2019 has shaped up to the promised year of "delivery" for Minister Faafoi in terms of new financial services regulation, backed up by hardworking teams at the Ministry of Business, Innovation and Employment. The key events this week being:
- the third reading yesterday of the Credit Contracts Legislation Amendment Bill (see our earlier update on that bill here); and
- the introduction into the House of the Financial Markets (Conduct of Institutions) Amendment Bill.
As we head into 2020, there is no question that financial services regulation is becoming more, rather than less, complex. Hopefully, next year does, however, allow time for continuing reflection on the ideal end state for the current web of financial regulation and the roles of different regulators within that.
The Financial Markets (Conduct of Institutions) Amendment Bill
The Financial Markets (Conduct of Institutions) Amendment Bill (Bill) provides the framework for the new conduct regime for banks, insurers, non-bank deposit takers (NBDTs) and their intermediaries, which will be overseen by the Financial Markets Authority (FMA). The framework will primary be implemented through amendments to the Financial Markets Conduct Act 2013 (FMCA).
More detail about the regime will emerge from regulations that are yet to be released. However, as it stands, the regime outlined in the Bill is uniquely complex given the extent to which it needs to account for:
- existing conduct-related legislation (for example, in the Credit Contracts and Consumer Finance Act 2003 (CCCFA) and in the new financial advisors provisions within the FMCA);
- the current regulatory remit and oversight of the Reserve Bank of New Zealand (RBNZ) and the Commerce Commission in relation to aspects of the operations and conduct of financial institutions; and
- the inter-relationships of (and so the potential for overlapping obligations on) a range of financial institutions and their intermediaries when delivering products and services to customers.
Whether the Bill has struck the right balance on these aspects will require further scrutiny, including to ensure that the key purpose of the new regime - a focus on good customer outcomes - does not become lost.
In terms of timing, the Bill is expected to have its first reading in early 2020 and will then be referred to Select Committee. The Bill anticipates a staged implementation of the new regime with potential deferred commencement of some new obligations up to two years after the date of Royal Assent.
At this stage, there are six key aspects of the Bill to note. Financial institutions and intermediaries should, however, undertake a more detailed review of the Bill itself.
1. Introduction of new licensing requirement
The Bill creates a new licensing requirement under the FMCA for financial institutions (registered banks, licensed insurers and licensed NBDTs) who are undertaking "relevant services". Relevant services are defined in the Bill with a focus on the provision of financial products and services to consumers/retail customers. For example, relevant products under the regime include consumer credit contracts, credit related insurance and "consumer insurance contracts".
While the FMA is the relevant supervisor of this new licensing regime, given financial system soundness and efficiency considerations, the Bill provides that the FMA must not suspend or cancel a licence unless the RBNZ has given its consent.
2. Introduction of a "fair conduct principle"
The Bill describes a new "fair conduct principle" which is that a financial institution (and any intermediary) "must treat consumers fairly, including by paying due regard to their interests". For a financial institution, the fair conduct principle will apply when it:
- is designing any relevant service or any associated product; or
- offers to provide any of those services or products to a consumer; or
- provides any of those services or products to a consumer; or
- has any dealings or interactions with a consumer in connection with any of those services or products (for example, responding to a complaint or handling a claim under an insurance contract).
For intermediaries, the principle will apply when the intermediary is involved in the provision of any relevant service or an associated product to a consumer. Intermediaries are defined as any persons involved in the provision of a relevant service or an associate product and who are paid or provided a commission or other consideration directly or indirectly by the financial institution or by another relevant intermediary of the financial institution.
Unlike in some other jurisdictions, however, the fair conduct principle is not itself a duty - a breach of which can lead to enforcement action. Instead, the fair conduct principle is linked to new duties on financial institutions and intermediaries concerning "fair conduct programmes".
3. New duties in respect of fair conduct programmes
The Bill contains four new duties regarding fair conduct programmes:
- Firstly, each financial institution must establish, implement and maintain an effective fair conduct programme. That programme must be in writing and include effective policies, processes, systems, and controls, including for:
- enabling the financial institution to meet all of its obligations to consumers, including under the FMCA, the Fair Trading Act 1986, the CCCFA, the Consumer Guarantees Act 1993, and the Financial Services Providers (Registration and Dispute Resolution) Act 2008;
- requiring its employees and intermediaries to follow procedures or policies that support the financial institution's compliance with the fair conduct principle;
- reviewing and systematically identifying deficiencies in the effectiveness of the programme and ensuring any deficiencies are promptly remedied;
- meet any other obligations yet to be prescribed in regulations.
- Secondly, financial institutions and relevant intermediaries must take all reasonable steps to comply with financial institutions' fair conduct programmes.
- Thirdly, unless an intermediary is itself a financial institution, financial institutions must take all reasonable steps to ensure that every relevant intermediary complies with the duties imposed on intermediaries under the financial institution's fair conduct programme and otherwise acts in a manner that supports the financial institution's compliance with the fair conduct principle. Carve outs in relation to this duty also apply in respect of an intermediary that is a financial advice provider.
- Fourthly, and potentially more contentiously, every financial institution must ensure that a copy of its current fair conduct programme and a copy of any material changes to the programme are available for public inspection at its New Zealand head office and are published on the internet. This proposed duty is one which financial institutions may wish to consider further, given we would expect that financial institutions' current policies, processes, systems, and controls are not created with a view to be customer-facing documents but, rather, logically are operational documents for internal use only. We also query whether there is a risk that the public facing nature of this duty will lead institutions to adopt such high level statements of their fair conduct programmes that these may not aid the Government's overall goals.
4. Duties relating to incentives regulations:
The Bill provides that regulations regarding incentives will be made and will need to be complied with by both financial institutions and intermediaries. There is no detail yet as to the content of these regulations. "Incentives" is, however, widely defined and so financial institutions and intermediaries should be ready to review these regulations upon release. For example, the incentive definition includes any commission, benefit or other incentive:
- to natural persons engaged by financial institutions and intermediaries and those between entities; and
- which are calculated by reference (directly or indirectly) to the volume or value of the services or products provided. (For example, this is said to include on a purely linear basis, eg, on a per service or per product basis).
5. New whistleblower protections:
The Bill introduces a protection to employees and agents of financial institutions and intermediaries who, in good faith, report to the FMA a contravention of the FMCA (ie, not just the new provisions in the Bill) or of the fair conduct principle.
6. Penalties and other enforcement provisions:
The new duties in the Bill are to be enforced as civil liability provisions under the FMCA. This means, for example, that compensatory orders and pecuniary penalties will be available in addition to the FMA having other options such as being able to give direction orders. In respect of pecuniary penalties and enforcement more generally, given the intersection of the Bill with other legislative regimes, there are also provisions seeking to avoid double up in actions and remedies and to ensure co-operation between regulators, particularly the FMA and the Commerce Commission.
Please get in contact if you would like to discuss the Bill further with us.