On 31 January 2024 the new Minister of Commerce and Consumer Affairs, Andrew Bayly, announced a number of planned reforms for financial services regulation.

On the hit list is the Conduct of Financial Institution (‘CoFI’) reforms – but not the full repeal the Minister had promised before coming into power. Instead, a more nuanced reform strategy is being implemented, with implications for all market services licensees. 

In this Financial Law Insight, we unpack what is being proposed, and consider how licensees should respond.

Reducing barriers for financial services

The theme of the proposed reforms is ensuring clarity and cutting red tape. The stated objective is to address aspects of financial market conduct regulation and areas of overlap and duplication, in addition to simplifying licensing requirements. 

How is this going to be achieved? 

Recognising the considerable investment that larger financial institutions, in particular, have already made in progressing their conduct licensing and developing fair conduct programmes, the Minister has abandoned previous plans to repeal the CoFI regime and conduct licences altogether. Instead, he referenced ‘grandfathering’ conduct licences. He has also directed the FMA to produce guidance for smaller financial institutions to ensure that their fair conduct programmes and conduct licence applications are right-sized. 

In response, FMA Chief Executive Samantha Barrass confirmed that the content of fair conduct programmes was the responsibility of individual financial institutions. That content is expected to be appropriately tailored.

The FMA will not be reviewing the content of fair conduct programmes line-by-line, nor providing sign off on them. It is a matter for each financial institution to take responsibility for designing a programme that is right for them. 

The Minister has put the onus on the FMA to provide clear guidance as to the minimum requirements to ensure fair conduct programmes are sufficiently developed. This is somewhat surprising, given the extent of industry engagement to date and material already produced by the FMA in this context. Nevertheless, we can look forward to yet more guidance in this space, with the expected emphasis this time around on smaller financial institutions and what they should be including in their fair conduct programmes. 

What does this mean for conduct licence applications?

The message for ‘larger’ financial institutions seems clear. Continue on your current path. You will still need a licence by March 2025, and what you have done to date will not need to be reworked. 

‘Smaller’ financial institutions, however, now have some added uncertainty. The clear message is that there is a different expectation on them, but any changes for them will be driven by FMA guidance, as opposed to changes in regulation. The main takeaway for those who regard themselves as ‘smaller’ financial institutions is to avoid overcooking their fair conduct programmes. While the horse may well have bolted for many, what we expect to see coming up is a more streamlined licence application process for those smaller financial institutions. 

Does that mean that those who have yet to apply for their conduct licence should defer further work on their application and fair conduct programme? We think not. While the Minister indicated there will be further developments within ‘a couple of months’, the timeframe is too tight for prospective conduct licensees to simply down tools. 

What now is certain is that all those within the scope of the CoFI reforms will still need a conduct licence by March 2025. It’s just a case of reduced engineering being required by some. In other words, the uncertainty generated by the Minister’s pre-election comments about a proposed repeal of the CoFI reforms has now been removed. 

Licence consolidation

In his speech, the Minister also highlighted concerns about the excessive layering of regulation and legislation. The fact that many financial service providers need multiple market services licences came in for particular criticism. 

The solution? A consolidation of licences is in the offing. Sort of a ‘one licence to rule them all’ scenario. 

How we think this will play out in practice is that existing licensees may end up being issued with a single ‘conduct licence’ with a set of standard conditions applicable to all services – compliance assurance, governance, records, business continuity and the like. Additional specific conditions would be imposed to address the particular types of financial services the licensee is licensed to provide, such as a bank being able to provide financial advice, derivatives, and managed investments alongside day-to-day banking services.

As a concept, we like it. This approach will address a concern we have repeatedly raised in relation to duplication and inconsistency of licence conditions addressing similar issues.

The timeline for this consolidation has yet to be announced; presumably once the dust has settled on the current conduct licences under the CoFI regime.

The concerns? First, there will inevitably be another round of upheaval for all as we move to a new consolidated licence system.

Second, and more fundamentally, this is the opening for CoFI fair conduct obligations to be rolled out across the entire market services licensee population. While this will help ensure consistency for consumers in their dealings with financial service providers, it raises the spectre of all licensees having a regulatory obligation to develop a fair conduct programme.

One thing seems clear from the Minister’s announcements: despite the new Government’s objective of reducing red tape, the years of tinkering with financial services regulation are set to continue for a while longer.   

Start a conversation 

If you would like to discuss any aspect of the CoFI regime or the Minister’s announcements and their implications for your business, or would like assistance with a licence application or developing a fair conduct programme, please contact Catriona Grover on +64 4 498 0816, David Ireland on +64 4 498 0840, Liz Lim on +64 9 909 6341 or Mark Schroder on +64 9 375 1120 or email the team at bankingandfinancialmarkets.nz@dentons.com.