Further developments on the CoFI Bill
Yesterday, the Ministry of Business, Innovation and Employment (MBIE) published further policy decisions to implement regulations in relation to the Financial Markets (Conduct of Institutions) Amendment Bill (CoFI Bill). The changes will be incorporated into a Supplementary Order Paper (SOP), which will amend the CoFI Bill.
The agreed amendments include limiting the application of the CoFI Bill to intermediaries, adapting provisions to accommodate the Lloyd’s insurance market, adding requirements for financial institutions to consider vulnerable customers, and making regulations under the CoFI Bill to prohibit volume or value-based sales incentives.
Who needs to read it? Why?
All financial institutions (defined in the CoFI Bill as registered banks, licensed insurers and licensed non-bank deposit takers) should note the Government’s decisions. In particular, these decisions will be of great interest to intermediaries of these financial institutions, as it reduces their obligations proposed by the CoFI Bill.
The CoFI Bill proposes to add a new Part 6A to the Financial Markets Conduct Act 2013, which will introduce, for the first time in New Zealand, conduct licensing by the Financial Markets Authority (FMA) for retail banking and insurance. As such, it will represent a profound change for those financial institutions within the new CoFI regime.
What does it cover?
The Cabinet Economic Development Committee (DEV) made decisions on the following points:
Obligations of intermediaries
The DEV agreed that the scope of the CoFI Bill’s provisions relating to intermediaries should be limited to intermediaries involved in the sales and distribution of financial products and services covered by the CoFI Bill. The DEV agreed to remove the obligations on financial institutions to train, manage and supervise their intermediaries. However, financial institutions must have, and implement, effective policies, processes, systems and controls regarding their distribution arrangements, including sales and distribution activities carried out by intermediaries, to ensure that they comply with the fair conduct principle.
These changes follow industry concerns about the scope of the CoFI Bill, particularly in relation the proposed duty of financial institutions to manage and supervise intermediaries. The DEV agreed that the current obligations in the CoFI Bill are too prescriptive, and may lead to intermediaries reducing the number of institutions that they work with, reducing competition and consumer choice.
Flexibility to accommodate Lloyd’s insurance market
The DEV agreed that the CoFI Bill’s requirements do not naturally apply to Lloyd’s market participants due to its unique structure.
The current drafting of the CoFI Bill places conduct obligations on Lloyd’s underwriting members. However, these members do not perform most of the functions of a traditional insurer and have no responsibility for the management of consumer business. Instead, managing agents manage syndicates of underwriting members and manage the day-to-day operations.
If the subsequent SOP is introduced, conduct obligations in the new regime will apply to Lloyd’s managing agents and not to underwriting members. Minimum conduct requirements for Lloyd’s managing agents will be introduced through regulation. Regulations will also exempt Lloyd’s underwriting members from the requirement to have a conduct licence, on the condition that obligations are imposed on managing agents.
Vulnerability of customers
The DEV agreed that financial institutions will be required to take into account the potential for customers to be in vulnerable circumstances when developing their conduct programmes.
In the supporting documents to the DEV’s decisions, MBIE stated that it considers consumers in vulnerable circumstances are more likely to experience harm from poor conduct, can be impacted disproportionately by poor conduct and are less likely to make a complaint. To address this, financial institutions will need to consider vulnerable customers in its fair conduct programmes.
Prohibition on sales incentives
The DEV agreed that financial institutions will be prohibited from offering sales incentives based on volume or value targets to their employees (except senior managers and executives), agents and intermediaries.
This follows Cabinet’s previous decision to regulate sales incentives based on volume or value targets. The agreed regulations will give effect to this decision.
Contracts of insurance to be financial products under fair dealing provisions
The DEV agreed to declare that insurance contracts are ‘financial products’ for the purposes of the fair dealing provisions in Part 2 of the Financial Markets Conduct Act 2013 (FMCA). The effect of this is that misleading conduct in relation to insurance contracts will be a matter for the FMA under the FMCA, rather than for the Commerce Commission under the Fair Trading Act 1986.
We welcome changes to the CoFI Bill that reduce its application to intermediaries, however, the changes do not go as far as many financial institutions and financial advice providers would have liked. We agree that the consequences of the current requirements in the CoFI Bill may be that some intermediaries would reduce the financial institutions that they deal with, reducing consumer choice – an unsatisfactory outcome, and contrary to the intention of this consumer-focused CoFI Bill.
The obligations to manage and supervise intermediaries have been replaced with more high-level obligations. However, financial institutions will still need to design their fair conduct programmes with regard to the intermediaries involved in the provision of their relevant services and products.
MBIE’s rationale for keeping this requirement is that financial institutions should be responsible for whether their consumers are treated fairly, regardless of the distribution channel used. Financial institutions will still be required to ensure distribution arrangements with intermediaries comply with the fair conduct principle, including through monitoring and regularly reviewing distribution arrangements. We consider that these changes may not go far enough to reduce the liability of financial institutions given that significant oversight of intermediaries by them is still required. Conversely, those intermediaries that are themselves licensed financial advice providers will need to respond to oversight by the finance institutions they support (even though a lighter touch is envisaged), as well as directly by the FMA.
The express requirement to consider vulnerable customers in the CoFI Bill reflects regulators’ keen interest in this area. We agree with the statement that vulnerable customers have the potential to be disproportionately affected by poor conduct – as we have seen in Australia. In developing their fair conduct programmes, financial institutions should note the Council of Financial Regulators Consumer Vulnerability Framework (here), the FMA’s guidance on its expectations for providers dealing with vulnerable customers (here) and the expectations of the Reserve Bank of New Zealand (RBNZ) on financial inclusion (here). We also note that this requirement will address the concerns of the FMA and the RBNZ in their conduct review of banks, life insurers and general insurance. The RBNZ and FMA, in their various reports, found that financial institutions did not have appropriate policies in place to deal appropriately with vulnerable customers.
The documents published by MBIE do little to explain why insurance contracts are to be declared financial products for the purposes of the fair dealing provisions in the FMCA, while consumer credit contracts continue not to be financial products (both “acting as an insurer” and “being a creditor under a credit contract” have been included as a financial service since FMCA was first enacted).
We understand the intention is to make it clear that the FMA is the primary regulator for misleading or deceptive conduct in relation to insurance contracts. There may be some benefit for insurers in being regulated by the FMA on these issues, as most will already have the FMA as regulator in relation to financial advice (and will be regulated by the FMA in relation to conduct when the CoFI Bill is enacted). By contrast, banks and non-bank deposit-takers will still be regulated by the Commerce Commission in relation their credit products. In any case, the substance of obligations remain substantially the same.
For more background on the proposed CoFI regime, please see our previous articles:
- Changes to the Financial Markets (Conduct of Institutions) Amendment Bill
- 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
If you have any questions in relation to the CoFI Bill or are considering how these changes affect your business, please contact one of our experts.
We are currently expecting the CoFI Bill to complete its passage through Parliament and be enacted later this year, with licensing applications opening in July 2023 and the new CoFI regime to take effect from December 2024.
This article was co-authored by Sarah Jones, a solicitor in our Financial Services team.