conduct law and the Financial Services Legislation Amendment Act

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is separate from the other licences required by banks, insurers and NBDTs, what does it mean if a conduct licence is withdrawn?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.

 

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Summary of proposed new conduct regime for financial institutions

A series of announcements today provide us with the expected update on the proposed new conduct regime for financial institutions. Here are the important links. Summary is below.

https://www.fma.govt.nz/news-and-resources/media-releases/fma-welcomes-government-announcement-on-expanded-remit/

https://www.beehive.govt.nz/release/new-financial-conduct-regime-makes-banks-and-insurers-treat-their-customers-fairly

https://www.mbie.govt.nz/business-and-employment/business/financial-markets-regulation/conduct-of-financial-institutions-review/

In summary, the regime will involve the following:

• Create a licensing regime for banks, insurers and non-bank deposit takers (such as credit unions) regarding their general conduct. These institutions will be licensed by the Financial Markets Authority.
• Require licensed institutions to meet a fair treatment standard (for example, to pay due regard to the needs and interests of customers and treat them fairly)
• Require licensed institutions to implement, effective policies, processes, systems and controls to meet the fair treatment standard. Regulations will specify what these policies, processes, systems and controls must include.
• Outline what obligations financial institutions have in relation to remuneration and any other sales incentives, and how they must manage the risks those incentives create.
• Prohibit sales incentives based on volume or value targets (e.g. soft commissions such as overseas trips, bonuses for selling a certain number of financial products, leader boards, and performance management based on the volume of sales). This prohibition will apply to banks, insurers, non-bank deposit takers and their intermediaries.
• Make licensed entities accountable for sales to consumers by the entities contracted intermediaries who are not financial advice providers (non-adviser intermediaries include car dealers, retailers selling add-on finance and insurance, and travel agents or airlines selling travel insurance).

More time needed for decent reflection on new conduct proposals

The incredibly short time-frame to respond to proposals for conduct law are really pushing people at the moment. The far-reaching consequences of such law, and regulatory powers they create deserve better than this. 

How to make a submission on the Conduct of Financial Institutions Options Paper:

Step 1: Read the materials in this blog post

Step 2: This is the a good approach to thinking about your submission

• Customer – How does this benefit customers? 
• Facts – use relevant facts to support your submission
• Comparison – How are we different to Australia? The UK?
• Who do you speak for? Build scale into your response, or get together with others
• Don’t make it confidential - unless absolutely necessary
• Make sure you are fully across detail
• Review your submission, get someone who is critical to help with this step
• You don’t have to submit on the whole thing – being specific has value

Step 3: Go to https://www.mbie.govt.nz/have-your-say/financial-institutions-conduct-review/comprehensive-submission-form-conduct-of-financial-institutions-review/

Step 4: Complete your submission on the relevant parts you want to comment on

Step 5: Submit and spread the word

Step 6: Plan for change in your business

MBIE seeks written submissions by Friday 7 June 2019.

Hurry up and wait: FSLAB delayed to April

Events create the pace in politics, and so FSLAB has been delayed due to a decision to bring the current legislative session to a close, based on this parliamentary announcement putting parliament into recess until 2 April. Read it at https://www.beehive.govt.nz/release/revised-plans-parliament-week

FSLAB progress

FSLAB moved from 13 on the parliamentary order paper last Thursday to place 8 on the order paper today.

Minister promises process of review of sales incentives

In this piece on RiskInfo Minister Faafoi and the Honorable Grant Roberston appear to outline a separate consultation process to run alongside the insurance contract law review process, later this year. This process is to review sales incentives in the light of the recent report on the life insurance sector. Link.

Minister of Finance, Hon Grant Robertson, highlighted four changes the Government wishes to see:

• Clearer duties on banks and insurers to consider a customer’s interests and outcomes, and to treat customers fairly
• An appropriately resourced regulator to monitor the conduct of banks and insurance companies, with strong penalties for breaching duties
• Changes applied to both banking and insurance, since the issues identified in both are similar. There are also overlaps between the sectors, with banks often selling insurance products.
• A strong response to internal sales incentives and soft commissions

“We will consult with the public and industry on these changes, but we are going to move as quickly as possible on this because New Zealanders need to have confidence their rights and interests are being protected,” said Robertson.

Faafoi noted that the consultation will run alongside the insurance contract law review currently in progress.

Australia: FINSIA signs up to landmark code monitoring agreement with professional associations

FINSIA Council member News Update announces a code monitoring agreement (see below). What interesting is the interaction between various standards and requirements. Legal standards, regulations, licence requirements, code standards, and contract terms all form a complex web of requirements for an advice business. Governance processes to monitor meeting all the requirements are central to the operation of the business. What can be safely outsourced, versus what must be managed within the business, will be a major issue for advice businesses whatever their size.

 

FINSIA signs up to landmark code monitoring agreement with professional associations 

The Financial Services Institute of Australasia has agreed to be part of a group of six professional financial planning and advice associations developing a code monitoring solution for members to deal with upcoming regulations.

The associations have agreed to work together to submit a code monitoring compliance scheme application to ASIC so the Financial Adviser Standards and Ethics Authority (FASEA) code of ethics can be monitored and enforced.

Chris Whitehead, FINSIA CEO and MD, F FIN, said: “As the professional membership body for the financial services sector, FINSIA brings its expertise to the cooperating associations to help lift professional standards within the sector by the introduction of a defined code monitoring cooperation agreement.  

“FINSIA supports its members by ensuring the financial planning and advice sector is recognised as a profession by developing a scheme by the profession for the benefit of the community.” 

For a copy of the media release, ‘A landmark code monitoring cooperation agreement announced by professional associations’ please click here

FINSIA is committed to keeping its members up to date on initiatives like these that help raise standards of professionalism for the financial services sector.

Looking back on 2018 - Minister Faafoi stands out

Looking back on the year, one of the stand-out performances has been Minister Faafoi. I noticed that recently David Farrar of Kiwiblog (a staunch National Party supporter) rated Faafoi as one of the most effective ministers in parliament. Many in financial services would agree.

Officially Minister Kris Faafoi was elected as a Minister of Civil Defence, Commerce and Consumer Affairs and Associate Minister of Immigration, in the current Labour-New Zealand First coalition government. He has already demonstrated ability and was recently rewarded with the broadcasting portfolio with the recent resignation of Clare Curran MP. Minister Faafoi has delivered a competent performance in every public speech or interview I have seen. That includes more comfort in going ‘off-script’ than was shown by predecessors.

Faafoi’s relationship with the media has also been much easier, as it should be given his background as a TVNZ journalist. That background may also explain his ability to quickly come to grips with the essential details of complex policy. Another advantage is his long-term interest in the problems of people dealing with pay-day lenders and consumer finance. Although not directly related to financial advice, or insurance law reform, they are adjacent areas, and mean broad familiarity with the financial services industry. Reflecting on Faafoi’s knowledge of some of the most difficult areas in consumer finance, it is probable that the Minister understands what really bad conduct looks like. He is likely to be aware of the importance of good conduct to protect potential customers – some less able, and therefore more vulnerable than others.