CoFI regulations issued

  • Legal update

    20 June 2023

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This month, a significant milestone was reached with the enactment of the Financial Markets (Conduct of Institutions) Amendment Regulations 2023, and the Financial Markets Conduct (Fees) Amendment Regulations 2023 (together, the Amendment Regulations). These regulations amend the Financial Markets Conduct Regulations 2014 (FMC Regulations) and the Financial Markets Conduct (Fees) Regulations 2014 respectively.

Links are available to the Financial Markets Conduct (Conduct of Institutions) Amendment Regulations 2023 (Amendment Regulations), the Financial Markets Conduct (Fees) Amendment Regulations 2023, and MBIE’s information webpage.

Who needs to read it? Why?

The CoFI regime will come into force on 31 March 2025, but the FMA will start accepting applications for licences from 25 July 2023.

The Amendment Regulations are relevant to those financial institutions (registered banks, licensed insurers, and licensed non-bank deposit takers) and the intermediaries covered by the new conduct regime that use sales incentives as part of the operation of their business. These incentives will need to be checked for compliance with the Amendment Regulations - and restructured or removed if they are not permitted. 

What does it cover?

Under these Amendment Regulations, financial institutions and intermediaries will be prohibited from offering sales incentives based on volume or value targets to any customer-facing employees and their immediate managers, and to their agents and intermediaries.

In the Amendment Regulations, examples are provided of what a ‘prohibited incentive’ versus a ‘non-prohibited incentive’ might look like in practice. The Amendment Regulations put into effect previous Cabinet decisions made around the prohibition of volume or value-based incentives because of the conflict of interest these incentives create between the consumer and the person potentially eligible to receive the incentive. For our previous news alert on the proposed regulation of sales incentives under CoFI, click here.

Other matters covered by the Amendment Regulations include:

  • calling in contracts of insurance as financial products under the ‘fair dealing’ provisions in Part 2 of the Financial Markets Conduct Act 2013;
  • ensuring the regime works for the unique structure of the Lloyd’s insurance market, so consumers buying insurance policies from Lloyd’s can expect the same fair treatment as they would from conventional insurers; and
  • excluding services offered to controlled entities of wholesale clients from the conduct regime, given that these entities do not require its protections.

The Financial Markets Conduct (Fees) Amendment Regulations 2023 prescribes a fee of $1024.93 (including GST) for an application for a market services licence to act as a financial institution. An additional amount is charged for each entity that will provide services under the licence as an authorised body.

Our view

The release of these Amendment Regulations gives more clarity to financial institutions and intermediaries that offer sales incentives as they outline those incentives will be prohibited under the new conduct regime. 

Regulation 237E of the Amended Regulations gives more detail, including helpful examples, of what is (and what is not) a ‘prohibited incentive’. Details of the examples are set out below.

Examples of a prohibited incentive
  • The employee of a life insurer is offered a $1,000 bonus for selling at least 100 life policies in a 3-month period. The bonus is a prohibited incentive because the employee’s entitlement to the bonus is determined by way of a direct reference to a sales target.
  • An employee (A) receives an annual bonus calculated on a sliding scale. The bonus is calculated as the aggregate of 0.5% of A’s base salary for the first $10 million in customer funds invested in a particular product based on A’s recommendations, 0.75% for amounts over $10 million, and 1.00% for amounts over $20 million. The bonus is a prohibited incentive because it is determined by reference to thresholds directly referencing the volume of the relevant services or associated products sold.
Examples of an incentive that is not prohibited
  • An employee (A) is paid a commission for each insurance contract that A arranges, calculated as 5% of the first year’s premium for the contract. The percentage does not depend on any target or threshold (that is, the percentage does not change based on the volume or value of contracts). The incentive is not prohibited because it is determined or calculated on a linear basis only (that is, on a per service or per product basis as a fixed percentage of the premium).
  • An employee (A) of an intermediary receives 5% of transaction income generated if A generates over $100,000 of transaction income from wholesale clients in a three month period. The transaction income includes income generated from financial products issued by financial institutions. The incentive is not prohibited because it does not in any way relate to transaction income from retail clients.
  • An employee of a financial advice provider has a base salary of $50,000. In addition, the employee receives a commission of 5% of every dollar’s worth of all sales in a quarter if the employee hits a target of $100,000 in a quarter. The $100,000 target is the only target that relates to the volume or value of the relevant services or associated products. The employee’s sales for a quarter are $200,000. The commission is $10,000 (5% of $200,000). The commission is not a prohibited incentive.

While helpful, the examples only deal with elementary remuneration models. The challenge will lie with those remuneration models that don’t fit neatly into the scope of the examples given. Care will need to be taken when considering the compliance of potentially more sophisticated remuneration models against the Amended Regulations.

What next?

The FMA will start accepting applications for CoFI licences from 25 July 2023. The CoFI regime comes into force on 31 March 2025, so licenses will be required from that date. 

See our newsletter here for one of the key steps financial institutions should be taking now to get ready to file their license applications: preparing their fair conduct programme.  

If you have any questions in relation to how the Amendment Regulations or CoFI generally may apply to your business, please contact one of our experts.


This article was co-authored by Elise Plunket, a solicitor in our Financial Services team.