News & Thinking
What a new Government means for financial services
“Cutting financial red tape and unlocking the enormous potential of KiwiSaver is part of National’s broader plan to strengthen the economy so we can reduce the cost of living, lift incomes for all and deliver the public services New Zealanders deserve.”
Andrew Bayly’s August 2023 press release sets a lofty goal, and the sentiment behind it is hard to disagree with. However, what does it actually mean, and what can the financial services sector expect from the incoming National-ACT (and potentially New Zealand First) Government? Our financial services partner, Nick Summerfield, shares his predictions.
Conduct law reform
At the Financial Services Council conference in mid-August, Christopher Luxon announced that National would repeal the CoFI Act, which legislates for the pending conduct licensing regime. It was the talk of the conference, with everyone (including me!) pouring over the detail of the speech and speculating on what it might mean.
Since then we haven’t had much clarity on what a roll-back of CoFI might look like, other than a slight softening of the language around repeal. However, National has been clear that it supports good conduct in the financial services sector. This includes how products are designed, how providers engage with their customers, how complaints are addressed, and fees and incentives. This essentially means they support the fair conduct principle at the core of CoFI.
What National doesn’t seem to support is the additional regulatory burden of conduct licensing, and (presumably) the detailed duties that will be imposed by CoFI, which centre on the creation of a fair conduct programme. Neither ACT nor New Zealand First have said anything about CoFI, although ACT did oppose it through the Parliamentary process.
In my view, the National-led Government will back down on National’s initial proposal to fully repeal CoFI, and instead keep the fair conduct principle. This would be a good outcome, and one that I expect the industry will support – all of my financial institution clients support CoFI, and I’ve seen great outcomes from the work done to date. Broad industry support will, in my view, give the new Government justification to retain the fair conduct principle.
This just leaves the question of how the fair conduct principle remains part of New Zealand law without the full CoFI Act. I think it would fit nicely as an expansion of the existing “fair dealing” rules. However, the question then becomes whether it applies only to financial institutions, or to all financial service providers.
Consumer lending laws
It’s generally accepted that 2020 changes to the Credit Contracts and Consumer Finance Act 2003 haven’t worked. They were far too restrictive, and impacted the availability of credit to borrowers across the entire sector. We have all read the anecdotal stories of people denied a mortgage because they watch Netflix, or like UberEats a little too much. Our work in supporting clients through the 2020 changes did see some credit products that are objectively good for customers being withdrawn from the market.
National has promised a Government it leads will fully repeal the 2020 changes, and subsequent regulations, and create a new set of regulations that focus on high cost lenders. I can’t see either ACT or New Zealand First disagreeing. This would build on the changes already made by the previous Government to address the more significant unintended consequences – and it does need to be recognised that other work (including on high cost credit rules and an exemption for emergency events) is already on MBIE’s work programme.
In my view, consumer lending laws are unnecessarily complex. However, I’m not sure it’s as simple as just rolling back the 2020 changes and revisiting high cost lending (which is already subject to some additional restrictions). I think there needs to be a back-to-basics review of consumer lending laws to develop something more appropriate.
Tweaking KiwiSaver, again
National has proposed two headline changes to KiwiSaver.
The single scheme requirement looks set to go, allowing KiwiSaver members to invest across more than one provider. If this proposal goes ahead, it will be a win for smaller KiwiSaver providers and especially those with specialist offerings that could form part of a diversified portfolio. However, it will add a lot of complexity and will make it harder for people to choose the best scheme(s). In turn this will present opportunities for the advice community.
National would also allow people under 30 to withdraw from KiwiSaver to pay rental bonds. National has called this a “common-sense change” but in my view it’s bad policy. KiwiSaver has been designed as a long-term savings scheme and this proposal cuts across it. There would be better ways to achieve the same objective, even within KiwiSaver.
New Zealand First have proposed a range of changes to KiwiSaver, including compulsory membership from age 18, auto-enrolment at birth, and increased Government contributions (which, by contrast, ACT would cap). All would have fiscal implications that in my view make the changes unlikely for now. New Zealand First also supports changes to default investment rules and allowing members with sufficient balances (they haven’t said what “sufficient” is) to withdraw funds to repay their mortgage. I’m not sure either proposal will have widespread support.
What won’t change
In my view, we are unlikely to see significant changes to AML laws. While Andrew Bayly indicated changes are on the agenda, and everyone finds the AML regime a hassle, it largely reflects international expectations. There is also already some limited relief coming, such as around address verification and low risk trusts. I see greater use of electronic verification and other technology as the game changer for AML compliance, not a loosening of AML laws.
I also think we’re unlikely to see significant change to the new financial advice regime, at least for now. A lot of time and effort has gone into establishing the new regime, and while not perfect it seems to be working fairly well overall.
What’s on the horizon
A new Government isn’t going to alter the pace of change in the sector. We will continue to see a need for financial services regulation to respond to new and emerging issues.
In the aftermath of the Kloogh Ponzi scheme it seems likely that we’ll (finally) see the introduction of a licensing regime for custodians. In addition, with crypto assets becoming mainstream I think we can expect to see purpose-built regulation of digital assets. Just this week Australia has announced licensing rules for digital asset platforms, leveraging existing AFSL requirements. New Zealand could do the same.
Finally, and despite what some other commentators have speculated, I think we can expect the Financial Markets Authority’s focus on enforcement to continue – especially in the conduct / fair dealing space.
Get in touch!
Anthony Harper’s internationally recognised banking and financial services team is actively supporting clients across the financial services sector on conduct licensing, fund offerings, consumer lending, and law reform. If you have any questions, or need help with your business, please get in touch with Nick Summerfield.