Cover to Cover has reported upon several legislative reviews under way which affect the insurance sector. In this issue, we provide an update on those reviews. We also report upon some new regulatory consultations by the Reserve Bank concerning its prudential supervision of licensed insurers.
Second reading of Financial Services Legislation Amendment Bill (FSLAB)
FSLAB passed its second reading in Parliament on 12 September with unanimous support. It is now with the Committee of the Whole House for consideration.
Broadly, the Bill will expand the minimum professional standards on giving financial advice to retail clients, requiring those who are permitted to give regulated financial advice to comply with standards of ethical behaviour, conduct and client care and to give priority to a client’s interests. The Bill is also intended to simplify the regime and its terminology.
Members of Parliament commented that it is vital that consumers have confidence in the financial advice they receive and that it is given in a principled way. These comments echo the messages of the Financial Markets Authority and Reserve Bank concerning conduct, culture and the importance of non-conflicted advice and good consumer outcomes.
Once the Bill has its third reading and receives Royal assent, some provisions will come into force immediately, but the main changes will take effect on a date to be specified by regulators, expected to be in mid-2019. Parts of the Act will not be brought into force until later – expected to be 1 May 2020 – and a transition period for some aspects will extend until 2021.
Review of insurance contract law
The Ministry of Business, Innovation and Employment is considering public submissions on its Insurance Contract Law and Conduct Issues Paper. Submissions closed on 13 July 2018, but we expect development of policy themes arising out of the Issues Paper and that consultation will be delayed as MBIE takes into account the themes underpinning the changes to the financial advisers regime in FSLAB, as well as the focus of regulators on the conduct and culture of New Zealand’s financial services firms. This follows the fallout from the Australian Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry.
Insurance (Prudential Supervision) Act 2010 review
In 2016, the Reserve Bank began a comprehensive review of the Insurance (Prudential Supervision) Act 2010. The review aims to assess the performance of the Act against its purposes and to evaluate the consistency of the regime with international guidance and other New Zealand legislation.
Phase 1 of the review is complete. The Reserve Bank considers that the responses to its consultation document support a comprehensive review of the Act in Phase 2, with the following issues to be given initial priority:
- the scope of the Act (including ensuring that it caters for existing and new insurance models);
- the treatment of overseas insurers;
- disclosure and financial strength rating requirements; and
- regulatory mechanisms, balancing the enforcement tools available to the Reserve Bank with its enforcement and supervisory approach.
Although Phase 2 was intended to start in November 2017 and be completed by mid-2019, the Reserve Bank’s issues paper feedback statement indicated that the timeframe may change depending on resource availability and competing priorities. Indeed, this resulted in the review being suspended in April this year, with no indication as to when it will recommence. When it does, the Reserve Bank has made it clear that issues will be appropriately explored and options developed with consultation.
Amendments to the Fire and Emergency New Zealand Act 2017 (FENZ Act).
In August this year, Cabinet provided policy approval for a number of amendments to the FENZ Act, including changes to key definitions and a delay to commencing the new fire services levy regime.
The FENZ Amendment Bill would delay commencement of the new fire services levy regime by a minimum of 12 months to 1 July 2020. This will be achieved by moving the backstop commencement date for the new levy regime to 1 July 2021, with an ability for this date to be brought forward to 1 July 2020 by Order in Council.
This delay is due to industry feedback that, once the regime is finalised, insurers will need around 15 months to make necessary changes to contract wordings, introduce new business processes and systems and notify policyholders three months before the new levy regime comes into force.
A number of drafting defects have also been identified in the FENZ Act, particularly with reference to definitions (for example, motor vehicle, residential property and personal property definitions). The proposed amendment bill will update the definitions to bring them in line with past and current levy collection practice.
Of particular importance is the proposed change to the definition of “amount insured” which is the new term introduced by the FENZ Act on which the fire service levy will be charged. This term is defined by reference to the express maximum limit on the amount for which a property is insured over the term of the contract, and where there is no maximum limit, the “declared value” of the property (calculated in accordance with the FENZ Act). The definition was intended to be principled and simple, distinct from the term “sum insured” as commonly used in the insurance industry, and designed to prevent avoidance by capturing the actual maximum that can be paid out under an insurance contract.
Policy makers have accepted insurers’ concerns that the calculation of the express maximum limit on many insurance contracts will be complex and costly, including on policies where there is little risk of avoidance. The proposed solution is calculating the levy on the “sum insured” (as that term is commonly used and understood in the insurance industry) only where it represents a fair and reasonable value of both the greatest value of insurance over the term of the contract and the value of the insured property.
Draft levy regulations have been released and are expected to be finalised in 2019 when the new levy rate is set. The infringement offences and fire plans regulations are expected to be approved later this year.
Audit requirements for insurer data returns
The Reserve Bank released a consultation paper in October 2017 on audit requirements for insurer data returns to consider introducing an audit requirement for the year-end insurer return and strengthening the existing requirement for year-end insurer solvency return. Consultation closed in December last year and the Reserve Bank is still considering submissions.
Solvency Standards and NZ IFRS 16 Leases consultation paper
As a result of the introduction of the new lease accounting standard NZ IFRS 16 applying for financial reporting periods beginning on or after 1 January 2019, the Reserve Bank proposes to amend the solvency standards for licensed insurers to allow for new right-of-use assets and lease liabilities, to be factored into minimum capital requirements.
Consultations on the paper closed on 24 August 2018 and the Reserve Bank aims to finalise the proposed changes and amend the current solvency standards to take effect from 1 January 2019.
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