On 7 August 2020, the Finance and Expenditure Committee (FEC) reported its findings on the Financial Markets (Conduct of Institutions) Amendment Bill (CoFI) to Parliament. The FEC summarised a number of amendments to CoFI based on submissions received during the Select Committee stage, including clarifying certain aspects of CoFI and reducing the extent to which the relevant obligations will apply to intermediaries.
See here for a copy of the FEC’s report (which includes the relevant amendments to CoFI).
For more background on CoFI, please see our previous articles:
- Regulatory update, including the Conduct of Financial Institutions Bill
- Conduct of Financial Institutions Bill receives first reading
- Conduct of Financial Institutions Bill introduced
- Conduct of Financial Institutions: MBIE releases new discussion paper
Who needs to read it?
CoFI is intended to cover registered banks, licensed insurers, and licensed non-bank deposit takers, and to apply broadly to relevant services and associated products provided by those specified financial institutions (including financial businesses and intermediaries who deal with them).
What does it cover?
The main changes to CoFI can be split into the following headings:
Clarifying the fair conduct principle
- Without limiting the concept of “fairness”, the FEC has recommended inserting a non-exhaustive list of factors relevant to the requirement to treat consumers fairly (see clause 9 of CoFI, new section 446B of the Financial Markets Conduct Act 2013 (FMCA)). In addition to existing requirements for institutions to pay due regard to the interests of their consumers, the list specifies other factors including:
- acting ethically, transparently, and in good faith;
- assisting consumers to make informed decisions; and
- not subjecting consumers to unfair pressure or tactics or undue influence.
Content of the fair conduct programmes
- While recognising the need for flexibility in the regime, the FEC suggests including the key content requirements for fair conduct programmes in CoFI (given the content will be a key component of the CoFI regime) (see clause 9 of CoFI, new section 446M of the FMCA). Regulations would instead be used to add any necessary additional requirements or provide further details.
- As such, drawing on matters previously only listed in regulation-making powers and the findings of regulators’ conduct and culture reviews, specific requirements have been inserted in CoFI relating to:
- designing and managing the provision of products and services (including regularly reviewing and making improvements to those products and services);
- identifying, monitoring, and managing conduct risks;
- remediating conduct issues; and
- managing or supervising employees, agents and intermediaries (including providing training, setting conduct expectations, dealing with misconduct, and monitoring consumer outcomes).
Availability of fair conduct programmes
- Addressing submitters’ concerns on the duty to make fair conduct programmes publicly available (because they could contain commercially sensitive information), the FEC recommends amending clause 9 of CoFI, new section 446H of the FMCA, to require financial institutions to provide their fair conduct programme to the Financial Markets Authority. The FEC also inserted a new section 446HA to require financial institutions to make a high-level summary of their fair conduct programmes publicly available. That way, consumers will be provided with some general information regarding how the financial institution will comply with the fair conduct principle, be able to make informed decisions in dealings and interactions with the institution, and assess the conduct of the financial institution against this standard and make a complaint.
Clarifying threshold for non-compliance with fair conduct programmes
- Though it is important for CoFI to apply in respect of individual consumers, the current threshold for contravening the duty for a financial institution to comply with its fair conduct programme is very low.
- The FEC recommended deleting section 446I(3) noting that it would not affect the intent of CoFI. This amendment will mean that non-compliance with the fair conduct programme will be determined by a financial institution failing to take all reasonable steps to comply, as opposed to the number of consumers affected.
Reducing the extent obligations apply to intermediaries
- Submissions expressed concerns for intermediaries being required to comply with multiple conduct programmes, thereby resulting in high compliance cost and potentially limiting access to their services.
- The FEC’s amendments provide for clearer requirements on financial institutions in new section 446M, including the training and supervision of intermediaries (see new section 446M(1)(b), (bb), (bc) and (bd)).
Incentives
- The bill as introduced enabled the Minister, through regulations, potentially to ban the use of incentives. This raised concerns with submitters that their revenue could be negatively affected and restrict the availability of financial advice.
- In response, the FEC recommended a list of matters for the Minister to have regard to before recommending a regulation or prohibition of incentives (see new section 546(5) of the FMCA, clause 16(4) of CoFI).
- The amendments also narrow the range of intermediaries to which the power to regulate or prohibit incentives can apply, by limiting it to intermediaries involved in the chain of distribution, such as sales and advice (see new section 546(4) in clause 16(4) of CoFI).
Future-proofing CoFI
Commencement of the regime
- The FEC recommends amending clause 2 of CoFI to extend the potential transition period from 2 years to 3 years. This would enable the Government to further consult on and develop supporting regulations as well as giving the industry time to prepare for CoFI.
Statutory review of the regime
- Clause 9 of CoFI will be amended to insert a new section 446X, setting out a mechanism to review how the conduct regime is operating and interacting with other parts of financial markets regulation and address any issues that arise.
Exemptions from obligations in CoFI
- The present definition of “licensed insurer” could capture a broad range of participants with varying market structures. To avoid all participants potentially being subject to an onerous and costly administrative burden, CoFI will be changed to allow a regulation-making power to exempt specified types of financial institutions from the requirement to hold a licence (see clause 6A, new section 389(4) of the FMCA and clause 16(1AA), new section 546(1)(c)(b) of the FMCA).
CoFI remains on standby as it awaits its second reading. The timing of when CoFI will go through the Committee of the Whole House and third reading will be confirmed after the general election (19 September 2020). Based on the first reading debate, indications are that CoFI is supported by the member parties of the current Coalition Government (Labour Party, New Zealand First, Green Party) but may be opposed by the Opposition.
Our view
CoFI, as introduced initially, lacked clarity on some important aspects, and appeared to rely overly on regulation making powers.
We believe the amendments as reported by the FEC address some of the concerns noted above by inserting mechanisms to narrow and clarify the applicability of some provisions to participants, remove certain obligations that would result in cumbersome compliance costs (i.e. in relation to intermediaries and financial institutions’ supervision of intermediaries), and provide certainty by including certain key requirements in the body of CoFI (as opposed to relying on the Minister’s regulation making power).
The FEC has also resisted the proposal by a number of submitters to extend the regime beyond its current targets. Licensed fund managers, for example, remain excluded.
What next?
If you have any questions in relation to how these recommended amendments to CoFI may affect you, please contact one of our experts.
