The Financial Markets (Conduct of Institutions) Amendment Bill took a major (and belated) step forward late last week with the release of the long awaited supplementary order paper (SOP) to amend the Bill.

This progress comes almost two years after Parliament received the Select Committee report on the Bill. Given the time that has gone by, it’s useful to quickly refresh where we have come from.

Background

CoFI is the Government’s response to the 2018/2019 joint Financial Markets Authority and Reserve Bank reviews into conduct and culture in financial institutions. The Bill will require banks, insurers, and non-bank deposit takers to be licensed by the FMA, so they can be held to a high level fair conduct principle. The original Bill was largely consistent with the policy announcements made in September 2019 (see our commentary here).

The August 2020 Select Committee report recommended a range of changes which, taken together, made the Bill more workable than originally proposed, without changing the fundamental nature of the regime (see our commentary here).

However, despite the changes, significant practical concerns remained about how intermediaries would be impacted by CoFI, and how financial institutions would be able to comply with their proposed duties regarding intermediaries.

Resolving the intermediary debate

Extensive consultation (and lobbying) over the last 18 months or so has focused on finding a workable solution to the intermediaries issue. In March 2022, proactively released Cabinet papers provided the Government’s response. The Cabinet papers indicated that financial institutions obligations’ relating to intermediaries would be amended in line with four principles:

1. that financial institutions are responsible for consumers experiencing fair outcomes and being treated fairly, regardless of the distribution channel;
2. that financial institutions’ responsibility for consumer outcomes is ongoing and covers the full product lifecycle;
3. when designing systems and controls to oversee distribution arrangements, financial institutions should take a proportionate risk-based approach; and
4. that financial institutions’ responsibility to oversee third party distribution arrangements is at a general level and not at the individual consumer level.

Overall, the SOP is true to these policy decisions.

As expected, the detailed requirement for intermediaries to follow procedures and processes designed to support compliance with the fair conduct principle has been removed. Requirements around training and supervision of intermediaries (and agents) are also gone. These are replaced with general obligations to ensure distribution methods operate consistently with the fair conduct principle, to keep them under regular review, and to remedy any deficiencies within a reasonable time.

In addition, when considering what policies are effective for this purpose (and for other elements of the fair conduct programme), a financial institution will need to consider the types of intermediaries it deals with and those intermediaries’ other legal obligations. Whether or not intermediaries are licensed financial advice providers is specifically mentioned as a factor. This is a very clear signal that a lesser degree of “involvement” will be expected when distributing through licensed FAPs.

Financial institutions (and intermediaries) should be pleased with these changes. No solution was ever going to please everyone, but we think these changes are a meaningful improvement and that the balance struck is about right overall.

Having said that, one change does concern me. A new regulation-making power will allow regulations to impose processes and procedures that intermediaries need to follow to support compliance with the fair conduct principle. The wording of this power is almost identical to the requirement removed from the Bill. Presumably it was felt that a back-up power is needed, just in case – but in our view this has the potential to undermine the other changes and shouldn’t be included.

Other changes

The SOP contains other changes to the Bill. They include the following:

• A subtle (but in our view important) change that makes it clear that product design expectations apply to likely consumers when viewed as a group (rather than individually).
• A new requirement that identified product enhancements should be made within a reasonable time.
• A specific requirement to have regard to vulnerable consumers when developing a fair conduct programme.
• Confirming the territorial scope of licensing (which, in simple terms, will require overseas financial institutions to take steps to ensure New Zealand consumers cannot access their products and services).
• Removing the requirement to provide fair conduct programmes to the Financial Markets Authority (although this could potentially become a licensing condition or similar).
• Technical changes to accommodate the Lloyd’s insurance market. Lloyd’s underwriters will be exempt from the regime, with Lloyd’s managing agents instead required to comply with fair conduct programme requirements.

There are also a range of minor updates and changes – some to correct minor errors in the drafting, some to make other points clearer, and some that simply reflect the passage of other legislation since the Bill was introduced.

There are no substantive changes to the framework for regulations that will limit incentives. On that point, seeing the regulations is key to understanding the detail.

Next steps

The March Cabinet papers indicated that the intention was for the Bill to become law by mid-2022, and this is broadly consistent with other public statements we have seen. With the SOP now tabled and the Bill approaching the end of the Parliamentary process this timing looks likely to be met.

Once the Bill passes, financial institutions can begin to think a little more about implementation. However, because the Bill only sets out high-level principles there will still be a lot of unknowns. Some of these will be answered by regulations, but FMA guidance will also be critical. It’s pleasing to see FMA already consulting with industry on this topic.

Get in touch!

Anthony Harper has extensive experience in conduct and culture, and are actively supporting clients across the financial services sector on these issues. We also regularly assist clients across all sectors with law reform issues. If you have any questions, or need assistance in your business, please get in touch: nick.summerfield@ah.co.nz or 021 242 7686.