The Financial Markets (Conduct of Institutions) Amendment Bill (Bill) which contains a new conduct regime was returned from select committee at the end of last week. The Finance and Expenditure Committee (FEC) made a number of amendments to the Bill but otherwise recommended that the Bill be passed. The Bill is, accordingly, now set to complete the Parliamentary process after the General Election. Financial institutions, and their intermediaries, should consider the changes made by FEC in order to be ready to re-engage with this law reform process after the election.
The FEC amendments do not change the fundamental elements of the proposed conduct regime as they apply to banks, licensed insurers and licensed non-bank deposit takers (NBDTs) who undertake relevant services as defined by the Bill (together "financial institutions"). That is, the Bill still:
- requires relevant financial institutions to obtain and operate under a licence from the Financial Markets Authority (FMA);
- establishes a "fair conduct principle" that "a financial institution must treat consumers fairly";
- requires relevant financial institutions to operationalise the fair conduct principle through establishing, implementing, maintaining and complying with a "fair conduct programme"; and
- requires financial institutions and relevant intermediaries to comply with regulations that regulate incentives.
However, as described further below, the amendments have materially changed the extent to which the regime operates in respect of intermediaries of financial institutions.
Other key inclusions, which financial institutions may wish to focus on when considering the changes made, are that the FEC has:
- added more guidance into the Bill regarding the substance of the fair conduct principle and the requirements of a fair conduct programme;
- replaced the original requirement on financial institutions to publish their conduct programmes with a requirement to provide a copy to the FMA and to publish or otherwise make available a high-level summary;
- amended the scope of the regulations that can be made to regulate incentives;
- extended the implementation periods in order to (i) provide a three, rather than two, year maximum transition period for the Bill to come into force; and (ii) enable the requirement to hold a licence to be phased in over five, rather than four, years;
- inserted a requirement for a review of the conduct regime, including the licensing requirements, to be commenced before the fifth year anniversary of when the Bill comes into force; and
- inserted a power that would enable regulations to exempt certain entities from requiring a licence.
The conduct regime will ultimately still require regulations to support its operation. MBIE has indicated that these regulations will be developed following a further policy and consultation process.
A copy of the Bill as reported back from the FEC can be found here. For those interested in more detail, additional information on a selection of the FEC's changes is set out below.
Intermediary changes
The Bill as introduced, with some exceptions, (i) required intermediaries of financial institutions to comply with the fair conduct principle and the fair conduct programmes of those financial institutions for whom they are intermediaries; and (ii) required financial institutions to ensure that their intermediaries did so. The FEC has removed these requirements and the regime is now more tightly focussed on the obligations of financial institutions (and a great deal less complicated).
Intermediaries do, nevertheless, remain within the regime in some respects. For example,
- financial institutions themselves are required to include in their conduct programmes provisions relating to training, supervision and oversight of intermediaries; and
- the incentives regulation provisions continue to apply to some categories of intermediaries.
Fair Conduct Principle changes
The FEC has inserted into the Bill an expanded list of factors relevant to the fair conduct principle's requirement to treat customers fairly. These factors include, in addition to "paying due regard to consumers' interests" (which was the sole factor specified in the Bill when introduced into the House):
- Acting ethically, transparently, and in good faith;
- Assisting consumers to make informed decisions;
- Ensuring that the relevant services and associated products that the financial institution provides are likely to meet the requirements and objectives of likely consumers; and
- Not subjecting consumers to unfair pressure or tactics or undue influence.
Fair Conduct Programmes changes
Under the Bill, financial institutions are required to operationalise the fair conduct principle through establishing, implementing and maintaining a written fair conduct programme.
Every financial institution must then take all reasonable steps to comply with its conduct programme. In this regard, the FEC has removed wording in the Bill that had said that a breach would occur "even if a failure relates only to one customer". Instead, in its report the FEC has said that: "For a breach to occur, the institution must fail to take all reasonable steps to comply with its programme, regardless of the number of consumers affected."
The FEC has also included more detail about the nature of fair conduct programmes in the Bill, rather than leaving all of the detail to be covered in regulations. The detail added to the Bill includes requiring financial institutions to have effective policies, processes, systems and controls across a wide range of activities. For example, in relation to:
- governance and accountability structures;
- product and service design and maintenance;
- customer communications;
- training;
- oversight, monitoring and quality assurance of the activities of employees, agents and intermediaries;
- issue identification and identification of deficiencies within the conduct programme itself;
- remediation; and
- consequence management.
In addition, the FEC has inserted into the Bill factors that financial institutions must have regard to when considering whether the policies, processes, systems and controls in their conduct programme are effective. These include:
- the nature, size, and complexity of the business;
- the services and products offered;
- the sales channels used;
- the consumers dealt with; and
- the types of intermediaries involved in the provision of its services and products.
Financial institutions and their intermediaries should review the full proposed list of minimum requirements to ensure that those requirements are not overly broad and/or do not otherwise give rise to any interpretation issues.
Availability of fair conduct programmes changes
The Bill as introduced contained an obligation to make their fair conduct programmes publicly available. The FEC has removed this requirement and created a separate obligation to provide the FMA with their conduct programme. Further, a revised obligation has been inserted for financial institutions to make a high-level summary of their conduct programmes available.
While these changes are positive and appear sensible, financial institutions may wish to consider:
- how the obligation to provide the conduct programme to the FMA will overlap with the conduct licensing requirements;
- given the breadth of the minimum requirements for a fair conduct programme, the practicalities of providing the FMA with all relevant written policies, processes, systems and controls that comprise their conduct programme; and
- whether the description in the Bill about what information about a conduct programme needs to be made publicly available is sufficiently clear.
Incentive regulations changes
The Bill requires financial institutions and relevant intermediaries to comply with regulations that regulate incentives. The FEC has made two changes to the powers to make these "incentive regulations" in an attempt to clarify the potential scope of such regulations:
- The FEC has limited the categories of intermediaries to which the incentives regulations apply. The FEC's intention being that the regulations are to only cover intermediaries involved in the chain of distribution for relevant products and services.
- The FEC has added a requirement that the Minister, when considering regulations relating to incentives, must consider whether the matters covered would not more appropriately be dealt with in primary legislation. In this respect, the FEC's report stresses that the regulation making power is not intended to be used to ban all incentives and that, if the Government had intended a total ban on all incentives, it would have been more appropriate to do this through primary legislation.
Again, we recommend further consideration of the drafting adopted in order to ensure that it best captures the intended changes.
Licensing requirements
Against the background that the definition of "financial institution" is broad, the FEC has added the ability for institutions to be exempt from the licensing requirement in respect of a service to the extent that the service is a prescribed exempt service. The FEC recognising that requiring all participants within certain market structures to gain a licence may be an onerous and costly administrative burden. The scope of such exemptions has not yet been detailed.
Please contact one of our experts if you would like to discuss any aspect of the Bill.
This article is intended only to provide a summary of the subject covered. It does not purport to be comprehensive or to provide legal advice. No person should act in reliance on any statement contained in this publication without first obtaining specific professional advice. If you require any advice or further information on the subject matter of this newsletter, please contact the partner/solicitor in the firm who normally advises you, or alternatively contact one of the partners listed below.