The FMA has opened up consultation on a new Guide to outcomes-focused regulation (‘Guide’). At first glance the guide is not overly controversial: it sets out seven nice-to-have ideals, accompanied by a nice circular diagram, set to a familiar tune. Digging a bit deeper, however, reveals a few mis-chords in the approach.

In this Financial Law Insight we take a look at the FMA’s latest outcomes focused guidance and what it means, if anything, for those disparate participants trying to dance to the FMA’s increasingly frantic regulatory beat.

Another round of consultation

New Zealand’s most prolific regulatory publisher, the FMA, continues to churn out consultation and guidance content. This time the focus is on ‘outcomes’.

Wait, haven’t we been here before?

Indeed!

Conduct and outcomes, risk-based approaches, a focus on harm and the like have been the FMA’s bread and butter since day one. For those facing consultation and guidance fatigue, this new overarching guide is one you do need to tune into.

What’s new, if anything?

As far back as December 2014, the FMA’s first Strategic Risk Outlook set out, as then Chief Executive Rob Everett phrased it, that:

“The greater vision we are working to deliver is increased trust and confidence in our financial markets. This trust and confidence, we believe, will deliver better outcomes for investors, businesses and our economy as a whole.”

That Strategic Risk Outlook talked about seven priorities and covered ‘outcomes’ in relation to governance, investor behaviour, conflicts of interest, information asymmetries, culture, distribution, and sales. All good stuff.

After all, who can argue that conflicts of interest don’t undermine good outcomes? And from an FMA perspective, boards have always had ‘a responsibility to continuously assess culture and conduct against both organisation and customer outcomes’ (again, from the 2015 Outlook).

In 2016, the FMA also embedded an ‘outcomes’ focus in its approach to enforcement, with its Regulatory Response Guidelines setting out that:

“Our monitoring and surveillance work is outcome focused, so we consider whether compliance is achieved and whether the desired outcomes for customers are delivered.”

So is the new Guide just a simple re-release with a few new band members singing the same old song? A repackaging of fairly old ideas; another set of the greatest hits?

For those who have been around for a while, we’ve heard this tune before.

What does the Guide add to the mix?

Even though the FMA has long been banging the drum about outcomes, what the proposed Guide at least does is bring everything together in one easy to digest, streamlined package.

By remixing and fleshing out the various outcomes, the guide provides some new clarity. For those concerned about the uncertainty of what the FMA’s repeated references to having an ‘outcomes focus’ actually means in practice, there is now a clear framework for that concept..

Outcomes have been brought up in the mix, with the FMA stating that fair outcomes, in essence, equate to good conduct.

Risk, as always, will remain a feature – a good outcome does not mean investors will not lose money. Importantly then, fair outcomes do not require participants to insulate investors from risk.

A-sides and B-sides

Breaking down the seven outcomes, we have five consumer focused ones and a couple more related to broader ‘market’ matters.

The general vibe of the consumer outcomes is this:

• Consumers should have access to appropriate products and services that meet their needs – although businesses cannot be forced to provide non-viable products and services. This one seems to be more a description of a utopian market ideal than referencing an obligation for individual businesses, so is something of a cross-over hit
• Good information and disclosure helps decision making – this is the old ‘clear, concise and effective’ classic
• The cost of the product or service should be good value – a more recent hit, this time with a new line about ‘low prices do not always mean fair value’
• Providers need to act in consumers’ interests – another classic. Put simply, where there is a conflict, providers must put the client’s interests ahead of their own
• Consumers receive ongoing care – ideally it is easy for consumers to switch or change products or services, and those consumers must be able to access dispute resolution when necessary.

In market focused matters, the FMA proposes that:

• Markets are trusted – that they are free from manipulation and scams
• Markets promote innovation and growth – with room for new ideas and technology to emerge, hopefully in fairly sustainable ways.

No rules

As the FMA points out, the ‘outcomes’ in the Guide are not rules. That’s good to know.

A frequent criticism of the FMA is that it seems fond of putting out guidance framed as assisting good practice, but worded in quite strident language – essentially framing up law in the guise of guidance. Regulator as legislature.

The Guide at least starts off by stressing that is not the case here. The stated purpose is to introduce what outcomes-focused regulation entails, and the implications of that. Which is laudable, only the seven principles read very much like a new set of rules…

In with the old?

So there are no new rules. But where does that leave the old ones? Presumably existing law still applies.

As the list above sets out, quite a few elements of the ‘outcomes’ are already embedded in, or designed as features of, New Zealand’s financial  markets regime.

Good disclosure, in the required form, underpins everything whilst access to dispute resolution is also key. Fraud and scams are crimes. Likewise for market manipulation and insider trading. This shouldn’t be new, or even news, to anyone.

Mix and match

In practice licensees and participants will need to adopt a bit of a mix and match approach to the application of the ‘outcomes’ to their day-to-day operations.

For banks and insurers, the consumer outcomes potentially impact work under the Financial Markets (Conduct of Institutions) Amendment Act 2022 (‘CoFI’). The CoFI regime allows for self-designed conduct programmes in order for banks and insurers to meet the fair conduct principle, i.e. to treat consumers fairly.

The FMA’s view on a few of these ‘new’ outcomes will need to be factored in – notably in respect of product and service design, incentives, and communications. Ultimately, the new Guide won’t add much in this space given the CoFI requirements are clear. The timing, however, is a little unhelpful given the work already done by many.

For financial advice providers the ‘outcomes’ will need to be matched with duties under the Financial Markets Conduct Act 2013 (‘FMC Act’) and then mixed with obligations under the Code of Conduct for Financial Advice Services (‘Code’). It may simply result in a bit of a repetitive mash-up.

Clients are already required to receive timely advice disclosure, have their interests prioritised, and must understand the nature and scope of service under the FMC Act. When combined with the Code requirements to treat clients fairly, act with integrity, and provide suitable and understandable advice, there’s not much room for anything else. Mashing those duties and standards up with a few of the FMA’s ‘new’ outcomes doesn’t really add much more in the way of substance.

Finally, managers of managed investment schemes (and even providers of discretionary investment management services) may want to cover their ears. If the FMA is looking for a way to really turn the outcomes volume up on them then the old favourite – acting in the best interests of participants or investors – will likely be rolled out again.

What’s a regulator to do?

The FMA is at pains to avoid a ‘tick box’ mentality and the need for technical compliance. But this doesn’t actually reflect what the FMA does in practice.

A large number of FMA actions – from public warnings through to licence suspensions and cancellations – have been taken on purely technical grounds. Whether it be a failure to follow disclosure requirements or collect certain information, the FMA has also been heavily ‘tick box’ focused. What is a monitoring visit if not an exercise in checking that the boxes have been ticked? Outcomes look set to become another box for the FMA to tick. With the Guide now out in the open, a challenge for the FMA will be to demonstrate that its renewed focus on outcomes is forward-looking, and not an exercise in judging with the benefit of hindsight.

So what will the FMA do now when faced with a ‘technical compliance’ failure? What if that technical non-compliance assists with delivering a fairer or more effective outcome for customers? Is there really any need to adhere to disclosure word counts and prescribed structure if that material can be presented in a far better way or via a more compelling medium that aids investor understanding and care? Unlikely! Those rules still apply.

Notwithstanding the Guide and the focus on outcomes, as a regulator, the FMA must still enforce the regulatory requirements. In fact, that is all that can be done.

As the FMA points out: ‘where we see unfair outcomes, we will consider the best use of our toolkit to respond.’ Reading between the lines, what this suggests is that the FMA has yet to readily identify any specific regulatory tools that could be used to enforce its seven ‘fair outcomes’. The tools at its disposal are there to enforce the law as written: but as the FMA repeatedly states, the Guide does not create any new rules...

A vote of no confidence

It appears the FMA is no longer so keen on applying the rules. Is the FMA suggesting a certain regulatory failure – that the law is not adequate or fit for purpose?

There is also a risk that the FMA’s actions continue to undermine trust and confidence in the market and the regulatory regime as a whole. Yet trust and confidence are the very things the regulator is meant to be promoting.

The inference from the Guide is that participants and licensees are all treating, or seeking to treat, customers poorly. And ripping them off to boot. That’s just not the case.

Ultimately, as regulator, the FMA needs to focus on key areas of concern. Those areas where there is most room for harm and bad outcomes to occur. This is primarily the unregulated or under-regulated periphery. Everything from unregistered offshore providers to non compliant wholesale offers.

The FMA has to act to protect the interests not just of consumers but also those licensees and participants who go to the time, effort, and cost to actually be licensed and to comply with their ongoing regulatory obligations. That is also a good outcome.

One size won’t fit all

Let’s take a breath. There’s really no need to fret. Licensees and participants can take the Guide in whatever way they want. Have a listen and assess how the principles are best applied in the context of your business and service offering. Then move on. As the FMA rightly states:

“These fair outcomes are not rules. They do not create, replace or even supplement existing legal obligations”.

In our view, taking the FMA at its word, the Guide is best viewed as an overlay to how market participants should be going about complying with their regulatory obligations. There is no need to start making a new playlist; your existing compliance plan should still play fine.

However, we can certainly see value in applying an outcomes lens if, say, a problem pops up and there are several ways to resolve it. That’s probably where the Guide adds the most value. In that case, the best way to fix the matter will be to adopt the solution that provides the fairest outcome for the consumer. An outcome lens then is a simple means to aid decision making.

Conclusion

Although it won’t be law – and there is no actual regulatory requirement to produce a good or fair outcome for consumers – the Guide will heavily influence how the FMA supervises and monitors your business and services.

Interestingly, there is no Christmas rush for responding to this one. Market participants have until 1 March next year to respond. We encourage all those affected (and that’s every regulated entity!) to make a submission. Let the FMA know what you think – whether you want to comment on the album as a whole and whether the Guide goes beyond the FMA’s genre, or whether you just want to critique individual tracks.

Rate it or not, the Guide and the proposed outcomes have implications for all financial market participants and financial service providers overseen by the FMA.

Start a conversation

If you would like assistance with a submission to the FMA about the proposed fair outcomes guide, or would like to discuss the application of a fair outcomes approach to 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.