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is separate from the other licences required by banks, insurers and NBDTs, what does it mean if a conduct licence is withdrawn?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


MBIE Consultation Opens on Disclosure Regulations

From the team at MBIE: 

We are now seeking feedback on the draft regulations that will set the disclosure requirements that will apply in the new financial advice regime.

The Financial Markets Conduct (Regulated Financial Advice Disclosure) Amendment Regulations will give effect to the Cabinet policy decisions made in February 2019. We are now seeking feedback on the content of the regulations themselves. In particular, we are seeking feedback on whether these draft regulations achieve the policy intent and whether they are workable in practice for the different ways in which advice can be given.

You can read the exposure draft and make a submission here: Submissions close on 8 November and we would greatly appreciate any feedback you might have.

Key points: 

  • As discussed previously, dollar disclosure
  • Disclosure of scope of service
  • Disclosure of conflicts and how they are managed - probably the latter part of that is the more interesting bit


MBIE announce updated timetable for implementation of new regime for financial advice

The Government has today announced that the new regime for financial advice will come into force in June 2020. The Government has also agreed on the licensing fees and FMA levies that will apply in the new regime and new requirements for registering on the Financial Service Providers Register.

You can view the media release here:

You can view updated timelines, the Cabinet papers and Regulatory Impact Statements on our website: and related pages

Now is the time for industry to familiarise itself with the new requirements and complete preparations for the coming changes. This includes determining how you will operate in the new regime and how you will comply with the legislation and the new code of conduct for professional advice services, and obtaining transitional licences when applications open.

MBIE will soon be consulting on the draft disclosure regulations that will apply in the new regime. We encourage you to review the draft regulations when they are available and to provide any feedback on how you think they will work for you.

MBIE updated timelineJune29

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

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.

LATEST: New Financial Advice Code Approved

The new Code has been approved. Here are the links you need:

New Code


Discussion point: personal liability for senior managers of insurance companies

In MBIE's recent paper on conduct of financial institutions one option, which is included in the preferred options package, is to extend personal liability to senior managers of insurance companies. 

Why is personal liability considered a useful tool? 

Reasons are presented in MIBIE's paper (which you can download here, and review yourself), however, in summary, there are two concerns.

The first, given most time in the report is the concern that managers may suffer from incentives to take better care of the insurer's interests than the client's - especially, perhaps, at claim time. 

The second, which is not in the report is, perhaps a legacy of some of the collapses in finance companies that occurred during the global financial crisis. Some directors claimed that they were not informed by senior managers. 

In both cases you can imagine how a personal liability could tip the scales towards behaviour more in the interests of the consumer and society as a whole. 

How would this work? 

There are some significant challenges in applying such an option. It is present in the Financial Market Conducts Act, and has also been included in the Credit Contracts Legislation Amendment Bill. Combined with its presence in the preferred options package, you should assume it is more probable than merely possible. Both the FMCA and the CCLA Bill prohibit insurance of the penalties. 

What are the downsides? 

These provisions could apply to many people. They may either be unwilling to shoulder such responsibilities, or they may require additional compensation in order to do so. Both outcomes seem likely to add significant cost. 

More information:

Any current subscriber to the Chatswood Quarterly Life and Health Sector review is welcome to my initial notes on reviewing both the conduct of financial institutions and insurance contract law papers. 


MBIE conduct of financial institutions options paper

For those of you who have spent the latter part of your weekend reading and making notes on the options paper, just know that you were not alone. If you have not yet had the pleasure, you can always download your copy here. I have been unable to locate the link at MBIE's site either for this, or the paper on insurance contract law referenced in the document. 

Download Conduct of Financial Institutions Options Paper

For institutional clients that subscribe to the Quarterly Life and Health sector industry report, I am preparing a one page issues summary and table of comments on the options. Do contact me if you would like a copy. 

For advisers, I thoroughly recommend this is one of the must read documents. 

FSLAB - more reading required

The FAA review team at MBIE sent this out - just in case you'd missed it:

The MBIE FSLAB website has been updated with fact-sheets summarising:

  • minor changes that are being made to the Financial Services Legislation Amendment Bill via supplementary order paper; and
  • recent Government decisions in relation to disclosure requirements which will apply in the new financial advice regime after the Bill comes into force.

The detailed requirements in relation to disclosure will be set out in regulations, and we expect to consult on draft regulations in Q2 of this year.

The Bill itself is awaiting its final stages in Parliament and we are hopeful that those stages can be completed in the coming weeks. Other work streams (fees and levies, registration processes and regulations, and other regulations) are also continuing to progress. The indicative timeframes published on our website (transitional licensing to open in Q4 of this year and new regime beginning in Q2 of 2020) remains our expectation.

Thank you for your input so far and we look forward to continuing to engage with you as details of the new regime are developed and finalised.

What are conduct obligations as distinct from financial advice?

What are conduct obligations as distinct from advice obligations? MBIE’s review of insurance contract law includes insurer conduct in its scope and takes a longer view of the need to ensure good conduct in the insurance market.

Pondering where the review may head, I reviewed ASIC’s reports on direct sales processes. Those clearly identify practices that fell short of acceptable, and details what it sees as effective remedies. A good reference point is there report “Rep587: The sale of direct life insurance” and “Rep588: Consumers experiences with the sale of direct life insurance”. The conduct obligations envisaged by the reports include:

(a) Provide adequate explanations of key exclusions and future cost
(b) Stop pressure selling
(c) Introduce a deferred sales model for downgrades
(d) Stop using techniques that frame consumers’ choices
(e) Establish a clear target market for limited value products and only sell these products where there is genuine consumer need
(f) Strengthen protections for vulnerable consumers
(g) Ensure that automatic cover increases do not exceed what the consumer can claim

Those all look like obligations distinct from the provision of financial advice as defined in our law, and hence apply to product providers even if not providing advice. If you group them under main headings they can be further summarised as:

• Sales practices must protect vulnerable consumers – which is probably not just an insurance-related issue (items b, d, and f)
• Information asymmetry must be addressed throughout the sales process (items a, c, and e)
• Eligibility is the responsibility of the insurer – including both at policy commencement and during the life of the policy (item g)