Regulations to support the new regime for the conduct of financial institutions

The Ministry of Business, Innovation and Employment (MBIE) released two discussion documents for public consultation on 21 April 2021 on the new conduct of financial institutions (CoFI) regime. This follows from the introduction of the Financial Markets (Conduct of Institutions) Amendment Bill (the CoFI Bill) on 11 December 2019.

The first is titled Regulations to support the new regime for the conduct of financial institutions and seeks feedback on a range of regulations to support the operation of the CoFI Bill.

The second is titled Treatment of intermediaries under the new regime for the conduct of financial institutions and seeks feedback on a range of issues around the CoFI Bill’s obligations on financial institutions on their intermediaries.

The discussion documents and submission templates are available here. Submissions for both discussion documents close at 5pm on Friday 4 June.

Please see our previous news alerts in relation to the CoFI bill here and here.

Who needs to read it? Why?

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).

At its heart, the concept is to introduce conduct licensing by the Financial Markets Authority (FMA) in relation to retail banking (deposit taking and lending) and insurance.

What does it cover?

Regulations to support the new CoFI regime

This discussion document seeks feedback on a number of proposed areas of regulations, particularly relating to:

  • additional or more detailed requirements for fair conduct programmes;
  • the regulation of sales incentives offered or provided by financial institutions and intermediaries;
  • the requirement to publish information about fair conduct programmes;
  • exclusions of certain occupations from the definition of an intermediary; and
  • calling in contracts of insurance as financial products under the ‘fair dealing’ provisions of the Financial Markets Conduct Act 2013.

Treatment of intermediaries under the new CoFI regime

This discussion document seeks feedback on policy objectives and a range of options for possible amendments to the Bill to address concerns raised by industry in relation to the treatment of the intermediaries of financial institutions, particularly:

  • the definition of an intermediary;
  • the obligations that apply in respect of intermediaries; and
  • the obligations that apply in respect of employees and agents.

Our view

MBIE recognises the need to find the right balance between a principles-based and rules-based conduct regime in order to achieve the objectives of the regime.

The CoFI Bill as amended by the Finance and Expenditure Committee (FEC) provides greater clarity around the requirements. However, we believe that regulations would be helpful, in particular, for clarifying the requirements for fair conduct programmes and agree with MBIE’s preferred option that regulations should be introduced to prohibit sales incentives, provided that there is sufficient clarity as to what is in and what is out.  Financial services businesses should read this part of the consultation carefully and determine whether, in their view, the intended coverage is both fair and workable

Initially, the CoFI Bill was relatively unclear on intermediaries and their obligations. We agree with MBIE’s proposal that the definition of ‘intermediary’ should be amended to capture only persons involved in the sale or distribution of a financial institution’s relevant service or associated products, and to reduce the obligations that apply to financial institutions in respect of “intermediaries” to minimise compliance cost and duplication of regulation while still ensuring financial institutions take appropriate responsibility for consumer outcomes.

At its heart, is a philosophical question as to the extent which the product issuers (banks, licensed insurers and non-bank deposit takers) can or should oversee the conduct of intermediaries who are likely to be separately licensed by the FMA as financial advice providers – and what effect (if any) the regulatory regime may have on competition and customer choice.

What next?

If you have any questions in relation to the new conduct of financial institutions regime or are considering how this consultation may affect your business, or if you would like any assistance in making a submission, please contact one of our experts.

MBIE has provided an indicative timeline for next steps in relation to the new CoFI regime with a view to finalising the Bill and regulations by 2022 and having the new regime in force in early 2023.

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