2021 Litigation Forecast - Financial services and insurance: Regulator expectations high
Regulatory change continues essentially unabated in the financial services and insurance sector, despite COVID-19. This means sustained litigation risk in the coming years.
The regulators have also sent clear signals that their expectations are high, and that ‘bedding in’ periods are now over in a number of key areas. This is particularly so in the areas of governance and culture, and AML/CFT.
Governance and culture
The Financial Markets Authority’s top strategic priority is governance and culture, and they now expect customer needs to be a constant focus for financial services organisations. Where significant breaches of the rules are identified, or where entities are not addressing the FMA’s recommendations in an appropriate or timely way, they will take “increasingly strong” action as outlined in the September 2020 Supervision Insights Report. Although further legislation is still to come in this area (notably, the Financial Markets (Conduct of Institutions) Amendment (COFI) Bill), there is now sufficient guidance available to the sector such that the FMA considers there are “no excuses” for conduct which causes harm to investors and customers. The FMA also continues to have a keen interest in what is happening with financial services regulation in Australia. We often see requests for information/investigations arising out of events in that jurisdiction. The FMA is also becoming less receptive to settlements out of court where they perceive customer harm has occurred.
The Reserve Bank of New Zealand has similarly indicated it is reviewing its enforcement framework and “increasing the intensity of its supervision”. Greater resourcing of the Reserve Bank, with a new five-year funding agreement, is also likely to result in heightened regulatory oversight. Directors should also take note: increased executive accountability is now planned for incorporation into the planned Deposit Takers Bill expected to be introduced at the end of 2021.
With conduct also a workstream priority for the Council of Financial Regulators, which is set to obtain statutory recognition under the Reserve Bank of New Zealand Bill, the overall picture is one of increased co-operation and co-ordination amongst financial sector regulators. Developments over the last several years mean the financial services sector is now firmly on notice that organisations must ensure they identify and remedy any weaknesses around governance, culture and customer-focus, or they may well find themselves facing regulatory action.
Announcing charges in June 2020 against CLSA Premium, the FMA noted that it was “imperative” for firms to ensure they were compliant with the AML/ CFT regime.
“The regime has been in place since 2013 and CLSAP’s alleged breaches are serious so it is appropriate for the FMA to take a strong regulatory response. CLSAP NZ needs to be held to account and our approach sends an important message of deterrence to the industry.”
Anti-money laundering is another area where regulators’ tolerance for breaches is decreasing.
AML/CFT enforcement activity continued during 2020, including:
- one formal warning and six private warnings reported in April 2020 by the FMA for AML practices;
- civil proceedings filed by the FMA against brokering and financial advice firm CLSA Premium in June 2020;
- civil penalties totalling NZD7.585 million imposed against two money remitters in proceedings brought by the DIA;
- two banks’ compliance with the AML/ CFT Act referred to enforcement by the Reserve Bank as at November 2020, with prescribed transaction reporting continuing to be a focus area; and
- the first criminal sanctions imposed in the case of Jiaxin Finance Limited. For Jiaxin Finance, as well as a NZD2.55 million fine for the company, the High Court considered it important for deterrence reasons to impose fines (of NZD180,000 and NZD202,000) on the two individuals responsible for the company’s conduct. The offending in Jiaxin occurred at a relatively early stage in the AML/CFT regime when there was some “confusion in the marketplace” about the obligations, and the fine imposed was less than that in two previous civil penalty cases.
However, with the AML/CFT regime now fully implemented, companies should expect both a greater likelihood of regulatory enforcement action and stiffer penalties where there is deliberate non-compliance. That is particularly so given the Financial Action Task Force (FATF) report on New Zealand’s AML practices due in early 2021, which is expected to identify further areas for improvement. The record AUD1.3 billion fine agreed in September 2020 between Westpac Banking Corp and the Australian regulator AUSTRAC for failures to report international transactions and insufficient monitoring of customers making suspicious transactions underlines the seriousness with which regulators worldwide are taking AML/ CFT compliance. New Zealand reporting entities should take notice.
Insurance sector reforms have been slower to materialise than anticipated, although in late 2020 the Insurance (Prudential Supervision) Act 2010 (IPSA) review was relaunched and will continue in parallel with a review of insurer solvency standards. The MBIE Insurance Contract Law review appears to be ongoing, with an exposure draft Bill for consultation now scheduled for release for consultation in mid-2021.
Insurance sector reforms have been slower to materialise than anticipated.
Complementing these intended reforms, the Insurance Council of New Zealand (ICNZ) launched its updated Fair Insurance Code in April 2020. This sets out industry best-practice standards for ICNZ members, placing broad new duties on insurers and strengthening compliance mechanisms. Despite the delays to the COFI Bill and Insurance Contract Law review, the trend is inexorably towards increased requirements on insurers to better serve customer needs and monitor and remedy any breaches.
Anticipated key legislative developments for 2021
- Financial Services Legislation Amendment Act 2019 (and supporting disclosure regulations) new start date of 15 March 2021
- Passage of Reserve Bank of New Zealand Bill in second half of 2021
- Introduction of a Deposit Takers Bill (consultation draft and bill in third quarter of 2021)
- Passage of Financial Markets (Conduct of Institutions) Amendment Bill – currently awaiting second reading
- (Potentially) an Insurance Contract Law Review exposure draft Bill by mid-2021