The Financial Markets (Conduct of Institutions) Amendment Act 2022 (‘Act’) finally received Royal assent on 29 June 2022, establishing a long-awaited conduct licensing regime for banks, insurers and deposit takers operating in New Zealand (‘CoFI regime’). 

Shortly before passing the stalled reforms into law, Parliament published a Supplementary Order Paper (‘SOP’) making last minute amendments to the Act, giving effect to Cabinet decisions made earlier in the year. A copy of the SOP can be found here. 

In this Financial Law Insight we look at the key changes the SOP made to the final form of the Act and what they mean for New Zealand banks, insurers, deposit takers and their intermediaries. 

Background

The introduction of the CoFI regime follows the FMA and RBNZ’s joint review into the conduct and culture of banks and insurers in New Zealand, which in turn was prompted by the Australian Royal Commission’s review of Misconduct in the Banking, Superannuation and Financial Services Industry. With the Act now in force (well, the regulation-making bits at least), financial institutions and their intermediaries need to get to grips with the consumer focus of the new CoFI regime and its implications for the way they conduct their business.

The Act’s requirement for fair conduct programmes aims to ensure customers are well served by their banks and insurers, that the products and policies they buy are well designed, meet their needs, and that their banks and insurers continue to check that those products and policies remain ‘fit for purpose’. This, of course, overlays existing commercial and reputational imperatives to do so.

As FMA CEO Samantha Barrass recently commented, “it is critical that consumers get the financial products and services they need throughout their life and receive fair treatment in all their dealings with financial institutions.” Ensuring that occurs is the key to the Act. The FMA has also signaled that it expects the industry to approach compliance with the CoFI regime as more than a mere tick box exercise. 

Fair conduct programme requirements

The SOP has removed the requirement for intermediaries and agents to be subject to any training, managing or supervision obligations under a financial institution’s fair conduct programme. The change means it is only the employees of financial institutions who need to meet these requirements.

Financial institutions must also ensure employees (but not agents or intermediaries) undertake initial and regular ongoing training in respect of the products and services they work on and the institution’s fair conduct programme. Financial institutions must also make sure their employees have a reasonable understanding of the matters covered in the completed training.

This change removes the need for financial institutions to have training and management or supervision plans in place for everyone they engage. Prior to the SOP, the requirement was for financial institutions to train and manage or supervise intermediaries. It is pleasing to see Parliament formalise its recognition that this was far too wide. This more sensible approach reduces the cost and risk posed in respect of third parties engaged by institutions.

Intermediary definition

The definition of ‘intermediary’ has been significantly narrowed. The term now omits preparatory services or assistance in administering or performing the institution’s services. The focus of the definition is now on a person who arranges a contract for a service or acquisition of a product from a financial institution, as well as a person who gives regulated financial advice about a financial institution’s products.

The ‘intermediary’ definition has also been amended where the person is itself a financial institution. In this case, the definition is broadened to include situations where commission or consideration is being paid by any provider of a service or product (not just a financial institution). The example used in the Act is that of a bank signing customers up to another entity’s KiwiSaver scheme. If the bank is paid a commission for customers signing up, then the bank will be an intermediary. 

Overall, these changes materially narrow the concept of intermediary to a more logical scope, and provide useful clarification as to exactly what an intermediary is. In particular, the limitation ensures third party professionals engaged by financial institutions such as lawyers, doctors and plain English writers fall outside the scope of what is considered an intermediary. 

As a consequence, ‘intermediary’ is no longer considered a key definition for the CoFI regime and has been repositioned within the Act. This is more than just a cosmetic change. We get it, but we don’t think shuffling the cards as has been done is helpful in the context of a new piece of legislation that is already very challenging to follow. Intermediaries still have significant obligations under the Act. In our view, how they are defined remains a key element in determining the scope of the CoFI regime and should not have been pushed back to appear after an ‘other definitions’ heading, exacerbating the game of hide and seek that must be undertaken when trying to interpret the Financial Markets Conduct Act.

Compliance with procedures and processes

The requirement for intermediaries to follow procedures or processes to support a financial institution’s compliance with the fair conduct principle has been removed. Instead, the obligation now only applies to agents and employees of a financial institution.

However, the Act does allow for regulations to be made imposing requirements on intermediaries and agents in connection with fair conduct programmes and the fair conduct principle.

It remains to be seen how this change will work in practice, and proposed Regulations in this regard have yet to be publicly circulated. 

From a financial institution’s perspective, they are still required to consider the types of intermediaries they engage and the methods by which their services and products are provided to customers, as well as reviewing those distribution methods. Regulations (and regulator guidance) are likely to play an important role in further clarifying expectations of institution intermediary relationships. It is inevitable that financial institutions will need to enforce some level of effective oversight of their intermediaries’ conduct, even if those intermediaries do not strictly need to follow an institution’s fair conduct programme.

Vulnerable customers

As previously drafted, financial institutions were required to have regard to the type of consumers the institution deals with. The Act adds an express requirement for financial institutions to consider consumers who are in vulnerable circumstances. This concept has been well versed of late, with the requirements foreshadowed in the Consumer Vulnerability Framework published by the Council of Financial Regulators earlier this year.

The CoFI regime aims to facilitate 'fair’ consumer outcomes, so consideration of a consumer’s specific circumstances mean financial institutions will need to avoid one-size-fits-all approaches in dealings with customers. Putting this requirement into practice will require, at the very least, focused training and processes for front line staff. Such a requirement means those staff that interact daily with customers will need to be ready to have nuanced and sensitive conversations with customers to tease out any potential vulnerabilities (without compounding those vulnerabilities).

No requirement to provide the FMA a copy of fair conduct programme

The Act, as passed, no longer requires financial institutions to provide copies of their fair conduct programmes to the FMA. Nor are they required to engage with the FMA when a material change is made to their fair conduct programme. 

This change was likely at the behest of the FMA. If the FMA were provided copies of every programme (and subsequent material change) then there might have been an implied approval of that programme or change regardless of whether the FMA had actually reviewed the document. We think that where the Act has landed on this aspect is a good outcome for all concerned.

Lloyd’s underwriters

Lloyd’s underwriters will now be exempt from the requirement to hold a license. Despite the licensing exemption, Lloyd’s managing agents, rather than Lloyd’s underwriters, will be required to comply with fair conduct programme requirements. Regulations can prescribe further requirements for a managing agent’s programme and the need to make information publicly available. 

Lloyd’s managing agents will now be classed ‘financial markets participants’ under the Financial Markets Authority Act 2011. Lloyd’s managing agents may also be required to pay a levy to the FMA.

Exempting Lloyd’s underwriters from the need to be licensed reflects the position that these underwriting entities do not have direct consumer-facing insurance businesses, and is a welcome narrowing of the scope of the CoFI regime. 

Other amendments

The SOP made several other minor changes to the final form of the Act. The territorial scope of the CoFI regime (to be contained in subpart 6A of Part 6 of the Financial Markets Conduct Act) has been clarified, to only apply to relevant services and associated products provided to consumers in New Zealand. 

Obligations around designing and managing the provision of services and products have been strengthened. There is now a requirement for financial institutions to ensure distribution methods are consistent with the overarching fair conduct principle.

Financial institutions must also have regard to the legal obligations of the intermediaries they engage (and not just the types of intermediary and the nature of their involvement, as had previously been proposed), as well as the types of agent they engage and the nature and extent of their work and of their authority to carry out work (which is new).

Concluding thoughts

The final form of the Act is here. The CoFI regime will slowly come into force over the next few years. The FMA has signaled that licensing applications will be accepted from mid-2023. The full regime is expected to be in force by early 2025. Institutions need to get moving to develop fair conduct programmes and work through the FMA’s licensing process and requirements. The development of new products and services and documenting arrangements with intermediaries can now proceed with the benefit of the scope of the new regime being finalised. This removes much of the uncertainty that has hampered the sector since the Bill was first introduced way back before the COVID-19 pandemic and lockdowns became a thing.  

The minimum requirements for fair conduct programmes are extensive. Financial institutions need to take stock of their existing policies and processes to consider which ones will remain ‘fit for purpose’. Many policies will require expansion or revision. A number of additional systems, policies, processes and controls will need to be built from scratch to meet the ‘minimum requirement’ threshold. 

The one key piece of the CoFI regime jigsaw that remains missing at this stage is the precise extent of the upcoming prohibition on value or volume sales target-based incentives. While Cabinet has confirmed its commitment to enforce such a prohibition, we must await draft Regulations later this year to assess the practical implications for commission and other incentive arrangements. That is more than a little frustrating for those trying to future-proof the terms of their distribution channel remuneration arrangements. Hopefully we will get some clarity soon, and we remain hopeful that the regulatory prohibition will be pragmatically couched to permit incentive arrangements that support good customer outcomes and good customer support practices and advice processes. 

The FMA will no doubt assist with licensing guidance and exemplars of what ‘good’ actually looks like in the context of the fair conduct principle and accompanying programmes, and early noises from the regulator in that regard are encouraging. As the FMA has mentioned before, the standard it is looking for is ‘good conduct’ rather than just ‘fair’. A regulatory expectation that licensed institutions exceed bare minimum requirements has been set. 

The FMA has signaled it is looking to work with industry on implementing the CoFI regime. Market participants are encouraged to take every opportunity presented to engage with the regulator to help shape the regime as it comes increasingly into focus. 

Start a conversation

If you would like assistance with navigating the CoFI Act, or would like to discuss any aspect of the CoFI regime and its implications for your business, please contact Catriona Grover on +64 4 498 0816, David Ireland on +64 4 498 0840, Mark Schroder on +64 9 375 1120, or email the team at bankingandfinancialmarkets.nz@dentons.com.